Think tank attendees hear about the development of global sustainability reporting rules from the ISSB
The creation of the International Sustainability Standards Board (ISSB) in November last year marked a major step toward consolidation in the sustainability reporting world.
The new organization brings together the Value Reporting Foundation, which houses the SASB Standards and Integrated Reporting Framework, and the Climate Disclosure Standards Board (CDSB), leading to a notable reduction in the alphabet soup of reporting bodies.
To begin with, the ISSB is developing two sets of standards: the S1 general requirements and the S2 climate disclosures. But what does this all mean for the range of existing standards and frameworks – SASB, TCFD, GRI et al – that corporate reporters have become familiar with in recent years? How does the ISSB’s work align with proposed national reporting rules? And how can IR teams prepare themselves for the changes ahead?
Sue Lloyd, ISSB
At the IR Magazine Think Tank – Europe 2022, attendees heard the answers in an exclusive interview between Steve Wade, IR Magazine’s head of event content, and Sue Lloyd, the ISSB’s vice chair.
While IR Magazine Think Tanks are generally off-the-record events, the ISSB has given permission to reproduce the conversation here. Some comments have been edited for clarity and brevity.
How are you looking to navigate the puzzle of stakeholders that have a vested interest in the development of the standards? It probably sounds a bit flippant to say, but the short answer is that we’re engaging the whole world in what we’re developing here with our global baseline. And I can say that without exaggerating because we are asking everybody who’s interested to look at our proposals and to send us letters – all comers are welcome.
More specifically, we’re interested in views from preparers providing the information, investors that will use the information, securities regulators that will be interested in the adoption of the standards and the audit firms that will be responsible for assurance.
We’re also working with jurisdictional working groups so we have established a jurisdictional working group comprising representatives from the UK, the EU, China, Japan, the US and us to try to get this global baseline idea to work.
Overall, we want feedback in order to understand whether what we’re asking for is operational, what the cost of it is for preparers, whether the information is useful for investors and whether it’s capable of being assured. We’re talking to all the parties we need to consult in order to really get that full sense of feedback.
And the other thing I should say is that we really want this to be a global baseline so we are particularly interested in making sure we understand aspects of proportionality. Can smaller companies do this, for example? And what are the implications for emerging economies?
How are you working with different standard setters? If you use our new standards, you don’t need to worry about the SASB Standards, CDSB or TCFD, because we’ve consolidated some of them, and you will comply with TCFD automatically if you meet our requirements.
What that does leave, though, is the GRI, a really important global standard setter, like us. Because of our memorandum of understanding, we’re working in co-operation with the GRI and our hope is that… by meeting our requirements, you’d meet investor needs, and we’d work in partnership with the GRI to meet broader information needs.
There would be a cleaner, more efficient system from us working together rather than having one set of requirements for investors and another set of requirements for all stakeholders that are totally disconnected. We want the pieces of the jigsaw to work together well. That’s our plan.
We are asking everybody who’s interested to look at our proposals and to send us letters – all comers are welcome
In addition to your S2 draft standards as an independent body, we also have the proposals from the SEC and the European Financial Reporting Advisory Group (EFRAG). Can you explain the differences between the proposals? Let’s talk about similarities and differences. If you look at our climate proposal, the S2 document, and the SEC’s proposals, there are a lot of similarities. The key similarity is that we are both focused on meeting investors’ information needs.
If you look at the front section of our document and compare that with the SEC proposals, you'll see they look very similar, and that's because we’ve both used the four pillars of the TCFD: governance, strategy, risk management and metrics & targets. It's very aligned. We also both ask for Scope 1, Scope 2 and Scope 3 greenhouse gas emissions to be disclosed.
Regarding differences with the SEC, there are a couple worth noting. One is that the SEC specifically requires a particular footnote disclosure in the financial statements related to the effects of climate on line items in the financial statements – we’re not that specific. And we have an appendix to our climate document, which is a series of industry-based disclosure requirements, that the SEC doesn’t have.
The other significant difference [between us and the SEC] is that in addition to S2, we’ve got S1, which sets out general requirements to disclose across all sustainability risks and opportunities, not just climate.
