Feedback requested for general and climate-focused disclosure drafts, which will be finalised by end of 2022.
The IFRS Foundation’s International Sustainable Standards Board (ISSB) has published its first proposals for investor-focused sustainability reporting standards, marking a key step in fulfilling its formal mandate. The general sustainability and climate disclosure standards are now open to feedback until 29 July and will be finalised by the end of this year.
Launched in November 2021 at COP26, the ISSB aims to provide a baseline for corporate sustainability disclosures that are compatible with jurisdiction-specific requirements, giving investors access to consistent and comparable decision-useful information globally. The standards are endorsed by the International Organisation of Securities Commissions (IOSCO), which has a membership spanning 95% of the world’s securities markets across more than 130 jurisdictions.
The climate disclosure standard builds on the existing and widely adopted Task Force on Climate-related Financial Disclosure (TCFD) framework. However, it will require companies to disclose “more granular information”, the draft noted.
For example, while the TCFD guidelines ask organisations to describe their exposure to short, medium and long-term climate-related risks and opportunities, as well as the impact these have on the organisation’s strategy and financial planning, the ISSB climate standard will require more detail.
Additional information required will include: how the entity is both directly and indirectly responding to these risks and opportunities (changes to its business model, production processes, workforce and suppliers), how its subsequent strategy will be resourced, and expected changes in both financial position and performance over time (investment plans, sources of funding and costs).
“By building on the TCFD’s framework, the ISSB’s climate proposals will create further consistency, comparability and reliability across climate disclosure so investors can make more informed financial decisions,” said Mary Schapiro, Head of the TCFD Secretariat.
The general sustainability standard sets requirements for disclosures on other sustainability-related matters in corporates’ financial reports, including risks relating to biodiversity.
In an earlier response to the draft, the UN-convened Principles for Responsible Investment previously called for the general disclosure standard to provide more details on materiality assessments, noting that the ISSB should provide clear guidance on the minimum requirements.
ISSB also announced plans to build on the industry-based standards development approach of the Sustainability Accounting Standards Board (SASB). SASB’s approach identifies sustainability disclosure topics that are most relevant to corporate enterprise value.
“Further enhancing and evolving the SASB standards will be a priority for the ISSB, as embedding the industry-based approach in the work of the ISSB is essential to delivering standards that support investors’ assessments of enterprise value across a broad range of sustainability issues,” said Emmanuel Faber, ISSB Chair.
Last year, SASB merged with the International Integrated Reporting Council to form the Value Reporting Foundation, which has since been integrated into the ISSB alongside the Climate Disclosure Standards Board.
Connecting two pillars
The ISSB’s emphasis on enterprise value-focused reporting contrasts with a focus on double materiality in forthcoming European sustainability reporting requirements (ESRSs).
Investors have previously expressed concern that reporting on just enterprise value will provide an incomplete picture of investee companies’ sustainability-related focus and performance. The double materiality approach goes a step further, further requiring insight into firms’ impact on people and planet.
The EU’s European Financial Reporting Advisory Group (EFRAG) and the Global Reporting Initiative (GRI) are co-constructing the ESRSs that will adopt a double materiality approach. The ESRSs will apply to companies falling under the scope of the delayed Corporate Sustainability Reporting Directive.
This week, EFRAG published a governance update on its due process procedures for sustainability reporting standard-setting, which will inform its preparation of the ESRSs.
“In order to meet the goals of the Paris Agreement and 2030 Agenda for Sustainability Development, we must drive disclosure that incorporates both value creation and impacts on people and planet,” said Pietro Bertazzi, Global Director of Policy Engagement and External Affairs at sustainability disclosure platform CDP.
Ashley Alder, Chair of IOSCO, has said that the ISSB standards will provide investors with insight into companies’ environmental impacts.
Earlier this month, the IFRS Foundation and GRI adopted a formal agreement to collaborate and coordinate on the development of sustainability-related disclosures. Through the new two-pillar approach, both organisations will join each other’s consultative bodies relating to sustainability reporting activities to ensure alignment between the developing standards and reduce the reporting burden for companies globally.
Next steps
In parallel with the ISSB’s consultation exercise, IOSCO will begin its own review of the draft standards to determine whether they meet securities regulators’ expectations prior to issuing its final endorsement.
“The group will consider: whether the proposed requirements can serve as an effective global baseline of investor-focused standards; whether they are fit for purpose in helping financial markets accurately assess sustainability risks and opportunities; and whether they can form the basis for the development of a robust audit and assurance framework,” said Sheldon Mills, Co-Lead of IOSCO’s Sustainable Finance Taskforce.
IOSCO aims to finalise its endorsement process shortly after the ISSB has finalised the standards by year-end.
Later this year, the ISSB will also consult on its standard-setting priorities, seeking feedback on the sustainability-related information needs of investors when assessing enterprise value and on the further development of SASB’s incorporated industry-based requirements.
An initial proposal for an IFRS Sustainability Disclosure Taxonomy, which will allow for the electronic tagging of companies’ sustainability disclosures, is due to be published shortly.
