Commentary

What the New ISSB Climate Standards Mean for Investors

Arthur Carabia, Director, ESG Policy Research at Morningstar Sustainalytics, outlines the key aspects of the ISSB standards, predicting benefits to the entire investment ecosystem.

On 26 June, the International Sustainability Standards Board published its long-awaited standards on sustainability and climate disclosures. The goal of the standard is to establish a common global baseline for sustainability reporting which, until now, has been subject to multiple voluntary standards and frameworks. The new standards consolidate and build on several existing sustainability reporting frameworks such as those from the Taskforce on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB).

The ISSB climate standard includes the same reporting pillars as TCFD, including governance, strategy, risk management, and metrics and targets, and requires issuers to disclose material qualitative and quantitative information about climate-related risks and opportunities. Issuers are also expected to report on their transition plans, climate resiliency assessments and, if material, Scope 1, 2 and 3 emissions based on the Greenhouse Gas (GHG) Protocol Corporate Standard.

Other performance indicators include share of assets subject to climate transition and/or physical climate risks and opportunities; share of executive management remuneration linked to climate-related considerations; and internal carbon prices used to assess costs of emissions.

When do the ISSB’s standards come into effect? 

The ISSB has confirmed its intention to prioritise the climate disclosures standard. Issuers are, therefore, expected to prepare their first report in line with the climate standard in 2024 and the broader sustainability standard in 2025.

However, it’s important to note that these standards are not directly enforceable. They first need to be formally endorsed by a jurisdiction to become mandatory in that region. This will likely be the case as the ISSB’s work is backed by G20 nations, among other governments. Also, several jurisdictions have already rolled out similar climate-related reporting requirements and have committed to endorse the standard or adopt similar initiatives, such as the UK, Japan, the US, and the EU.

Alternatively, issuers can also directly claim compliance with the standards via a statement. We expect that firms already aligned with TCFD and/or SASB standards to be early adopters.

A global baseline, but not a global standard 

As suggested above, we expect the new climate standard to be endorsed by several jurisdictions and for it to become a mandatory reporting framework for issuers. The fact that other jurisdictions such as the EU and the US have published or are planning to publish their own standards should not be too concerning either. For instance, the EU’s Corporate Sustainability Reporting Directive (CSRD) focuses on double materiality and reporting on environmental, social and governance factors – going beyond ISSB requirements.

But when it comes to the three preeminent climate disclosure standards (ISSB, US Securities and Exchange Commission’s Climate Disclosure Rule, and the EU’s CSRD) we note that their scopes and methodologies all follow TCFD guidance and the GHG Protocol Corporate Standard. ISSB reporting should, therefore, be a very solid foundation to comply with local expectations, even if not a perfect regulatory fit.

Overview of the ISSB climate disclosure requirements

Building off the success of TCFD, the ISSB disclosure requirements follow the same four key areas, while surpassing TCFD in terms of specificity and sophistication. The ISSB standards also come with industry-based guidance to enable more companies in more areas of the global economy to disclose their approaches to physical climate risk and climate transition risk.

The high-level disclosure requirements put forth by ISSB are:

Governance: What policies and plans does an organisation have in place to tackle climate-related risks proactively and reactively? Disclosures should include information about the organisational bodies responsible for climate polices such as members’ skills and competencies; their process for setting climate targets; metrics used in remuneration policies, etc.

Strategy: How does an organisation factor climate-related risks and opportunities into its future business plans? Companies should report how they expect physical and transition risks to affect operations, cash flow, business model, etc. in the short, medium, and long terms. Other considerations include the effect of climate change on the business value chain, financial planning, and organisational resilience.

Risk Management: How are climate-related risks and opportunities identified, assessed, and managed? Companies will need to define their processes and disclose how these risks and opportunities are factored into the overall management process.

Metrics and Targets: How does an organisation measure, monitor, and manage its climate-related risks and opportunities over time? Here companies can share details on targets and metrics they use. For instance, details on their GHG emissions should include scopes 1, 2, and 3, as well as information on internal carbon price, whether they use absolute or intensity targets, etc.

What the new standards could mean for investors

We anticipate that the adoption of the ISSB’s climate disclosures standard will benefit the entire investment ecosystem, from issuers, to investors, to ESG research providers. The standardisation of the climate-related information reported by issuers will help investors and research providers in assessing issuers’ management of climate risks and opportunities. The fact that the ISSB standard is based on existing frameworks such as TCFD and the GHG Protocol Corporate Standards should ease its adoption by companies and jurisdictions. Finally, the climate standard’s requirement to report on scope 3 emissions and climate transition plans ensures investors have a truly representative view of issuers’ climate risks and resilience.

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