Accurate sustainability reporting has quickly become necessary in the contemporary investing environment. As a firm’s ESG performance has become increasingly important, so have calls for accountability and scrutiny of their sustainability initiatives given the apparent severity of the climate crisis and known economic benefits of action. However, despite the existing ESG reporting frameworks, there still is no widely adopted or recognised standard, globally consistent, and comparable framework. In response to strong market demand, at the COP26 climate summit in November 2021, the Trustees of the International Financial Reporting Standards Foundation (IFRS) announced the formation of the International Sustainability Standards Board (ISSB).

Seeking to address the fragmented landscape of the current voluntary sustainability reporting standards, the IFRS intends the ISSB to emerge as a comprehensive global baseline of sustainability disclosures designed to increase the effectiveness and efficiency of corporate sustainability and ESG reporting. Through the consolidated and internationally recognised framework, the IFRS hopes the ISSB will address the information needs of inventions, reduce the costs for data preparers and improve information usability for data users. Moreover, the ISSB would enable companies to provide comprehensive sustainability information to global capital markets; and facilitate interoperability with disclosures that are jurisdiction-specific and aimed at broader stakeholder groups.

ISSB Structure and Operational Model

The proposed ISSB consists of 14 board members – including four members from the Asia/Oceania region; four from Europe; four from the Americas; one from Africa; and one appointed from any area. The constitution requires a geographical balance and aims to represent the best technical expertise and diversity of international business and market experience. In order to ensure proximity and market relevance, it will operate in a multi-location model. In addition, the ISSB will operate closely alongside the International Accounting Standards Board (IASB) ensuring continuity between the standards. While each board is independent, the staff of the IASB and the ISSB coordinate to ensure their standards are compatible and provide the best information to capital market participants.

IFRS S1 and S2 Disclosure Standards

At the end of Q2 2023, the ISSB plans to issue the final versions of the first two IFRS Sustainability disclosure standards; the IFRS S1 General Requirements for Disclosure of Sustainability-Related Financial Information and IFRS S2 Climate-Related Disclosures. The ISSB will support the implementation of both standards, which beginning as of January 1st, 2024 will become effective for annual reporting periods, with companies beginning to issue disclosures against the standards in 2025.

IFRS S1 is the basis and provides the groundwork for the ISSB’s universal standard. It stipulates companies provide material information on all significant sustainability-related risks and opportunities the reporting entity is exposed to. The reporting entity would provide disclosures about governance, strategy, risk management, and metrics and targets that are comparable, verifiable, timely, and understandable. These disclosures should enable stakeholders to better understand the connections between sustainability-related risks and bolster their ability to assess value. The IFRS S1 standards will also require companies to publish their sustainability disclosures at the same time as their financial disclosure – driven by the principle that sustainability performance is fundamentally linked to financial performance, necessitating that this information be simultaneously reported. However, once the standards come into effect in January 2024, companies will have a one-year relief period from the simultaneous reporting requirement.

The IFRS S2 requires the reporting entity to provide complete information about their exposure to climate-related risks and opportunities to help assist stakeholders' ability to assess the entity’s value. The climate information, in tandem with the rest of the financial reporting, will provide useful information for assessing an entity's future cash including their amounts, timing and certainty, over the short, medium and long term. The draft will require reporting for climate-specific risks in four main areas across governance, strategy, risk management and metrics and targets. The Climate Exposure Draft mandates reporting requirements on how an entity's processes, controls and business model will identify, measure, adapt, and prepare for anticipated and far-reaching effects of climate-related risk including more frequent and several extreme weather events, increased infectious disease burdens and locations, and food and water insecurity.

With the goal of maximising the compatibility of standards, the S1 and S2 have incorporated and built upon existing sector-specific standards. The IFRS S1 borrowed from the Sustainability Accounting Standards Board’s (SASB) standards and the IFRS S2 disclosures are broadly consistent with the Taskforce on Climate-related Financial Disclosures (TCFD) reporting recommendations focusing on climate. However, the IFRS S2 also builds on the TCFD by incorporating social and governance topics and requiring additional and more granular information such as reporting on Scope 3 Emissions and requiring reporting on how climate-related considerations are factored into executive pay, and the percentage linked to climate considerations.

As the anticipated rollout approaches, the ISSB has been garnering substantial political and market endorsements. At the G7 Summit in Hiroshima, Japan in May 2023, political leaders supported the finalisation of the ISSB standards for general reporting on sustainability and for climate-related disclosures and working toward achieving globally interoperable sustainability disclosure frameworks. The G7 backing accompanies the growing list of international leaders in support of the ISSB including the G20, International Organization of Securities Commissioners (IOSCO), the Financial Stability Board, African Finance Ministers and by Finance Ministers and Central Bank Governors from over 40 jurisdictions.

Despite the political backing, the widespread adoption of the ISSB standards will depend on the efforts made by local jurisdictions and the pace of implementation could differ substantially around the world, especially where the impacts are greater and disproportionately felt. Without national regulations, the extent that the ISSB standards become globally adopted will depend on the level to which each national regulator and authority decides to implement them. While this at-will approach is consistent with the IASB’s approach to IFRS and financial reporting, it begs the question, to what extent will the ISSB’s ability to change the status quo be limited by the lack of meaningful accountability measures?