A common language for sustainability disclosures: Arrival of the ISSB Standards

The standards of all sustainability standards have landed. Markets, governments and financial regulators have been eagerly awaiting the ISSB's sustainability standards to tackle inconsistent, competing and overlapping reporting mechanisms, and to ensure issuers work from a common language and global baseline for sustainability-related financial disclosures.

The International Sustainability Standards Board ("ISSB") was established in November 2021 at COP26 with a mandate to deliver a global baseline of sustainability disclosure standards that meet the needs of investors in international capital markets. On 26 June 2023, the ISSB issued final versions of its sustainability-related disclosure standards in a step towards creating a unified global framework for sustainability reporting. IFRS S1 establishes general requirements for disclosures of sustainability-related financial information, and IFRS S2 establishes specific requirements in relation to climate-related disclosures.

With governments and financial regulators all over the world (such as those in the UK, US, Australia and Japan, among others) indicating their intention to incorporate the ISSB standards into domestic reporting regimes, companies should be paying attention to what this means for them, their sustainability objectives and their reporting obligations going forward.

Overview

The ISSB was launched by accounting and disclosure standards-setter, the International Financial Reporting Standards ("IFRS") Foundation, during COP26, in response to growing public interest in the ESG profiles of corporates and the demand for increased transparency when it comes to disclosing sustainability-related financial information.

ISSB's global disclosure standards

IFRS S1: general requirements for disclosure of sustainability-related financial information. IFRS S1 establishes the general framework and conceptual foundation for sustainability-related disclosures, designed to enable primary users of general purpose financial reports (i.e., investors, lenders and other creditors) to understand the sustainability-related risks and opportunities faced by companies and how these might reasonably be expected to impact the business in the short, medium and long term.

IFRS S2: climate-related disclosures. IFRS S2 establishes specific disclosures required in relation to climate-related risks (including both physical and transition risks) and opportunities faced by a company. These incorporate the recommendations previously made by the Task Force on Climate-related Financial Disclosures ("TCFD"), a market-led organisation set up by the Financial Stability Board in 2015 to develop a disclosure framework that would enable companies and other organisations to disclose climate-related risks and opportunities.

Note that IFRS S2 is designed to be read alongside the general requirements laid out in IFRS S1.

In recognition of the lack of cohesion across existing sustainability disclosure frameworks, the ISSB was charged with creating a standardised benchmark against which companies can make meaningful and, importantly, comparable sustainability-related disclosures to aid investment decisions and facilitate effective allocation of capital by companies.

The ISSB published exposure drafts of its standards for consultation in March 2022. Having received extensive feedback from various industry stakeholders, the ISSB has now published these in final form.

The ISSB has helpfully created a list of "ten things you should know about the ISSB standards". See the list here.

Core content of disclosures

Following the format of the recommendations of the TCFD, the core content of the disclosures required for IFRS S1 and IFRS S2 can be mapped across four thematic areas, broadly summarised below:

1. Governance: the governance processes, controls and procedures a company uses to monitor and manage sustainability- and climate-related risks and opportunities.
2. Strategy: the approach a company uses to manage sustainability- and climate-related risks and opportunities.
3. Risk management: the processes a company uses to identify, assess, prioritise and monitor sustainability- and climate-related risks and opportunities.
4. Metrics and targets: the entity's performance in relation to sustainability- and climate-related risks and opportunities, including progress towards any targets the company has set or is required to meet by law or regulation.

Conceptual foundations

As well as setting out the content of the disclosures required (i.e., what information companies should disclose), IFRS S1 lays conceptual foundations to act as guiding principles for companies when making their disclosures (i.e., how companies should disclose such information).

Notably:

• Companies must make fair representation of relevant information about sustainability-related risks and opportunities that could reasonably be expected to affect their "prospects" (an undefined concept in IFRS S1) and their faithful representation in accordance with the principles set out in IFRS S1. To achieve this, companies must provide a complete, neutral and accurate depiction of sustainability-related risks and opportunities.
• Companies must disclose material information about the sustainability-related risks and opportunities that could reasonably be expected to affect their prospects. (Of particular note is that the ISSB uses the same definition of "material" that is used in IFRS Accounting Standards, that is, information is material if omitting, obscuring or misstating it could be reasonably expected to influence investor decisions. It does not adopt the double materiality approach proposed by the European Commission under the European Sustainability Reporting Standards ("ESRS"). For more on the double materiality approach under the ESRS, see our briefing here.))
• Companies must disclose connected information such as connections between items to which the information relates (e.g., connections between various sustainability-related risks and opportunities) and/or connections between disclosures (e.g., connections between disclosures on governance, strategy, risk management and metrics and targets).

