The International Sustainability Standards Board (ISSB) recently unveiled its first two corporate reporting standards on ESG. The standards are expected to help establish a much-needed global baseline for sustainability disclosures amid an estimated 600 standards worldwide. How would the new standards affect you and your supply chain?
If your company is required to report on risks and opportunities related to sustainability matters, the ISSB standards are good news. By providing clarity and consistency in ESG reporting, the standards will help boost public confidence in company disclosures about governance, strategy, and risk management related to climate and environmental sustainability.
In the past, the lack of relevant and useful ESG information from companies has impeded asset managers from assessing corporate ESG risks and efforts, which are important in making investment decisions that could foster a global green economy.
As environmental concerns grow worldwide, a movement toward corporate sustainability and accountability has also grown and stakeholder and consumer demand for more information on ESG risks has increased. The existence of hundreds of reporting standards throughout the world meant companies must navigate a fragmented and complex compliance landscape.
“The ISSB Standards provide a global baseline for companies to disclose decision-useful, climate-related financial information – information that is critical for creating more transparent markets, helping achieve a smooth low-carbon transition, and building a more resilient and sustainable global economy,” said Mary Schapiro, Head of the Task Force on Climate-related Financial Disclosures (TCFD) Secretariat.
The standards, which are likely to be supported by 140 jurisdictions, will go into effect in January 2024.
Initial ISSB Standards
The ISSB announced its first two Sustainability Disclosure Standards in June 2023. They are known as IFRS S1 and IFRS S2 – named after the International Financial Reporting Standards Foundation, which created the ISSB to draft the standards.
The IFRS announced the ISSB’s establishment at the 2021 United Nations Climate Change Conference (COP26) in Glasgow. The board’s overarching goal is to help improve the consistency and quality of ESG reporting across the globe by matching the importance of sustainability reporting with the current regulations around financial reporting.
The two ISSB standards are meant to work together in providing a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects. Both standards incorporate the recommendations of the TCFD.
Here are the standards in a nutshell:
IFRS S1: This standard sets out the requirements for disclosing information about a company’s sustainability-related risks and opportunities, including governance processes, controls, procedures, and performance or progress toward any required targets.
IFRS S2: This standard requires disclosures about climate-related risks and opportunities that could reasonably be expected to impact a company’s cash flows and prospects. As part of metrics, companies will be required to report greenhouse gas emissions categorized in three scopes.
Global Reach of ISSB Standards
The ISSB standards are based on concepts underpinning the IFRS Accounting Standards, which are required for publicly listed companies in more than 140 jurisdictions. This excludes the United States, which follows the U.S. Generally Accepted Accounting Principles. Still, the ISSB standards could influence the U.S. Securities and Exchange Commission’s proposed rules that would mandate enhanced climate-related disclosures by public companies.
While many governments and regulators are likely to adopt the ISSB standards, mandatory application will depend on each jurisdiction. Countries expected to adopt the standards as part of financial reporting include the United Kingdom, Australia, Canada, China, Japan, New Zealand, and Singapore.
In the European Union, the Corporate Sustainability Reporting Directive (CSRD), requires EU and non-EU companies with activities in the region to file annual sustainability reports alongside their financial statements. These reports must be prepared in accordance with the European Sustainability Reporting Standards (ESRS). While ESRS is binding and mandatory in the EU, the ISSB standards are voluntary.
The EU and the ISSB have worked together to improve the interoperability of their respective climate-related disclosure requirements, which will enable companies to apply both sets of standards with minimal duplication of effort.
ISSB Standards and Third-Party Risk Reporting
For many corporates, the main questions are: which companies can use the ISSB standards? How can the standards help them in third-party risk reporting?
Companies worldwide that are required or voluntarily choose to prepare general-purpose financial statements (regardless of size, location, industry, or listing status) may use the standards. Doing so will improve the overall quality and comparability of the ESG information that will be available to investors and financial markets.
If your business uses a network of third parties, you can use the ISSB standards as a basis, guidance, or reference to help you:
- Incorporate sustainability and climate factors in third-party assessments and vetting.
- Streamline data collection and reporting for a more consistent reporting practice across different jurisdictions.
- Engage third parties in dialogue and collaboration to address their risks and opportunities.
- Adopt or establish a new third-party risk management platform such as the Ethixbase360.
Instead of using different ESG standards for different reports to various regulators, you can use the ISSB standards as an overarching tool to enforce transparency and accountability across your value chain. By using widely accepted and supported standards, you’ll be able to promote shared responsibility across your third-party network in a more cohesive and consistent manner.
While the standards are voluntary, it behooves you to get familiar with them now as some countries may eventually adopt them for mandated reporting disclosures. Contact Ethixbase360 for more information and expert guidance.