The creation of the new International Sustainability Standards Board (ISSB) was a major step in the effort to establish a global consensus for sustainability disclosures and simplify the complex landscape, according to industry participants.
“There are just too many frameworks and sets of standards, so the reporting landscape is becoming more and more fragmented, and people are struggling to navigate it,” says Yen-Pei Chen, senior policy manager corporate reporting and tax at ACCA, going on to call the new board a “badly needed” development.
“There needs to be one set of rules so that investors can access this information in a clear, reliable and comparable way without having to wade through lots of irrelevant information.”
The ISSB was announced in November 2021 as one in a series of “significant developments” from the International Financial Reporting Standards Foundation (IFRS).
Broadly, the aim of the ISSB is to strengthen and standardise the practice of non-financial reporting to address ongoing investor demand and capital markets’ need to monitor a wider variety of risks and opportunities.
In addition, the board will consolidate with the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) by June 2022, resulting in the formation of a new global standards setter.
Also among the IFRS’ “significant developments” was the publication of prototype climate and general disclosure requirements. The prototypes were developed by the Technical Readiness Working Group (TRWG) – a group formed to undertake preparatory work for the ISSB.
For Andromeda Wood, vice president of regulatory strategy at Workiva, the creation of the TRWG was a particularly important step in this process, as it allowed the ISSB to gain a head-start in creating an official set of disclosure standards.
“It was definitely a point of concern in the market that this board wouldn’t be able to move quickly enough or be agile enough to deal with the urgency. But they understood that and took steps to mitigate it.”
She also hails the ISSB’s consolidation with other standard-setting organisations, calling the move a “powerful symbol”.
But on the whole, it’s what the IFRS refers to as “investors’ urgent demands” that characterises the core significance of the Board’s creation.
Helena Watson, director in KPMG’s International Standards Group, argues that there is a need for ESG standards that “are treated with the same rigour as financial reporting standards”.
“One of the most important things about this is connecting your sustainability-related risks and opportunities to your financial statements,” she says.
“It’s all about supporting investors and stakeholders and ensuring they have the information they need. Unless you can connect everything together, it’s going to produce very disjointed reporting.”
An exposure draft of the ISSB’s standards is expected to be released for industry comments by the end of Q1 2022, and a final version could be completed by the end of the year.
In addition, the IFRS is currently completing the process of appointing key personnel to the Board, having already announced Emmanuel Faber and Sue Lloyd as Chair and Vice-Chair respectively.
Faber is the former CEO of multi-national food product company Danone, while Lloyd is a long-standing member of the International Accounting Standards Board.
Global comparability needed
Despite her general optimism, Watson points out that a critical challenge emerges in the form of ensuring global comparability.
“There’s a lot to suggest that this is going to be impactful – it has support from IOSCO and many countries are behind it – but it needs to be that countries actually adopt it,” she says.
While the UK says it is planning to use the ISSB standards when they become available, this may not be the case in other jurisdictions.
For instance, US regulators have been notoriously reluctant to adopt global reporting standards in the past, and speculation continues as to whether forthcoming proposals will be in alignment with the ISSB.
The European Commission is currently pushing ahead with producing its own set of standards. The work is currently being undertaken by the European Financial Reporting Advisory Group (EFRAG) as per a 2020 mandate.
The standards are being produced in parallel with negotiations on the EU’s Corporate Sustainability Reporting Directive – a piece of legislation that will seek to mandate sustainability reporting and assurance.
For Chen, the disparity between different jurisdictions makes for a challenging and “unclear” picture
“If they [The EU] are not aligned for sustainability reporting, that could really set these standards on the back foot and possibly make the reporting landscape even more fragmented.”
But a “very key” and often underappreciated aspect, she says, is how these various standards will interact with sustainable finance regulation in different jurisdictions.
The EU Taxonomy Regulation, for instance, is a classification system designed to allow businesses and investors to determine the extent to which activities can be considered environmentally sustainable. The framework entered into force in July 2020.
Similarly, since March 2021, the Sustainable Finance Disclosure Regulation has required financial advisers and manufacturers of investment products to disclose how sustainability concerns were integrated into their decisions and advice.
