The International Sustainability Standards Board (ISSB) is pioneering the future of sustainability reporting and looking to overhaul the way companies share information about their sustainability efforts. In this article, we explain everything you should know about the ISSB and more.
The sustainability landscape is complex. Between a variety of acronyms, standards, and frameworks, businesses struggle to understand what they should do to meet the expectations of investors, governments, and other stakeholders.
This lack of consistency, conformity, and understanding when it comes to the sustainability landscape creates a serious blocker to the adoption of sustainable practices.
That is where the International Sustainability Standards Board (ISSB) comes in. Along with its inaugural standards, S1 General Requirements for Disclosure of Sustainability-related Financial Information, and S2 Climate-related Disclosures, the ISSB is set to create a clear path for sustainable development.
What is the ISSB?
The ISSB is a standard-setting body established by non-profit the IFRS Foundation. The foundation had a single guiding mission, “to develop high-quality, understandable, enforceable and globally accepted” set of sustainability reporting standards, making the reporting landscape much more accessible – the ISSB was formed in order to develop them.
The importance of consistent standards
The flow of capital is seen as one of the biggest drivers of change and governments are counting on it to help transition to a low-carbon and equitable economy in the future. Sustainability, in all its forms, is now becoming a focal point for capital market investors and issuers alike.
Sustainable investing, also known as “impact” investing, has been on the rise in recent years. According to a survey by HSBC Sustainable Finance and Investing in 2019, 94% of investors now consider ESG (environmental, social, and governance) factors important. This is backed up by a study from PwC Luxembourg, which found that ESG funds continued to grow significantly in 2022, increasing to 10,154 in the second half of 2022, up from 9,279 in the first half of 2022.
For investors and other stakeholders looking to make educated decisions about where to invest their money, there needs to be a way to determine which organisations match their values. Standards, not to be confused with sustainability frameworks, exist to provide investors with that clarity. They set specific, replicable, and detailed requirements for what entities should be reporting on to create a level of uniformity in reporting.
But, with a number of different standards being used today, depending on which a company uses, the output may vary wildly between different reports, creating an inconsistent benchmark for stakeholders to use.
Where the ISSB S1 and S2 standards comes in
The IFRS, the parent body of the ISSB wants to solve this fragmentation of standards and in June 2023, the board published its first two finalised standards: S1 General Requirements for Disclosure of Sustainability-related Financial Information, and S2 Climate-related Disclosures
These standards offer a comprehensive global baseline of sustainability disclosures and have been embraced by investors, companies, governments, and regulators, providing a global baseline for understanding sustainability risks and opportunities.
So, what are the standards?
- IFRS S1 is a more general standard that applies to all sustainability-related risks and opportunities. It requires entities to disclose information about the nature of these risks and opportunities, their potential impact on the entity, and how the entity manages them.
- IFRS S2 is a more specific standard that focuses on climate-related risks and opportunities. It requires entities to disclose information about the potential financial impact of climate-related risks and opportunities, as well as information about how the entity manages these risks.
To create these standards, the ISSB has built on the work of other sustainability disclosure standards, such as the Climate Disclosure Standards Board (CDSB), the Task Force on Climate-related Financial Disclosures (TCFD), the Value Reporting Foundation’s Integrated Reporting Framework, and industry-based guidance from the Sustainability Accounting Standards Board (SASB).
In doing so, the ISSB has consolidated a number of different standards into one. Making it easy for companies to report on, and investors to compare on.
How the new ISSB standards will affect business
Although all public and private companies can apply IFRS S1 and IFRS S2 standards to their disclosures, the ISSB can’t mandate the application of the standards.
However, whilst companies can voluntarily apply them, in the future individual countries may decide to make reporting to these standards mandatory for large businesses. For example, the UK Government recently signalled support for the ISSB and announced that it would be establishing a mechanism for formal UK endorsement and adoption of the standards.
Those looking to apply these standards can work with disclosure frameworks such as CDP or GRI to understand what information they are required to report on moving forward.
Preparing ESG strategies for the ISSB
As mentioned earlier, the ISSB standards are not mandatory right now. However, the UK plans to adopt them in response to the EU’s CSRD (Corporate Sustainability Reporting Directive). So, companies might need to prepare for these standards sooner than they think.
Depending on where companies operate, they should review their ESG strategy (Environmental, Social, and Governance) and disclosure frameworks, making sure they align with both ISSB and CSRD requirements.
The future of the ISSB standards
The TCFD has been a leading force in the development of sustainability reporting standards. But, in a recent move, the Financial Stability Board (FSB), creators of the TCFD, has requested that the ISSB take over the monitoring and development of future standards.
This change has been met with mixed reactions. Some see it as a positive development, as it will bring the monitoring of sustainability reporting standards in line with the global standard-setting body. Others are concerned that it could lead to a weakening of disclosure standards, as unlike the TCFD, the ISSB is not affiliated with any governmental bodies and open to corporate capture.
ISSB vs CSRD
Both the ISSB and the CSRD (Corporate Sustainability Reporting Directive) are considered the “gold standard” for the future of sustainability reporting. Offering investors, governments, and other stakeholders all the information necessary to gauge business efforts.
Both standards emphasise the importance of ESG (Environmental, Social, and Governance) performance into financial decision-making and reporting, and the CSRD will be the EU’s legally binding answer to reporting requirements. For companies who may need to report under both, there needs to be consistency in order to avoid any contradictions or confusion.
For example, there are differences between the two approaches. The primary distinction lies in their treatment of materiality. The ISSB recommends focusing solely on financially material standards, whereas the EU approach entails disclosing items that are both financially relevant and significant to the world/society.
While the ultimate level of interoperability between IFRS/ISSB and EFRAG/ESRS is yet to be determined, both standards share the common objective of establishing a global, interoperable baseline for enhanced ESG-related disclosures and EFRAG, the standard’s setter for the CSRD, has already acknowledged “the high level of interoperability reached on climate between ESRS and ISSB standards.”