If I look at EFRAG, what’s similar is that [neither of us is] just focused on climate. Our S1 document covers all significant sustainability risks and opportunities. EFRAG also has the ambition of being [across different] sustainability topics.
The key difference between us and Europe is that we’re investor-focused, and EFRAG is explicitly focused on double materiality, which is meeting the needs of those wanting information beyond investors.
And then if you look at the architecture, while the content of the TCFD requirements is included in the climate materials EFRAG is asking for, it has used different architecture. There isn’t such a clear alignment with those four pillars that are common between us and the SEC.
The single best thing you can do is read our proposals, because that gives you the best and clearest idea of what’s ahead for you
Who is ultimately responsible for mandating and then implementing these new standards once they’ve gone through your process? Ultimately, the adoption of the ISSB standards will be determined by jurisdictions. It’s the same for international accounting standards; they were adopted by jurisdictions. So different governments or securities regulators within countries will make the decisions on who is required to apply the standards.
Who exactly does that in different countries is still developing because it’s a new type of reporting. But it will be a series of conversations with securities regulators and government bodies to determine where these requirements are mandated.
What’s fantastic, in terms of positive signs, is that the G20 and G7 have both been very supportive of the work of the ISSB. And the International Organization of Securities Commissions has also been very supportive, which gives us the positive signal that we should be well received by jurisdictions once we get through that journey.
Once you’ve gone through your S1 and S2 standards, what are you looking to develop next? We hope that before the end of the year, we’ll put out a document with some initial thoughts from the board’s perspective on what we think our next priority topics should be, after the climate and general requirement exposure drafts are finalized.
We’re going to be asking you guys what you think our priorities should be. I’m not going to tell you what I think my priorities should be; I’m waiting to hear from you. I would encourage everybody to get involved in that because it’s really important for us to understand where people think our resources should be concentrated.
What advice do you have for companies that want to make sure they’re ahead of the game and preparing for those changes in the ESG reporting space? The single best thing you can do is read our proposals, because that gives you the best and clearest idea of what’s ahead for you, so I’d really recommend that. It’s also good if you are already applying TCFD or SASB standards or the Integrated Reporting Framework. Continue to do so because that is really good preparation for what comes next as we build on those documents.
The other thing is to look at the proposals and think about where you might have data gaps, where you might have skills gaps and start really thinking about that journey ahead. Don’t delay – I think it’s always good to be prepared.
Find out more about the IR Magazine Think Tank – Europe 2022.
While the International Sustainability Standards Board (ISSB) is developing its global baseline for sustainability reporting, various jurisdictions around the world are working on their own ESG reporting rules for listed companies. Here we round up some of the major regulatory changes in the works.
In March, the SEC published its long-awaited climate disclosure rule that, if adopted, would require companies to include certain information in their registration statements and annual reports. The rule would require disclosure of material climate-related risks, greenhouse gas emissions and climate-related financial metrics. An extended comment period ended in mid-June. Once finalized, the rule is expected to face legal challenges, which could delay its adoption or lead to changes.
The European Commission has proposed the Corporate Sustainability Reporting Directive (CSRD), which would substantially expand the number of companies covered by sustainability reporting rules and put an explicit focus on double materiality. As part of the CSRD, the commission plans to adopt EU Sustainability Reporting Standards, which are being developed by the European Financial Reporting Advisory Group (EFRAG). In April, EFRAG published draft standards, which closed for comments on August 8.
Since April this year, large UK companies and financial institutions must report in line with TCFD recommendations. The UK government has also announced plans to implement Sustainability Disclosure Requirements (SDRs), which will require companies and investors to report on environmental risks. ISSB standards are expected to ‘form a core component of the SDR framework,’ says a government report. SDR requirements are planned to come in over the next one to three years, although implementation is dependent on the parliamentary timetable.
In December 2021, Singapore Exchange revealed a ‘roadmap’ for companies to provide climate disclosures aligned with TCFD recommendations. Climate reporting will be required by all issuers on a comply-or-explain basis from the financial year 2022. For some sectors heavily impacted by climate change, climate reporting will become mandatory from the financial year 2023 or 2024. From January 1, 2022, firms must also follow other sustainability reporting rules, such as setting a board diversity policy.
