ISSB publishes draft proposals for global sustainability disclosures

The global drive to standardise sustainability disclosures took a major step today as the newly-established International Sustainability Standards Board (ISSB) published its first set of global guidelines for public consultation.

“Rarely do governments, policymakers and the private sector align behind a common cause. However, all agree on the importance of high-quality, globally comparable sustainability information for the capital markets,” said ISSB CEO Emmanuel Faber in a prepared statement.

“These proposals define what information to disclose, and where and how to disclose it.”

The guidelines are divided into two exposure drafts, with the first setting out general sustainability-related disclosure requirements.

The second details specific climate-related disclosure requirements and is broken down into Scope 1 (a company’s direct emissions of carbon dioxide in metric tonnes), Scope 2 (indirect emissions from the energy it has bought), and Scope 3 (all other indirect emissions, such as from suppliers).

Comments on both sets of standards are to be received by July 29, 2022. The ISSB will issue a set of final requirements thereafter, forming a comprehensive global baseline of sustainability disclosures.

“With the release of the first two proposed standards today, the ISSB is taking an important step in connecting sustainability information and financial reporting,” Larry Bradley, global head of audit at KPMG, said.

“The creation of globally consistent and transparent sustainability reporting standards will help strengthen the capital markets by helping investors and business leaders make more informed decisions and refresh their focus on building the long-term value of their business.”

The ISSB was announced in November 2021 as one in a series of “significant developments” by the International Financial Reporting Standards Foundation (IFRS).

Broadly, its aim is to strengthen and standardise the practice of climate-related financial reporting to address investor demand and capital markets’ need to monitor a wider variety of risks and opportunities.

The board’s inception was accompanied by the publication of prototype disclosure requirements. These were developed by a number of standard-setting groups, including the Taskforce on Climate-Related Financial Disclosures (TCFD) – a body formed by the Financial Stability Board in 2015 with a view to standardising the disclosure of climate-related financial risk.

The ISSB’s draft proposals are “fully building upon” the TCFD’s recommendations, added Faber.

As of April 6, 2022, the UK will become the first G20 nation to enshrine mandatory TCFD-aligned reporting into law for its largest businesses.

A “fragmented” landscape

The ISSB’s creation was considered to be a major step in establishing a global consensus for sustainability disclosures, but the landscape remains complex.

“There are just too many frameworks and sets of standards, so the reporting landscape is becoming more and more fragmented,” says Yen-Pei Chen, senior policy manager corporate reporting and tax at ACCA.

While the UK says it is planning to use the ISSB standards when they become available, the US Securities and Exchange Commission, for instance, has indicated that it will push ahead with developing its own rules.

Additionally, The European Commission is currently producing its own set of standards. The work is being undertaken by the European Financial Reporting Advisory Group as per a 2020 mandate.

The standards are being produced in parallel with negotiations on the EU’s Corporate Sustainability Reporting Directive (CSRD), which comes into force in January 2023.

The CSRD takes a more comprehensive approach than the ISSB, adopting 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.

However, for Andromeda Wood, vice president of regulatory strategy at Workiva, a great deal of comparability between jurisdictions can still be achieved. The EU and the ISSB have, for the most part, committed to producing standards based on the same existing frameworks, she points out.

“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.”