The International Sustainability Standards Board (ISSB) has this week issued its long-awaited sustainability and climate disclosure standards, marking what it hopes will be a ‘new era’ of greater consistency in sustainability-related disclosures in capital markets worldwide.
Whilst the voluntary standards represent a clear positive step, global consistency remains a work in progress. Although many countries are expected to integrate the standards into their local regimes, there is an ongoing risk of divergence if the process isn’t carefully coordinated across jurisdictions. Hong Kong is likely to be one of the first, and the UK amongst others has previously announced that it’s on board. At the same time, some regimes might not implement the standards at all. Others, like the EU, are already planning to go beyond the ISSB’s approach by adopting a more demanding “double materiality” approach.
But any rigorous attempt at standardisation should be welcomed and the direction of travel for businesses is clear – sustainability and climate reporting is on the up.
New standards emerging from the old
The standards — IFRS S1 and IFRS S2 — are intended to help improve investment decisions by increasing trust and confidence in company disclosures. IFRS S1 provides a general purpose set of disclosure requirements to enable communication of sustainability-related risks and opportunities in the short, medium and long term. IFRS S2 is designed to be used with IFRS S1 and sets out specific climate-related disclosures relating to physical risks and transition risks.
Perhaps controversially, the sustainability standard includes a requirement for companies to disclose “Scope 3” emissions (indirect emissions that occur in the value chain of the reporting company, including both upstream and downstream emissions). These have traditionally been a thorny issue in terms of attribution, as one company’s indirect emissions are another company’s direct emissions.
The standards should otherwise feel somewhat familiar since they:
- build on the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) and reflect the TCFD’s four pillars of governance, strategy, risk management, and metrics & targets approach;
- take a “single materiality” approach, meaning they only require businesses to report on the risks and opportunities posed by sustainability and climate change to the business, but not vice versa;
- make explicit reference to the pre-existing SASB sector-specific standards;
- are built on the concepts that underpin the IFRS Accounting Standards, which are already required by more than 140 jurisdictions; and
- reflect that the ISSB has been working with the GRI, which focuses on the impact businesses have on people and planet, to support integration and interoperability between the two sets of standards.
Determining what is material
In terms of what would need to be disclosed, the sustainability standard requires disclosure of “material information” about the sustainability-related risks and opportunities that could reasonably be expected to affect a business’ prospects. Materiality is judged on the basis of whether omitting, misstating or obscuring that information could reasonably be expected to influence decisions of primary users of general purpose financial reports.
The standard recognises that materiality is specific to each business, so it does not apply specific thresholds for materiality or predetermine what would be material in a particular situation. Appendix B of IFRS S1 provides some useful application guidance.
Sustainability disclosures will need to be made in a company’s general purpose financial reports and the reporting entity would be required to make an “explicit and unreserved statement of compliance” when disclosing against the standards. This means that a company can only describe their disclosures as compliant with the standards if they comply with all of the relevant requirements, which raises questions around what type and level of assurance will be required.
Integration into domestic regimes and business strategy
The next step will be to see which national governments integrate the standards into national legislation, and when – the head of the Principles for Responsible Investment has already come out calling for policymakers around the world to introduce mandatory ISSB disclosures by 2025.
Hong Kong is likely to be one of the earliest adopters. The Hong Kong Stock Exchange is currently consulting on a set of new climate-related disclosures heavily based on the ISSB’s climate disclosure standard (with interim disclosures available for a two-year period for some of the more challenging items such as Scope 3). These will be mandatory for all Hong Kong-listed companies. Companies will need to start collecting the relevant data and information for the 2024 reporting period, ready for disclosure in sustainability reports published in 2025.
The UK amongst others has previously said it intends to incorporate the standards, albeit slowly over the next couple of years. This will involve a two-step process of formally endorsing the standards within the next 12 months, before adopting them into law. The FCA intends to update its reporting requirements following the UK government’s endorsement decision.
Meanwhile, the EU has said it will look to ensure interoperability with its sustainability disclosures approach, and China has said it is fully committed to supporting the ISSB’s work. However, gaining support in the US, where conversations surrounding ESG are becoming increasingly politicised, may prove challenging. To help the integration process, the ISSB plans to create a Transition Implementation Group to advocate for and support national adoption.
In the meantime, businesses do not need to wait for legislation in order to start reflecting on the changes the new baseline may require. It would be open to them to voluntarily start to disclose against the new standards to get ahead of the opportunities and risks involved.
 Companies following the ISSB’s standards would need to report on the risks and opportunities posed to them, but not by them, when it comes to sustainability and climate, whereas double materiality requires both
 Subject to transitional provisions in the sustainability standard that initially allow for disclosures to follow later