ISSB Sustainability Standards: A Common Blueprint for Sustainability and Climate Disclosure

In June of last year, the ISSB published its climate-related disclosure standards (IFRS S1 – sustainability related, and IFRS S2 – climate related), which came into effect on January 1, 2024.

From the offset, the ISSB Standards faced some criticism regarding the approach and choice of audience. Following their recent launch, Leisa Cardoso De Souza takes the opportunity to explain the ins and outs of the Standards.

What are the ISSB disclosure standards?

The ISSB standards (IFRS S1 - General Requirements for Disclosure of Sustainability-Related Financial Information and IFRS S2 - Climate Related Disclosures) are voluntary sustainability reporting standards. They were designed to establish a common global blueprint to guide regulators and / or  corporates, regardless of size or sophistication, in terms of the type of sustainability and climate related information investors are looking for.

As such, IFRS S1 defines general requirements for sustainability reporting, specifying the broader topics that the reporting entity should address, particularly the risks and opportunities that will impact its financial performance (single materiality). While the IFRS S2 addresses climate-related risks and opportunities, including the use of industry specific metrics and targets through the Sustainability Accounting Standards Board’s (SASB) industry standards.

Both Standards require a mix of qualitative and quantitative information, as well as forward-looking information to assess risks and opportunities in the medium and long-term.

One point of caution, however, is that the standards do not require external verification or assurance to demonstrate compliance. This is left for the adopting jurisdiction to define or to the company to decide on a voluntary basis.  

With the TCFD, ESRS, various taxonomies, does the world really need another set of standards?

The ISSB came to simplify the disclosure landscape by incorporating different frameworks - such as the Sustainability Accounting Standards Board’s (SASB), Climate Disclosure Standards Board (CDSB), Integrated Reporting, the Taskforce on Climate-Related Financial Disclosures (TCFD) - and reduce the number of requirements needed to be adopted by corporates. The ISSB is also working with other Standard setters to be interoperable with other international (e.g., Global Reporting Initiative) and regional (European Sustainability Reporting Standards) sustainability disclosures frameworks .

When establishing the Standards, the ISSB did not reinvent the wheel. The IFRS S1 (Sustainability) and the IFRS S2 (Climate) build upon the structure and core recommendations of the Taskforce for Climate-Related Financial Disclosures (TCFD) - (i) governance, the processes, controls, and procedures to monitor and manage risk; (ii) strategy, approach used to manage risks and opportunities; 

 (iii) risk management, process to identify, assess, prioritize, and monitor risks and opportunities; and (iv) metrics and targets, performance against identified risks and opportunities, including self-imposed or mandatory targets.

As an international standard, it aims to be adopted by jurisdiction across the world, which will define whether it will be embedded into regulation or followed as market best practice. In practice, it should be adopted mainly in jurisdiction where no sustainability reporting or climate-reporting regulation exists, as a baseline. In the meantime, in jurisdictions where sustainability or climate-related disclosures are endorsed by regulators, companies with exposure to capital markets may voluntarily use the IFRS Sustainability Standards to report on sustainability and climate-related risks and opportunities. In some cases, depending on the importance of their operations in the European Union (e.g., size in terms of revenue, staff, listing on regulated financial markets), they may also have to report under the European Sustainability Reporting Standards (ESRS) framework, that integrates an international / extra-territorial and legal dimension.   

The ISSB faces criticism on its approach to materiality, what’s all the fuss about?

The adoption of a single-materiality lens has been criticized as it ignores significant social and environmental impacts an entity may have, placing it as a secondary element

Materiality is likely to remain at the centre of sustainability disclosure standards setting debate. What is important to consider is that the ISSB Standards were created to cater to investors’ needs. Traditionally, these primary users of corporate reporting evaluate an entity’s value, which has historically been determined by its future cash flows (which may or may not be impacted by external risks affecting the entity). This “entity-centric” vision has led to the concept of single materiality (outside-in), considering only how external social and environmental impacts affect the reporting entity’s financial performance.

Conversely, the European Union’s European Sustainability Reporting Standards (ESRS) cater to investors as well as to a wider group of user types including customers, suppliers, broader society, and governments, and so it considers double

materiality (inside-out); which takes into account not only the financial risks deriving from external social and environmental issues (financial materiality), but the entity’s impact on people and the environment (impact materiality).

Although there are divergences as to the single and double materiality perspective, many investors are demanding more than a single materiality approach, especially when they integrate sustainability impact in their strategies It is a good start to sustainability disclosure, and many corporates already look at double materiality by reporting via the Global Reporting Initiative.

Why would a company adopt the ISSB standards?

By adopting the ISSB Standards, companies operating in jurisdictions which do not have sustainability/climate-related disclosures or that have not yet integrated the IFRS Sustainability Standards, have a clear means to monitor key ESG metrics and define strategies to improve their performance by following market best practice as the demand for corporate sustainability information increases, particularly from investors facing regulatory requirements. This provides better risk management positioning and allows companies to enhance their resilience.

Ultimately, the ISSB Standards create an international reporting framework that if adopted by jurisdictions (or voluntarily by corporates) will allow for better comparability and data reliability. Brazil, Australia, Canada, Japan, Hong Kong, New Zealand, Nigeria, Singapore, South Africa, Taiwan, the United Kingdom, the Philippines, Mexico, Kenya are a few countries that announced the adoption of the ISSB.

Another important point is that the ISSB is mainly aimed at reducing the reporting burden by setting a baseline on what should be disclosed. As implementation rolls out this year, we will be better able to figure out the shortcomings and benefits of the ISSB, particularly as it co-exists with distinct reporting standards, such as the one implemented in the European Union.   

Collaboration will be central for sustainability disclosure progress across the world. Continuous dialogue between jurisdictions and standard setters on interoperability will remain crucial to help users of such Standards navigate between coexisting and sometimes competing requirements.

Though it is likely that the ISSB will not fully harmonize/simplify the sustainable disclosure landscape it should prove useful to countries and entities that do not yet have consolidated sustainability reporting standards, helping them understand the data that is required and meaningful for investors, creditors and other stakeholders. The sheer weight of its supporting institutions could provide the ISSB Standards the impetus to succeed and prevail, at least in important emerging countries. For jurisdictions with advanced regulatory requirements in place, the ISSB Standards could rather serve as benchmark to calibrate overseas requirements. 

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