Focus on enterprise value means continued divergence from European standards.
The International Financial Reporting Standards (IFRS) Board Trustees officially launched its International Sustainability Standards Board (ISSB) during Finance Day at COP26 in Glasgow, simultaneously consolidating with the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF).
The ISSB aims to provide a baseline for sustainability disclosure standards for companies in order to provide ESG information to the financial markets. It will operate in close cooperation with the International Accounting Standards Board (IASB) to ensure compatibility with existing financial reporting standards.
“Capital markets can have an essential role to play in reaching net zero. But that can only happen when sustainability information is produced with the same rigour, assurance of quality and global comparability as financial information,” said Erkki Liikanen, Chair of the IFRS Foundation Trustees, speaking at the summit.
The IFRS Foundation will also consolidate the CDSB and VRF into the new board by June 2022. The technical standards and frameworks of the CDSB, VRF, Task Force on Climate-related Financial Disclosure (TCFD) and the World Economic Forum’s Stakeholder Capitalism Metrics will provide the basis for the technical work undertaken by the new board.
“The TCFD welcomes the formation of the ISSB, which builds upon the foundation of the globally accepted TCFD framework and the work of an alliance of sustainability standard setters,” said Mary Schapiro, Head of the TCFD Secretariat.
Further, the IFRS Foundation’s Technical Readiness Working Group (TRWG) has undertaken the preparatory work for the ISSB’s prototype climate and general disclosure requirements.
“The ISSB will consider these recommendations and determine next steps, including the issuance of potential exposure drafts for standards informed by the TRWG’s work, subject to the independent due process of the ISSB,” the TRWG noted in its summary statement.
Throughout the process of introducing the standard, the board will receive guidance from the International Monetary Fund, the Organisation for Economic Co-operation and Development, the World Bank, and the United Nations.
“Investment managers have a vital role to play in the shift to a more sustainable global economy. [They] need comparable data on the risks that companies face from climate change, and these measures will be pivotal for investors and companies to achieve the Paris Agreement targets,” said Chris Cummings, CEO of the UK’s Investment Association.
Two tribes?
The Global Reporting Initiative (GRI) has also welcomed the announcement. The standards-setter is currently co-constructing the European sustainability reporting standards (ESRSs) alongside the European Financial Reporting Advisory Group (EFRAG). These standards will focus on double materiality, rather than enterprise value.
Today’s consolidation is likely to fuel the debate as to whether investors prefer company disclosures to focus on the financial impacts of climate change or the inclusion of how business operations impact the environment and society.
“Disclosure on a company’s financially material sustainability topics – while important from the context of helping markets to assess opportunities and risks – is not sufficient to deliver full transparency on sustainability impacts, as envisioned by the GRI Standards and embraced by the EU,” said Eric Hespenheide, Interim CEO of GRI.
“Corporate transparency that meets the needs of all stakeholders requires improved connectivity between sustainability and financial reporting. I therefore reiterate once again that GRI stands ready to engage with the IFRS Foundation in support of this aim,” he added.
The ISSB’s standards will be developed to “facilitate compatibility with requirements that are jurisdiction specific or aimed at a wider group of stakeholders”, the IFRS Foundation said. It has formed a working group that will create a mechanism for formal engagement on standard-setting between the ISSB and jurisdictional representatives.
Path to global standards
Also speaking at COP26 on Wednesday, Ashley Alder, Chair of the International Organisation of Securities Commissions (IOSCO), said that the IFRS Foundation is making “good progress” ahead of issuing the climate disclosure standard next year.
IOSCO plans to assess the ISSB’s draft standard in 2022 and aims to endorse it before the end of the year.
“If the ISSB’s future standard meets IOSCO’s expectations, our endorsement will support all our 130 members in considering ways they adopt, apply of be informed by the standard,” he noted.
“There is much work ahead of us and many challenges on the way,” warned Liikanen, who suggested companies need to be ready to comply with the standard by the third or fourth quarters of next year.
“However, we now have a path towards global sustainability disclosure standards for the financial markets. We will move diligently, but with pace.”
The Trustees are in the process of appointing a Chair and Vice-Chair(s) to the ISSB and will appoint a further 14 members to the board.
