ESG and sustainability reporting boasts more acronyms than an electoral ballot paper. But unlike voting, which happens periodically, corporate reporting’s wheels of disclosure turn at an unrelenting pace. Capital markets are increasingly recognising that sustainability risks have a material impact on an organisation’s enterprise value and financial returns. As the Great Resignation and environmental degradation take a grip on financial returns, investors are sending a clarion call to businesses to disclose and communicate how they’re incorporating critical sustainability issues into their operating models. With that, disclosure requirements continue to increase in granularity and complexity, with a myriad of standards and frameworks peppering an already fragmented reporting landscape.
Decoding the ISSB standards
To curb the paralysis experienced by report preparers, the IFRS Foundation announced the creation of a new standard-setting board – the International Sustainability Standards Board (ISSB) – a grand coalition of global bodies such as the Carbon Disclosure Standards Board (CDSB), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB). The ISSB’s primary mandate is to develop a comprehensive global baseline of high-quality sustainability disclosure standards that meet investors’ information needs. Importantly, the board looks to bring about a much-needed convergence in reporting.
Following a series of sector engagements and consultations, the ISSB unveiled the first two draft sustainability standards in March of 2022. IFRS S1 unpacks a set of general requirements for the disclosure of sustainability-related financial information, while IFRS S2 provides tailored recommendations for an organisation’s climate-related disclosures.
The proposed standards require an entity to disclose material information about all the significant sustainability risks and opportunities to which it is exposed. The proposal builds on the important work of the Task Force on Climate-Related Financial Disclosures (TCFD), leaning extensively on its four-pillar disclosure structure of governance, strategy, risk management and metrics and targets. In advising entities to report against these four areas, the standards also encourage entities to take a keen interest in how sustainability risks and opportunities relate to business activities, critical relationships, and the use of resources along its value chain.
Towards a common language
In a sense, the proposed ISSB standards expand on the globally accepted TCFD model by infusing it with the International Integrated Reporting Framework’s ‘strategic focus’ principle, SASB’s financial materiality approach, and the adept technical disclosures encouraged by the CDSB. However, the ISSB standards extend corporate reporting’s long-standing slow dance with investors, adding to a long list of data sources used by providers of financial capital to determine where to dispense their funds.
Additionally, given the omission of the Global Reporting Initiative (GRI), the ISSB standards don’t quite include all the pieces of corporate reporting’s proverbial jigsaw. Although, with the IFRS Foundation and the GRI recently announcing a ‘collaboration agreement’ to work towards coordinating their work and standard-setting activities, the road to reporting universality may be paved still.
We may not be past the era of reporting practitioners rummaging through countless standards and frameworks like a voter sifting down a lengthy ballot paper, but what we are seeing is a fundamental reconfiguration in corporate disclosure. A subtle but significant step-change in aligning the language of corporate sustainability. A slow but definitive answer to reporting’s great clarion call.
Moving forward, one should hope that the ISSB expands its mandate to not only disclose how sustainability risks impact business, but also, how business poses a risk to sustainability. The question, though, is how? Double materiality, anyone?