The confusing world of competing sustainability reporting frameworks and standards is soon to become a little simpler. In early 2022 work will begin in earnest on the creation of the International Sustainability Standards Board (ISSB), a body designed to guide companies on which sustainability disclosures investors need to supplement financial statements.
A multitude of sustainability reporting standards already exist, including the GRI, the TCFD, the SASB – which recently merged with the International Integrated Reporting Council to become the Value Reporting Foundation (VRF) – and the Climate Disclosure Standards Board (CDSB), to name just a few. The sheer number of frameworks and standards has led to confusion and inconsistent disclosure in the market. The VRF and the CDSB will be consolidated into the new ISSB, eliminating some of that complexity.
The board’s launch was announced at the 26th UN Climate Change Conference – COP26 – in early November, and its creation has been led by the IFRS Foundation, which is responsible for setting global accounting standards plans and which held a consultation in 2020 to gauge demand for global sustainability standards and whether it should help set them.
‘The main thing we heard was that, yes, there is a strong, growing and urgent demand for an improvement in global consistency, comparability and sustainability reporting, and that people wanted the foundation to take a role here,’ says Sue Lloyd, vice chair of the International Accounting Standards Board (IASB). The IASB is the accounting standard-setting body of the IFRS Foundation.
The foundation is launching the ISSB to create standardized ESG reporting rules that will complement the IASB’s financial accounting regimen, which already requires companies to consider climate risk in their accounts whenever it is material.
The new board is slated to focus on climate first because investors consider it one of the most important sustainability topics, but it will also look at sustainability factors more generally that could have a material impact on a company’s value. It will use the TCFD and other sustainability reporting frameworks and standards as a baseline.
The ISSB wants to pull all the different standards together in a format resembling an IFRS standard, Lloyd says. The board will also seek to create ‘a presentation standard that would comment more generally on what sustainability information for investors should look like, whether it’s climate-related or other topics,’ she adds.
Increased sustainability demands disclosure As companies focus more on sustainability, they are paying more heed to disclosure frameworks and standards. As of October 2020, more than 1,500 organizations had expressed their support for the TCFD, more than five times higher than in 2017, according to the State of Green Business 2021 report, published jointly by S&P Global and GreenBiz Group.
On average, 42 percent of companies with a market cap of more than $10 bn disclosed at least some information in line with each individual TCFD recommendation in 2019.
But it’s important to note that supporting the TCFD isn’t the same as actually making climate-related disclosures. According to the 2020 TCFD status report on around 1,700 public companies for the 2017-2019 period, ‘companies’ disclosure of the potential financial impact of climate change on their businesses, strategies and financial planning is low.’ For example, only one in 15 companies disclosed information on the resilience of its strategy under different climate-related scenarios.
Corporations are taking an increasing interest in ESG. In 2020, 1,386 companies took part in S&P Global’s Corporate Sustainability Assessment, an annual evaluation of sustainability practices. That compares with just 280 in 1999.
Investors value the different disclosure frameworks and standards already in existence, but how useful they find them varies. According to Edelman Trust Barometer data, 43 percent of US investors find the TCFD very useful and 52 percent find it somewhat useful. Regarding SASB, 56 percent describe it as very useful, and 38 percent somewhat useful.
SASB chair Jeffrey Hales tells S&P Global Sustainable1 that he has seen an uptick in the number of companies using SASB standards primarily because of investor demands. ‘They’ve heard clearly from their investors that this is information they want, and they’re increasingly understanding how the investors are using that information,’ he says.
Mandatory disclosure The standards ISSB creates will function like global accounting standards, Lloyd says. ‘If I use our accounting standards as an example, we don’t require countries or companies to apply our international accounting standards, but particular jurisdictions have chosen to require companies in their jurisdictions to apply those standards,’ she tells S&P Global Sustainable1.
‘Similarly, when the ISSB writes standards, the countries that would apply them and whether they would be mandatory or not is really a decision that would be made by regulators in particular jurisdictions.’
Calls for mandatory disclosures in different jurisdictions are increasing, as market participants seek more information about companies’ ESG risks. ‘To get complete disclosures on the types of information we need embedded throughout all the companies that are being invested in… it’s probably going to take a regulatory push to get there,’ says Hales.
The US lies outside the international accounting standards set up by the IFRS Foundation. Companies based in the US report under a framework created by the FASB. But Gary Gensler, chair of the SEC, said in June 2021 he was ‘struck by the call for enhanced disclosures’ in the SEC’s request for comments on whether to make ESG disclosures mandatory.
The EU is also expanding the reach of its Non-Financial Reporting Directive, creating a new regulation – the Corporate Sustainability Reporting Directive – which will require information on how a firm's business affects society and the environment.
New Zealand has introduced legislation to make climate risk reporting mandatory in line with TCFD recommendations, and the UK as of January 1, 2021 requires commercial companies with a premium listing to disclose against them.
Switzerland in August 2021 announced it will require large companies to implement the TCFD’s recommendations and report on climate risk. France already requires publicly listed companies, financial institutions and asset managers to disclose their climate risk exposure.
‘I think everyone recognizes a global solution is ideal, but global solutions are very hard to actually implement and maintain because of regional jurisdictions,’ says Hales. ‘So I think the second-best [option] is that regional distinctions end up being part of a building blocks approach… where you might have the IFRS Foundation establish a set of standards that could be applied globally.’
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