ISSB must show leadership

It used to be so simple. Investors and companies were crying out for standardisation of the ‘alphabet soup’ of frameworks, guidelines and rules on climate-related disclosures. So, the International Sustainability Standards Board (ISSB) was launched in November 2021 by the IFRS Foundation to do just that.

Since it subsumed some leaders in the field, the ISSB did not need to reinvent the wheel. It could focus on the common ground and the needs of investors for a broader set of information to make decisions about buying or selling stocks, voting and engagement with management.

But ‘ESG’ rule-making – taking account of environmental, social and governance issues – has become political. The evidence is clear from the US, where the Securities and Exchange Commission’s authority is being questioned over its proposed climate disclosure rules; to the Netherlands, where the Farmer-Citizen Movement has campaigned against the European Commission’s ‘farm-to-fork’ strategy; to Uxbridge in the UK, where opposition to extension of London’s Ultra Low Emission Zone saved a parliamentary seat for the Conservative government.

So, the ISSB’s Request for Information on its 2024-26 agenda priorities (a surprisingly short-term horizon) is being conducted in a less benign environment. Its proposed projects – biodiversity, human capital, human rights and integration with financial reporting – should be uncontroversial. Just as the Task Force on Climate-related Financial Disclosures has shaped standardised rule-making, a similar international Taskforce on Nature-related Financial Disclosures is now finalising its framework.

Future focus?

With IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2, Climate-related Disclosures, published in June, the key question is how much priority should be given to new projects and how much to supporting implementation of S1 and S2?

For me, the answer is: crack on with the next standards, starting with biodiversity. After all, one of the ISSB’s constituents, the Climate Disclosure Standards Board, already has application guidance on this. The ISSB also works with the Global Sustainability Standards Board, which is updating the Global Reporting Initiative’s biodiversity standard, first published in 2016. The standards have application guidance and point to various compatible sources.

But many voices, including the UK Endorsement Board, are saying ‘not so fast’. In its comment letter, the UKEB says a high priority should be given to implementation and a low one to new research. It advises the ISSB to ‘consolidate its achievements to-date to deliver on the promise of globally accepted, mandatory baseline sustainability disclosure standards’, with a warning that some jurisdictions are considering modifications.

This concern makes the endorsement of the ISSB’s standards by IOSCO (International Organization of Securities Commissions), announced on 25 July, all the more important.

In setting out a baseline, the ISSB has never taken a maximalist approach. The more ambitious European Sustainability Reporting Standards should be interoperable with ISSB sustainability standards, while adding ‘impact’ materiality to financial materiality (which is no small ask).

No small ask

Yet, I do feel a little uneasy: S1 and S2 are not basic. Under strategy, they prescribe reporting on the ‘anticipated’ effects on financial position, performance and cashflows over the short, medium and long term.

Then there’s Scope 3 reporting of greenhouse gas emissions. The Greenhouse Gas Protocol extended its reach to the Corporate Value Chain in 2011, yet it remains difficult for companies to measure accurately emissions from entities they do not control.

While larger companies should already have the bulk of the information required, concerns about the burden on smaller ones can be mitigated at national level by phasing in and waivers.

With governments blinking in the face of grassroots opposition and investors being warned off ESG missions, something will have to give. If it is not to be the environment, then investors should loudly remind policy- and rule-makers that managing these risks and opportunities is integral to wealth protection and creation.

The ISSB will need to have the courage of its conviction that standardisation provides a vital service to both investors and companies. It should be leading international developments, not standing by while others stir up and add to the alphabet soup.