The International Sustainability Standards Board (ISSB) has unveiled its long-awaited set of global sustainability-related disclosure standards for capital markets, in a "frontier-crossing" release designed to aid better-informed green investment decisions.
The ISSB, which was established at the COP26 UN Climate Summit in Glasgow by the International Financial Reporting Standards (IFRS) Foundation, said the new standards for the first time provided "a common language for disclosing the effect of climate-related risks and opportunities on a company's prospects".
Published today, the International Financial Reporting Standards Sustainability Disclosure Standards, S1 and S2 (IFRS S1 and S2) have been designed to provide a clear, holistic framework to enable corporate sustainability-related reporting to be used alongside annual statements and accounts at a global level in the same reporting package, according to the ISSB.
Emmanuel Faber, chair of the ISSB and former CEO of French food brands giant Danone, said today's launch of the standards represented the culmination of more than 18 months of "intense" work.
"The ISSB Standards have been designed to help companies tell their sustainability story in a robust, comparable and verifiable manner," he added. "We have consulted closely with the market to ensure the Standards are proportionate and will result in disclosures that are relevant for investment decision-making.
"We know that better information leads to better economic decisions. Today's publication is just the starting point as we consult on our future priorities, beyond climate."
Widespread demand
A globally-recognised set of sustainability standards has long been sought by the business community in a bid to provide clarity and a level-playing field where firms face a vast array of voluntary and mandatory data reporting requirements.
Sue Lloyd, vice-chair of ISSB, described the standards as a response to the "resounding request from the market…to bring an end to the alphabet soup" of current corporate reporting systems.
As a result, both S1 and S2 are designed to enable compliance with the Taskforce on Climate-related Financial Disclosure (TCFD) guidelines, and are fully compatible with GAAP (generally-accepted accounting principles) standards, ISSB said.
Faber described the new "accounting-based language" as "crossing the frontier" from formerly inconsistent, competing and overlapping sustainability-related reporting mechanisms.
"The flurry of about 500 Different ESG metrics, standards and disclosures over the last decade is evidence that despite the very comprehensive accounting systems that we operate, there is apparently something that the market participants are needing and did not find in the current system," he said.
The detail
Faber underlined the point that IFRS S1 and S2, are not just "a suite of ESG metrics or disclosures". The new standards provide "a comprehensive language, which is deemed to be consistent, verifiable, and therefore, decision-useful", he explained.
IFRS S1 - the 'General Requirements for Disclosure of Sustainability-related Financial Information' - provides a set of requirements for companies to use alongside their financial statements to share forward-looking, sustainability-related risks and opportunities over the short, medium and long term.
Meanwhile, IFRS S2 - 'Climate-related Disclosures' - provides guidance on reporting on corporate risks associated with climate change impacts and the net zero transition, and is designed to be used in conjunction with IFRS S1.
Announcing the new standards this morning, Faber explained how the two documents would help to "connect the dots with financial statements".
Firstly, he pointed to "conceptual" alignment, based on the concept that the value a company creates is "inextricably linked" to its wider business ecosystem. Faber said the standards would enable businesses to express the risks and opportunities relating to a firm's entire value chain - from society and business partners to the natural capital it employs.
Secondly, he emphasised the forward-looking nature of the standards due to the requirement it places on firms to disclose "the current and anticipated effects of sustainability risks and opportunities on financial statements and the company's prospects".
"It's not about a new suite of ESG standards," Faber added. "It's about ensuring our accounting will gradually incorporate, as part of general purpose financial reporting, information which market participants are in dire need of to have to make decisions."
UK response
Now that IFRS S1 and IFRS S2 are issued, the ISSB said it would work with jurisdictions and companies to support adoption. It said the first steps would be to create a Transition Implementation Group to support companies that apply the Standards, and launching capacity-building initiatives to support effective implementation.
The launch of the ISSB's new sustainability standards were immediately welcomed today by the UK government, which has indicated it could look to integrate its recommendations into UK policy and regulations.
Baroness Penn, a Treasury Minister with responsibility for ESG, said the government would "continue to make the case for [the ISSB standards'] importance as the global baseline standard."
"Global standards and interoperability are at the heart of…minimising the costs to firms operating across multiple jurisdictions, and crucially providing investors with comparable and consistent information to inform capital allocation," she said.
No firm timescale has yet been given as to when the standards could be firmly integrated into the UK's regulatory landscape, but Baroness Penn insisted "the development of the UK framework to assess and endorse the standards for use in the UK is proceeding at pace".
Sacha Sadan, director for ESG at the UK's Financial Conduct Authority (FCA), said progress and clarity on sustainability disclosures would help provide assurance across green investment markets.
"As a financial regulator, it's pretty obvious that we need one single standard so that we can all talk the same language; that's the really important thing," he said. "Everyone has really good incentives and wants to do things - if they're speaking different languages, it just doesn't happen."
"It's all about trust," he continued. "The investors want to make sure that they can believe in these things."
Business reaction
Now the standards have been published, the International Organisation of Securities Commissions (IOSCO) - the global association of securities market regulators - is set to evaluate whether to publicly endorse the standards for adoption across different jurisdictions, according to the ISSB.
The IOSCO described the standards as "a real gamechanger" for financial market regulators worldwide.
The business community also welcomed the launch of the new standards today.
Steve Varley, global vice chair for sustainability at consulting giant EY, said the ISSB standards would give businesses and investors "freedom from ambiguity and opportunity to go further, faster".
"The current global disparity in sustainability reporting makes clear our need for a common language and baseline for sustainability-focused disclosures, particularly regarding investments," he explained. "Having worked with CSOs [chief sustainability officers] from around the world, both at EY and as co-chair of the S30, I've seen first-hand just how vital a harmonised approach is."
Gilly Lord, PwC UK's global leader for public policy and regulation, said the standards were "urgently needed"
"Clear and widely adopted reporting standards are a vital part of any plan to strengthen trust in corporate disclosures around sustainability, including climate change," she explained. "It will be far easier to directly compare businesses, knowing that they are reporting against the same definitions and standards."
However, Lord argued there was still a need to go further in order to incentivise adoption to ensure companies use them to "produce high quality sustainability reports".
Moreover, she urged the ISSB to develop further standards beyond just climate change, looking in addition at a raft of other key sustainability issues such as nature risk.
"Globally aligned corporate sustainability reporting can accelerate progress toward net zero and other objectives by creating transparency and accountability," Lord said. "Reporting helps companies and their stakeholders identify which areas require focus and the actions they need to take. It is therefore a crucial element to achieving the kind of systemic economic reform the world needs."
Green investment groups also welcomed the ISSB's release today. James Alexander, CEO of UKSIF - the UK Sustainable Investment and Finance Association - said the standards would "help to deliver the coherent, global baseline of sustainability disclosures sought by our members."
He therefore urged the UK government to consult the market "as soon as possible, on the full implementation of the ISSB's standards across the economy".
