Globally applicable standards will open “new horizons” for identifying sustainability risks and opportunities to inform long-term investment decisions, say market participants.
The International Sustainability Standards Board’s (ISSB) inaugural standards have been formally launched with the promise of delivering a comprehensive accounting-based language for sustainability-related disclosures that provides global investors with consistent, verifiable and decision-useful information.
Speaking at the launch event, Emmanuel Faber, Chair of the ISSB, said that the ISSB’s standards would open general-purpose financial reporting to “new horizons” for assessing sustainability risks and opportunities that are vital in informing the investment decisions of investors and other capital providers.
IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1.
Both standards fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
“The two standards being issued today enable companies to communicate with investors effectively,” said Sue Lloyd, Vice-Chair of the ISSB.
“This communication is crucial for investors to have confidence in understanding the sustainability-related risks and opportunities companies face.”
According to Lloyd, IFRS S1 asks companies to report on a range of risks and opportunities, beyond climate, partly by leveraging the works of predecessor organisations folded into the ISSB, such as the Sustainability Accounting Standards Board (SASB), the Climate Disclosure Standards Board (CDSB) and the International Integrated Reporting Council (IIRC).
This will ensure a global baseline and allow the ISSB standards to be applicable to any accounting framework, she said.
Companies using IFRS S2 will be “fully compliant” with the TCFD recommendations, requiring companies to provide information on physical and transitional climate-related risks and opportunities, she added. Additionally, industry-specific disclosures are included, building on the SASB standards but with improvements for international applicability.
The ISSB developed IFRS S1 and IFRS S2 based on market feedback and in response to calls from the Group of 20, the Financial Stability Board and the International Organization of Securities Commissions (IOSCO), as well as leaders in the business and investor community.
“[Investors] prefer working with a single set of standards rather than a mix of public and private standards,” said Jean-Paul Servais, Chair of IOSCO.
“The collaboration between the ISSB and IOSCO has been constructive, and we can proudly say that key sustainability-related disclosure standards will be ready for corporate use by the end of 2024.”
Adopting ISSB standards
Now that IFRS S1 and IFRS S2 are issued, the ISSB will work with jurisdictions and companies to support adoption. The first steps will include creating a Transition Implementation Group to support companies that apply the standards and launching capacity-building initiatives to support effective implementation.
IOSCO is conducting an independent assessment of the ISSB standards, with its approval necessary before individual national securities regulators can adopt the standards into their respective regulatory frameworks. IOSCO said that it will make sure its assessment is done in a prompt, orderly and thorough manner.
In the first year, companies are required to report on climate, and from the second year, disclosure expands to other sustainability-related risks and opportunities, said Lloyd, adding that the ISSB acknowledges that this level of reporting is “new for many, and represents a significant change in reporting practices globally”.
“The ISSB is ready to provide ‘after-sales service’ and support the implementation and application of the standards,” she said. “The ISSB is establishing a Transition Implementation Group to address stakeholder questions and encourages everyone to visit its website and start using these important standards to provide information that informs investor decision-making.”
Also speaking at the launch event, Lysanne Gray, Executive Vice President Sustainable Business Performance and Reporting at Unilever, stressed the importance of the ISSB standards being adopted “as much and as broadly” as possible.
“As a community, there’ll be many people here with a finance background and accounting background. It took us a long, long time to go from jurisdiction-based accounting standards [before we] saw the value of international accounting standards,” said Gray.
“My plea is, let’s take the lesson from that and not repeat that 20 years of painful history that some of us have had to live through. Let’s actually skip that […] for international sustainability standards.”
The ISSB has committed to working with jurisdictions wishing to require incremental disclosures beyond the global baseline. This includes a memorandum of understanding with voluntary sustainability standards setter the Global Reporting Initiative (GRI) to support efficient and effective reporting when the ISSB standards are applied in combination with other reporting standards.
