Has the day that investors longing for harmonized ESG reporting standards long wished for finally arrived?
The International Sustainability Standards Board (ISSB), launched at COP26 in Glasgow, has published its first two finalized standards: S1 General Requirements for Disclosure of Sustainability-related Financial Information; and S2 Climate-related Disclosures.
The standards are intended to be the foundation for a comprehensive global baseline of sustainability disclosures specifically focused on the needs of investors and the financial markets — something investors have long desired.
Rather than adding new ingredients to the alphabet soup of extant sustainability disclosure standards, the ISSB standards build on the work of (among others) the Climate Disclosure Standards Board (CDSB), the Task Force on Climate-related Financial Disclosures (TCFD), the Value Reporting Foundation’s Integrated Reporting Framework and industry-based guidance from the Sustainability Accounting Standards Board (SASB).
So what do preparers, investors and other market participants need to know about this next phase of evolution in sustainability disclosure?
I spoke with ISSB Chair Emmanuel Faber, former CEO of Danone, about the launch of the first finalized standards, why they matter and why Scope 3 is still a work in progress. This interview was edited for clarity and length.
Grant Harrison: The International Sustainability Standards Board launched its first two standards today. What is the most proximate next step that investors and issuers should get smarter on as it regards this launch?
Emmanuel Faber: Alongside the ISSB standards themselves — which I would encourage anyone with an interest to read and which include application guidance — we have published supporting materials to provide context to the standards, summarize their key points and illustrate their application. Those looking for a faster read can turn to the project summary published on our website. We have also produced an effects analysis, which examines the costs and benefits our standards will have on companies and investors, thus providing a detailed analysis of the anticipated outcomes.
Harrison: For organizations newer in their sustainability journey and that are getting a sense of the existing reporting landscape — what do you tell them when it comes to using other reporting regimes (GRI, TCFD, etc.) in the market? How do those fit or not fit into the global baseline the ISSB is developing?
Faber: I would tell them that companies have been wrestling with a complex reporting landscape for some time. This is a core reason why the ISSB was created. Our standards have been developed by consolidating voluntary initiatives. Among others, we have built our standards using other previously established work, including the industry-specific SASB standards (which are now a part of the International Financial Reporting Standards Foundation, or IFRS Foundation), as well as the TCFD recommendations, so companies that have already adopted these will be in a great place to apply IFRS S1 and IFRS S2. Companies applying ISSB standards will be fully compliant with the TCFD recommendations.
We had over 1,400 comment letters in response to our consultation on the proposed standards.
The ISSB standards are focused on the information needs of investors and other providers of capital, while [the Global Reporting Initiative, or GRI] seeks to meet the broader information needs of other stakeholders. Companies looking to provide a holistic suite of information for investors as well as other parties can combine the use of ISSB standards and GRI standards in a multi-stakeholders reporting approach, in an efficient way. We established a [memorandum of understanding] with GRI last year to align our work programs and standard-setting activities, and that way can provide a comprehensive and seamless suite of reporting standards.
Harrison: Can you share a bit about how these newly launched standards fit into the web of sustainability regulations that are coming into effect over the next few years, particularly in Europe?
Faber: ISSB standards are designed to create a global baseline of sustainability-related financial language, on top of which jurisdictions might add specific building blocks. And they are [agnostic when it comes to the generally accepted accounting principles]. To optimize this approach, we have worked closely with jurisdictions through our jurisdictional working group, which includes representatives from China, the [European Union], Japan, the U.K and the U.S., recently joined by Chile and Singapore. We have also created a dedicated advisory forum consisting of a broader group of jurisdictions to inform the ISSB’s work.
The EU is a specific case, as they had started their standard-setting activities before we started and did so with a multistakeholder materiality approach. We have worked very closely bilaterally as the draft [Corporate Sustainability Reporting Directive, or CSRD] established a year ago that the [European Sustainability Reporting Standards] should incorporate the work of ISSB standards to the greatest extent possible.
As a result of our joint work, there is a lot of common ground between our climate standard, IFRS S2, and the European reporting requirements on climate. Where we have seen room for further alignment, we have made modifications to ensure that companies applying ISSB standards will not need to massively duplicate efforts to meet EU standards on climate, which require companies to report a wider set of information to meet the needs of stakeholders other than investors. We should be able to share more information with respect to navigating from one set of standards to another in the coming months.
Harrison: Are there any key themes you want to highlight from the consultation process that most strongly inform how the standards took, or didn’t take, their final shape?
Faber: We were fortunate to be working from a strong foundation of work that had already been applied in the real world in the form of SASB standards, the CDSB framework, the Integrated Reporting Framework and the TCFD recommendations.
We had over 1,400 comment letters in response to our consultation on the proposed standards. Those comments made it clear, for example, that information on Scope 3 GHG emissions is important for investors and bankers, notably to assess the transition risk exposure of their portfolio companies. The feedback helped us confirm our proposal to include that requirement. However, the feedback also illustrated that Scope 3 reporting is challenging for companies, in particular because of the need to map their overall value chain, and this is an investment in processes. That is why we have given companies one additional year to include Scope 3 information and provided other forms of support, in proportionality on Scope 3 measurement, as well as specific guidance.
Overall, the changes we have made in response to feedback have been nuanced adjustments, rather than wholesale changes. For example, we have clarified some concepts and modified some of the language. We also decided to use the exact same definition of “materiality” as in IFRS accounting standards to facilitate connections between accounting and sustainability disclosures.
Overall, the changes we have made in response to feedback have been nuanced adjustments, rather than wholesale changes. For example, we have clarified some concepts and modified some of the language.
The main theme highlighted to us in the feedback was how necessary and urgent investors see this effort. This cannot be without a very inclusive approach of all capital markets participants, with various sizes of companies, and various levels of economic development. We have therefore added very significant scalability and proportionality, both structural and transitional reliefs to ensure that all participants can start applying our standards. We don’t expect the same comprehensiveness from [small and midsize enterprises] and from large multinational companies.
Harrison: What should we expect next?
Faber: A critical next step will be the endorsement that the International Organization of Securities Commission (IOSCO) mentioned they are working on. With an IOSCO membership of over 170 countries’ market regulators, this will open for us the opportunity to engage with countries in a bilateral and multilateral way. On our side, we are finalizing the digital taxonomy of our standards, which will be critical to ensure cost effectiveness and interoperability. We are also going to support market participants and jurisdictions in their adoption of the standards. As announced at COP27 last year, we are designing and will deliver capacity building programmes in partnership with other organizations aimed to help address adoption and implementation issues across the world.
Looking longer term, beyond climate, we have also recently published a consultation to seek feedback on our priorities for our next two-year work plan. We are seeking feedback on four potential projects. Three research projects are on sustainability-related risks and opportunities associated with biodiversity, ecosystems and ecosystem services; human capital; and human rights, as well as a project on integration in reporting to explore how to integrate information in financial reporting beyond the requirements related to connected information in IFRS S1 and IFRS S2.
Feedback from the market will be critical to inform our next steps. I encourage readers to take a look at our agenda consultation and provide us with your insight on what would be most useful for us to work on next. This consultation is open until Sept. 1.