These conceptual themes aim to ensure that information disclosed in accordance with the standards is comparable, verifiable, timely and understandable. As part of this, companies will also be required to disclose comparative information as against the previous reporting period.

The conceptual foundations apply equally to IFRS S2 which, as noted, should be read alongside the general requirements set out in IFRS S1.

For a fuller overview of the ISSB standards, see the illustration below.

VIEW IN FULL HERE

Technical requirements and transition relief

Sustainability- and climate-related disclosures should be included in a company's general purpose financial reports and the information should be for the same period as that covered by the related financial statements. Companies that comply with all of the disclosure requirements contained in the standards should also make an "explicit and unreserved" statement of compliance.

In an effort to aid and encourage adoption of the standards, the ISSB is offering transition relief for companies during the first reporting period, including the following:

• Companies will not be required to disclose comparative information.
• Companies may make sustainability-related disclosures after the related financial statements have been published.
• Companies may choose to disclose information in relation to climate-related risks and opportunities only (i.e., IFRS S2).

The standards are ready for use for annual reporting periods beginning on or after 1 January 2024.

Comparisons with other standards

Publication of the ISSB standards comes just a couple of weeks after the European Commission published the draft ESRS delegated act, the consultation on which is due to close on 7 July 2023. For more information, see our earlier blog and accompanying briefing here.

There are some notable differences between the two disclosure regimes, such as:

• Enforceability: the ESRS, once adopted, impose disclosure obligations on companies under the Corporate Sustainability Reporting Directive. The ISSB standards, on the other hand, do not impose obligations on companies unless or until individual governments/regulators adopt the standards or integrate them into domestic reporting regimes.
• Scope of sustainability matters: the ESRS contain an extensive list of environmental, social and governance topics in relation to which disclosures are expected. The ISSB standards relate to general sustainability matters and climate change more specifically, with thematic standards expected to be published over time.
• Materiality: the ESRS are based on a double materiality approach, with disclosure requirements in relation to material impacts, risks and opportunities. The ISSB standards are based on an investor-focused approach, such that information is material if omitting, obscuring or misstating it could reasonably be expected to influence investor decisions.

Climate-related disclosure standards are also being developed by the US Securities and Exchange Commission. It remains to be seen how, in practice, the ESRS, ISSB and SEC standards will interact with each other, though interoperability seems to be top of minds for all those involved in the creation of the respective standards. See the ISSB's Basis for conclusions (which accompanies IFRS S1), where the Board discusses interoperability and compatibility of the standards with jurisdictional and regional initiatives.

We are preparing a more detailed briefing considering the points of alignment and divergence across these three regimes.

Next steps

As already noted, the ISSB standards do not impose mandatory disclosure obligations; it is up to individual governments and/or financial regulators to adopt the standards or integrate them into domestic reporting regimes. But given prevailing demands for a common language and global baseline for sustainability disclosures, we are likely to see a quick uptake in the standards around the world.

In the UK, for example, the government has previously expressed its support of the ISSB and, as part of its 2023 Green Finance Strategy, announced its intention to establish a framework to assess suitability of the ISSB standards for domestic adoption (as part of the UK's future Sustainability Disclosure Requirements ("SDR")) once final versions of the standards are published. We expect the government to launch a formal assessment mechanism in this regard sometime in Q3 2023.

The Financial Conduct Authority, the regulator responsible for overseeing the SDR regime for asset managers and their UK-based fund products and portfolio management services, welcomed the publication of the ISSB standards and indicated its commitment to updating its own climate-related disclosure rules with reference to the ISSB standards in due course.

Global securities regulator, the International Organisation of Securities Commission ("IOSCO") has also praised the standards, indicating it that it will review them with a view to endorsing them for IOSCO membership going forward.

Mika Morissette gives an overview of the ISSB standards. Watch her here:

*With thanks to Elise Furneaux (Professional Support Paralegal) for her substantial contributions to this blog.