“I welcome publication of the IFRS S1 and S2 standards, which will help provide insights into sustainability-related risks and opportunities of reporting organisations,” said Carol Adams, Chair of the Global Sustainability Standards Board (GSSB), responsible for the GRI’s standards.
“We are working on an amendment within the Universal Standards to show how reporting on impacts using the GRI standards informs IFRS S2 disclosure on risks and opportunities.”
The GRI’s standards are designed to provide stakeholders with information about companies’ sustainability impacts as well as risks. The standards setter co-created the standards which will be used by firms falling under the EU’s Corporate Sustainability Reporting Directive.
Adams added that the GSSB is engaging with the ISSB to develop “questions and answers” regarding the use of both sets of standards, and to align the organisations respective work programmes, adding that this will allow a “double materiality perspective” that meets the needs of reporters and other information users.
Baroness Joanna Penn, co-Chair of the Transition Plan Taskforce (TPT), said that the development of the green financing framework to assess and endorse the standards for use in the UK is “proceeding at pace”, with the Financial Reporting Council (FRC) currently recruiting a Chair and members for a new technical advisory committee that will provide endorsement recommendations to the government.
“Global standards and interoperability are at the heart of our approach to green finance, minimising the cost to firms operating across multiple jurisdictions, and crucially, providing investors with comparable and consistent information to inform capital allocation,” said Penn, reiterating the vital role that governments will play in maintaining the momentum behind the commitments made at COP26 in Glasgow.
“Global standards are at the heart of the work of the [TPT], which is working hard to create and develop best practices for companies and investors producing and using transition plans,” she added.
“We are also strong supporters of the Task Force for Nature-related Disclosures, which is looking to launch their standards later this year […] and are already engaging closely with the ISSB on its work.”
The TNFD released its fourth and final beta framework for nature-related risk management and disclosure in March, with it on track to publish its final recommendations in September.
Filling the gap
Eighty-six percent of asset owners are now integrating sustainability into their investment strategies, according to data and analytics provider FTSE Russell’s annual global ‘Sustainable Investment Asset Owner Report’.
“We’ve seen asset owners around the world, Asia, Canada, the US, EMEA, starting to integrate sustainable considerations into their investment process, and especially climate considerations in very fundamental ways,” said Arne Staal, CEO of FTSE Russell.
“Our research shows that for our FTSE All World Index, which covers 4,000 companies, there’s a very, very large gap of even the most basic sustainability data disclosures.”
Elizabeth Fernando, CIO of the National Employment Savings Trust (NEST) pension fund, echoed similar sentiments: “The alphabet soup has already been mentioned a few times. I’m not sure it’s a soup; it’s more like a porridge.
“Being brutally honest, we need to find our way through it and try to make informed decisions because ultimately, that is what we are here to do. We’re here to make informed decisions and give capital to those who will make the best use of it over the long term.”
The ISSB’s standards were officially launched at the IFRS Foundation’s annual conference, with the organisation hosting further events this week at stock exchanges globally, including Frankfurt, Johannesburg, Lagos, London, New York, Santiago de Chile; the ASEAN Capital Markets Forum is also hosting a launch event in Singapore.
“Today is a landmark day for the global economy and the financial sector as we celebrate the launch of the IFRS sustainability disclosure standards, S1 and S2,” said Julia Hoggett, CEO at London Stock Exchange. “These standards can provide the foundation for advancing shared sustainability objectives, whether you’re a corporate financial institution, a government, or a regulator.”
According to Emily Pierce, Associate General Counsel and VP of global Regulatory Climate Disclosure at climate management and carbon accounting platform Persefoni, the ISSB’s progress with its standards presents a “tremendous opportunity” for both investors and companies.
“Investors can now access more consistent, comparable, and reliable information to support their investment decisions. Companies can tell their sustainability story in a more efficient way, enabling them to access the capital that requires the information,” said Pierce, former Assistant Director, International Affairs at the US Securities and Exchange Commission.
“Communicating this information consistently can unlock competitive advantages in terms of business relationships,” she added.
