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International Sustainability Standards Board wins praise for draft reporting standards

13 May 2022 Max Tingyao Lin

The IFRS Foundation is advancing its plan to establish global standards for companies' reporting of their environmental, social, and governance (ESG) performance based on prevalent disclosure norms, winning praise from the business community.

During COP26 last November, the London-based nonprofit—whose International Financial Reporting Standards (IFRS) are widely adopted—launched the International Sustainability Standards Board (ISSB) to develop a global baseline for sustainability reporting standards.

Two proposed standards were released in late March, of which the General Requirements for Disclosure of Sustainability-related Financial Information focuses the overall requirements for disclosing ESG information, and the Climate-related Disclosures sets out the specific requirements for reporting on risks and opportunities related to climate change.

"The ISSB got themselves together, got off the ground, and got those early exposure drafts out. That's really important," London-listed National Grid Chief Financial Officer Andy Agg told the Net Zero Delivery Summit this week. "I think it's definitely a step in the right direction."

"Perfection is sometimes the enemy of pace. We've got to make sure that isn't the case here," he added.

Agreeing that the ISSB's speed is "great," Hywel Ball, the UK chair of accounting giant EY, said at the same event: "They're not reinventing the wheel. They've been, as they promised, building on the others … that's incredibly encouraging."

No common rules

With many companies pledging to achieve net-zero emissions later this century, several sets of ESG disclosure standards have emerged in recent quarters.

This created confusion among some in the financial industry, as the criteria set up by various organizations do not always align with one another.

"We need some standardization," said London Stock Exchange CEO David Schwimmer, in part because investors often need to make their own estimates that could be "wildly off" when attempting to evaluate ESG performance based on a variety of information.

The IFRS Foundation set out to address this issue by coordinating or merging with other industry initiatives, including the Task Force on Climate-Related Financial Disclosures (TCFD) and CDP's Climate Disclosure Standards Board (CDSB).

In March, the nonprofit signed a memorandum of understanding with the Global Reporting Initiative (GRI) to collaborate on setting sustainability standards, which is expected to enrich the ISSB's social and governance criteria.

Separately, the IFRS Foundation will consolidate with the CDSB and Value Reporting Foundation (VRF), which houses the Integrated Reporting Framework and the sector-based Sustainability Accounting Standards Board standards, by the end of next month.

"What we're looking to do … is to consolidate the reporting space" that is currently like an "alphabet soup," ISSB Technical Director Ravi Abeywardana said in the summit. "The ISSB has taken very much a 'building-blocks' approach."

One step further

The two drafts were developed based on TCFD recommendations, with input from the CDSB, VRF, and the World Economic Forum's International Business Council, according to the foundation.

Compared with the TCFD requirements, which are becoming mandatory for some companies in jurisdictions like the UK and New Zealand, the ISSB in its proposals wants additional and more granular information in some instances.

For example, Scope 1 (direct), Scope 2 (from purchased electricity), and Scope 3 (from the whole value chain) emissions are reportable for both. But the ISSB wants a reporting entity to provide metrics specific to its own industry and separately disclose the Scope 1 and 2 emissions from its affiliates, joint ventures, and subsidiaries.

When establishing emissions and carbon intensity targets, the ISSB proposed that a reporting entity should disclose whether those are validated by a third party and based on a sectorial approach.

The ISSB also has a stronger focus on social and governance standards. For example, the General Requirements for Disclosure of Sustainability-related Financial Information state that a company should report on its "reputation, performance, and prospects as a consequence of the actions it has undertaken, such as its relationships with people, the planet, and the economy, and its impacts and dependencies on them."

This means a company would need to disclose the impact on local employment opportunities when shutting down a factory due to its high GHG emissions.

However, the ISSB has yet to define which metrics and targets a company should adopt when disclosing social and governance performance. Abeywardana said it plans to carry out an industry consultation on whether specific standards need to be established for issues other than climate change.

"We're going to have to be dynamic here … sustainability matters are very dynamic," he said.

A global outlook

The ISSB is seeking feedback on the proposals until 29 July. If all goes well, the standards will be formally published by the end of this year.

In parallel efforts, the ISSB has formed a working group composed of government officials from China, Japan, the EU, the UK, and the US to discuss how its standards can be applied in their jurisdictions. In the third quarter, the Sustainability Standards Advisory Forum will be launched to facilitate regular dialogue between the ISSB and a wider set of jurisdictions.

"We want to allow investors to ultimately have clear and consistent information. You can only really have that if you have a comprehensive global baseline," said Abeywardana, adding that he hopes some governments will start to mandate ISSB standards on ESG reporting a year from now.

It's likely that governments will be receptive, as some have used existing standards as the basis for their regulations. For example, the US Securities and Exchange Commission's (SEC) proposed climate risk disclosure rules, announced in April, are based on TCFD.

The IFRS, published by the IFRS Foundation's International Accounting Standards Board, have been adopted in 144 jurisdictions for financial reporting by listed companies.

"We're looking to actually deliver what the IFRS has done from an accountant's standard perspective," Abeywardana said.

His remarks resonated with similar comments from others at the summit.

Mary Schapiro, head of TCFD's secretariat and a former chair of SEC, said: "There is now the prospect of global markets meeting consistent global standards on climate disclosure … we would encourage governments and regulators to seek global consistency."

Schwimmer said the exchange community supports common ESG reporting standards, but stressed that a "government push" is required. "We do need the regulatory mandate to make this happen," he said.

Posted 13 May 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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