“Ultimately, what companies report is going to feed into what investors are going to have to pick up to comply with the sustainable finance regulations in their jurisdiction. So, all of that will have to line up as well,” says Chen.
However, October 2019 saw the launch of the International Platform on Sustainable Finance. Now comprising 17 finance ministries, the grouping seeks to compare and coordinate efforts on approaches to environmentally sustainable finance. Crucially, it also pledges to “respect national and regional contexts” in the process.
According to Chen, this body could play a critical role in the ISSB’s next steps.
“International groupings like this are really going to have to be an active contributor to the IFRS foundation for it to work,” she says.
Wood also laments the potential for disparity in approach across jurisdictions, citing the differences in how the concept of ‘materiality’ is viewed when it comes to financial reporting.
The EU, for example, has adopted what it calls a “double materiality perspective”. This means that companies have to report on both the financial and environmental implications of their sustainability efforts.
On the other hand, the ISSB is hyper-focused on meeting the information needs of investors and, therefore, takes an approach that would be more akin to ‘single materiality’. In other words, it will seek to measure financial importance alone.
“Nothing’s a silver bullet that’s going to fix everything,” says Watson, imparting a degree of reservation about the IFRS’ recent developments.
“The one thing you can’t avoid talking about when you’re thinking about how impactful it’s going to be is parallel developments.”
The road to a global ESG standard
But Wood argues that, amid fears of a messy and fragmented regulatory landscape, a great deal of comparability can still be achieved.
“It’s all diplomacy from here on in. The larger the number of companies that adopt the ISSB standards, the larger the pressure is from markets to be comparable with them.”
She also argues that, because the EU and the ISSB have, for the most part, committed to producing standards based on the same existing frameworks, comparability is much more feasible.
“Because we have a reasonably solid base in the existing standards and because the TCFD framework does give us a very consistent set of overall concepts for disclosure, there’s going to be significant comparability.”
The key question is what happens with the finer details, she adds.
Watson also highlights the significance of commonality between jurisdictions in the form of a global baseline, arguing that this could serve to simplify the landscape.
“It’s about creating a common global baseline. It’s not saying that the EU, for example, can’t go ahead and add to that specific jurisdictional information that stakeholders need.
“We support what EFRAG are doing on sustainability reporting standards but believe that international comparability needs a common baseline based on global sustainability reporting standards.”
But in any case, the “standard-setting race with Europe” will be best navigated through close collaboration, says Chen.
“For the ISSB, the main focus would have to be that they collaborate in any way they can with EFRAG. That’s going to be really key.”
Perhaps crucially, this view was mirrored in a statement given by EFRAG board president Jean-Paul Gauzès.
“European standards should align with international initiatives as far as possible,” he said.
The role of accounting and finance teams
The expertise of accounting and finance teams will also be critical as demand grows for ESG disclosures, says Wood.
“There’s this acknowledgement that sustainability data has to come from many more sources, and at least accounting and finance has experience in how to handle that and how to build a reliable process.”
Whilst the practice of disclosing ESG information is often dubbed as ‘non-financial reporting’, Wood argues that this is a misnomer. Sustainability reporting is inherently financial, she says.
“It’s not the case that sustainability issues have no financial impacts. So, I think accounting teams have a lot to offer because they’re going to have to account for the financial impact of those sustainability KPIs.”
However, she also points out that with the continuing emergence of various ESG reporting frameworks, finance teams’ skills must be refreshed in line with new methods.
“In order to apply existing finance skills, people are going to need to understand impact accounting and sustainable finance.
“There’s definitely a big call to the industry to get themselves in the know quite quickly.”
Chen goes on to argue that a recalibration among finance professionals is needed as we enter a new era of intangibles reporting.
“The Big Four firms have been scaling up massively on this, but smaller and medium-sized practitioners are still playing catch up,” she says, going on to suggest that accountants have been slow to see sustainability as a part of their remit.
“It’s a skills question and a mindset change that needs to happen. And it’s not just accounting firms that need to change – it’s those working in businesses and also CFOs who need to embrace this.”
In October 2021, the UK announced that it will become the first G20 nation to mandate climate-related disclosures for its largest businesses.
The disclosures will be produced in line with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations, and the mandate will take effect from April 2022.