The International Sustainability Standards Board (ISSB) yesterday published its long-awaited first set of standards, the General Sustainability-related standard (S1) and Climate-related standard (S2) (together the Standards), in an effort to revolutionise sustainability reporting worldwide. The two standards will be effective for annual reporting years starting after 1 January 2024, and whilst endorsement from the International Organization of Securities Commissions (IOSCO) is awaited, the early indications of adoption around the globe are positive.
Driven by the need for global comparability and consistency (overcoming an ‘alphabet soup’ of voluntary sustainability reporting standards), the ISSB set out to create standards that meet both investor and reporting entity needs. To this end, the resulting Standards provide a framework that:
- builds on existing voluntary reporting initiatives to minimise reporting burdens
- provides decision-useful and comparable information for investors.
Alongside existing approaches to sustainability reporting, the Standards include within scope the disclosure of financially material information about sustainability-related risks and opportunities.
The ISSB was established at COP26 climate conference in Glasgow in 2021, responding to market demand for a global and joined up approach to sustainability reporting. Like the IFRS International Accounting Standards, these Standards have been created through a rigorous, inclusive and transparent process, involving global consultation and dialogue with stakeholders throughout the process – with some 1,400 consultation comments having been received.
“The launch of the ISSB Standards is an exciting and historic moment as we see, following consolidation of leading sustainability-related standards-setters into the IFRS Foundation and with the support of G20 and many others), the creation of a global baseline of sustainability-related disclosures for capital markets. I strongly encourage companies to use these two new standards — which have been built from TCFD recommendations.
Teresa Ko, Freshfields Bruckhaus Deringer’s China chairman and corporate partner, who is Co-Vice Chair of the IFRS Foundation and Member of ISSB Steering Committee
Exposure drafts of the Standards were initially shared for consultation in March 2022, with the ISSB issuing regular market updates throughout the standards-development process, including:
- Scope 3 emissions to be included under the Climate-related Standard
- Discussions with other reporting initiatives and regional and domestic regulators ongoing to support interoperability, especially with the European Financial Reporting Advisory Group (EFRAG) in relation to the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD)
- Transitional relief (ahead of comprehensive disclosure) available to allow reporting entities to prioritise climate change in the first year, with full sustainability reporting in year two (particularly helpful for non-EU companies not reporting already under ESRS); similarly, reporting entities may exclude Scope 3 emissions and use alternative methodologies to the GHG Reporting Protocol during the transitional period
- The Standards are GAAP-agnostic so that they may be used by non-IFRS reporting entities.
Impact on companies subject to the CSRD
For companies that fall under the CSRD, the Standards might not have a dramatic impact. This is due to the ESRS on the one hand currently having a broader thematic scope and on the other requiring relevant companies to satisfy the double materiality standard. Double materiality means that reporting should consider (i) the impact of sustainability issues on the reporting entity as required by the Standards; and (ii) the impact the entity has on sustainability (e.g. environment, human rights, communities). As a result, entities fulfilling the ESRS will usually also fulfil the requirements set by the Standards.
Without doubt the Standards represent a historic moment in global sustainability reporting. But there is a long road ahead. In particular, the ISSB – and its many supporters – now needs to persuade legislators or regulators to mandate the use of the Standards around the world, just as IFRS financial reporting is required in 144 jurisdictions today. A key milestone will be endorsement by IOSCO and the Financial Stability Board (FSB) which will influence the pace of uptake.
While the Standards provide a much-needed boost for consistent, global sustainability reporting, it remains to be seen how they will align in practice with existing TCFD reporting (in the UK for example) and imminent disclosure rules from the ESRS and the US Security and Exchanges Commission’s (SEC).
Click here to download our comprehensive briefing comparing global sustainability disclosure standards, including the ISSB, ESRS and draft SEC.