PRI Calls for ISSB Prototype to go Further on Materiality

Investor alliance also recommends stronger strategic alignment, sector-specific detail for climate disclosures.

The general prototype disclosure standard issued by the International Sustainability Standards Board (ISSB) should require corporates to provide more details on their materiality assessments, according to the Principles for Responsible Investment (PRI).

The ISSB’s general prototype sets requirements for disclosures on sustainability-related matters in corporates’ financial reports to provide comparable and decision-useful information to investors.

Noting that sustainability reporting should address both financial materiality and sustainability performance, the PRI recommended that firms should report the results of their internal materiality assessments. This should explain why particular data is and is not included in the assessment, to ensure the verifiability of the data, in terms of completeness, neutrality and consistency.

The PRI also said the prototype standard should provide “clear guidance” on the minimum requirements for conducting a materiality assessment, including “clarifying whether a higher-level assessment of sustainability-related matters is required before management considers data requirements for each matter”.

The PRI’s analysis and recommendations on the ISSB’s sustainability disclosure standards are contained in a  draft position paper for comment by PRI signatories.

It emphasised the dynamic nature of the financial materiality of sustainability issues over time, with reference to the financial implications of the “rapid pace” of sustainability policy and of company impacts on key economic, environmental and social systems.

“Sustainability reporting standards should evolve to respond to the needs of investors, which increasingly includes information enabling them to fully assess and interpret a company’s sustainability performance and alignment in the context of long-term sustainability goals and thresholds,” the report observed.

Building a global baseline

The ISSB was formed last November and officially unveiled at COP26 by Erkki Liikanen, Chair of the IFRS Foundation Trustees. In parallel, the IFRS’s Technical Readiness Working Group issued two prototype disclosure standards.

The Climate Prototype sets out the requirements for the identification, measurement and disclosure of climate-related financial information by corporates, while the General Requirements Prototype outlines the overall requirements for disclosing “sustainability-related financial information relevant to the sustainability-related risks and opportunities faced by the entity”.

Earlier this week, Ashley Alder, Chair of International Organization of Securities Commissions (IOSCO), said the ISSB climate standard was still on track to be finalised and in use by the end of the year. Adoption of ISSB standards by IOSCO effectively provides a green light for their use by member securities regulatory bodies globally.

The ISSB was formed with the intention of creating a global baseline for the reporting of sustainability-related financial disclosures by corporates. But a number of experts have argued that it will provide an incomplete picture by requiring firms to report only on sustainability-related factors impacting the enterprise value of the reporting entity, not their impact on wider society and the environment.

Room for improvement

The PRI also makes recommendations for improvement of the general prototype standard with regard to interoperability, presentation of disclosure requirements and implementation. In particular, it encourages the ISSB to continue to engage with regional standard setting and policy initiatives on corporate sustainability reporting, in order to fulfil its objective of providing a global baseline “whether that is based on financial materiality or double materiality”.

The PRI position paper welcomed the “strong alignment” of the ISSB’s Climate-related Disclosures Prototype with the updated recommendations of the Task Force on Climate-related Financial Disclosures, but said there was a need for more detailed reporting on company strategy and on sector-specific factors.

On strategy, it suggested the ISSB introduce disclosure recommendations to reflect the alignment of reporting firms’ strategy and business model with the objectives of the Paris Agreement “to better capture companies’ resilience to uncertain and rapidly changing environmental policy across jurisdictions”.

In addition, it said disclosures needed to capture material activity- and sector-specific greenhouse gas emissions to allow investors to compare firms operating in the same sector. The PRI also called on the ISSB to propose quantitative disclosures on how executive remuneration is affected by performance against set emissions reduction targets, to help investors assess their credibility.

The PRI is a not-for-profit company with over 4,300 signatories, including pension funds, insurers, investment managers and service providers, with approximately US$120 trillion in assets under management.

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