The International Sustainability Standards Board has far-reaching goals over the next five to 10 years. To start, it is working to build momentum for worldwide rules around how organizations will disclose their impact on the climate, and rolled out
But it doesn't plan to stop at climate; in fact, it plans to go well beyond climate — and even beyond sustainability itself.
Building on a strong foundation
The ISSB was established in November 2021 during the United Nations' COP26 climate change conference with the goal of bringing together various environmental, social and governance standard-setters under the oversight of the International Financial Reporting Standards Foundation.
The Value Reporting Foundation's Sustainability Accounting Standards Board and the International Integrated Reporting Council were consolidated into the ISSB last year, along with the Climate Disclosure Standards Board. They have since been working on bringing together the various sets of standards, while also proposing this year to expand into other areas like biodiversity, ecosystems and ecosystem services; human capital; human rights; and integration in reporting.
"The ISSB was set up to meet information needs about sustainability risks and opportunities of investors globally," said vice chair Sue Lloyd, who became vice chair of the International Accounting Standards Board (which is also overseen by the IFRS Foundation) in 2016 and has been an IASB member since 2014. "Historically, there have been a number of approaches for how such reporting should occur and a huge variety of the kinds of information that is being provided in the market. That's why a decision was made to create the ISSB following demand from our stakeholders globally, to provide high-quality information that would be globally comparable and designed to meet investor needs.
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One goal of the board is to combat so-called "greenwashing" by companies that could pick and choose which standards they wished to abide by on their sustainability reports.
"It's clear from our work over the last year that companies are keen to provide information about sustainability that is useful in global capital markets to inform investment decisions," said Lloyd. "So, the ISSB is seeking to ensure that companies can communicate with their investors, providing decision-useful information about sustainability-related risks and opportunities. We're also very focused on the efficiency of the reporting system. Our goal over the next five years is to establish a globally consistent approach to reporting sustainability information for investors, bringing the robustness typical of transition financial reporting."
Accounting firms are watching developments at the ISSB closely as more firms get involved in ESG and sustainability reporting and assurance.
"I would say the ISSB plays an important part in continuing to standardize important areas of sustainability reporting, and so I'm encouraged by the progress and the engagement that they've had in the U.S. and other major markets around the world," said Wes Bricker, vice chair and co-leader of trust solutions at Big Four firm PwC and a former chief accountant at the Securities and Exchange Commission.
SEC climate rule
The Securities and Exchange Commission is also expected to finalize its own climate-related disclosure rule this year after proposing it in March 2022 and receiving over 5,000 comments. Multinational companies will have to decide on how to proceed with complying with both the SEC rule and ISSB standards.
"There are similarities between ISSB and SEC proposed standards with variations on how much detail to provide on go-forward plans and strategies," said Tyler Williams, deputy head of Americas sustainability at consulting firm Capgemini. "In 2023, ISSB is supposed to include areas of biodiversity, human capital and human rights, while the SEC does not. However, both cover Category 15 financed emissions."
Category 15 refers to the emissions from a company's investments. It falls under Scope 3 emissions, where a company would report on greenhouse gas emissions from parts of its supply chain.
Most public companies are already doing some form of sustainability reporting, and both the SEC and ISSB disclosures align with the widely used framework from the Financial Stability Board's Task Force on Climate-related Financial Disclosures.
"I can tell you that over 90% or 95% of Fortune 100 companies are doing some kind of sustainability reporting," said Mihir Jhaveri, managing director and ESG practice leader at Centri Business Consulting, an accounting and advisory firm based in Philadelphia. "It's all voluntary. There is no mandate from anyone. That's what the SEC proposal is all about. … The whole purpose of why the ISSB was even established is to provide that standardization to the investors and the other shareholders, especially of large companies, to make sure that there's comparability between what companies are reporting."
The ISSB's S1 general sustainability disclosure standard and S2 climate-related disclosure standard should provide companies with more of that consistency and comparability. "There is no mandate [for] which companies should use what framework today," said Jhaveri. "The hope is that the convergence of these different frameworks and standards is going to essentially push companies to start adopting something that's more consistent within the industry or peer group."
The ISSB released the standards today. "We've kept it pretty close to what the targets were," said Jeffrey Hales, a member of the ISSB who was formerly chair of the SASB Standards Board.
The two standards draw upon the ones the ISSB inherited from its various predecessors. "They're very much built on the TCFD and SASB standards as well as the CDSB and integrated reporting," said Hales. "All of the organizations that were consolidated and the TCFD are going to work very closely. That's all baked into this new guidance. It's all in one place. We think that for a lot of companies that are already relying, for example, on SASB and the TCFD that this won't be as big of a jump for them. The new reporting always takes a little while longer to do."
Beyond climate, beyond sustainability
The S1 general sustainability disclosure standard that's been proposed by the ISSB already includes some of the other areas that the board is looking to explore further in the future.
"In fact, from the second year of application, S1 requires a company to report on the range of sustainability risks and opportunities that affect it," said Lloyd. "While we have prioritized climate first, we are not a climate-only board. We are then looking to our stakeholders to help us decide the next sustainability-related matters we should be focused on to develop detailed disclosure requirements."
The ISSB consultation will help the board decide on which areas to prioritize. "Responses to this agenda consultation that sets out these four potential research projects will help the ISSB prioritize its activities for a two-year period starting after the determination of the work plan by the board," explained Lloyd.
The proposed projects on biodiversity, human capital, human rights and integration in reporting would all require a great deal more work. "I don't think any of these projects will be straightforward and they are all substantial," said Lloyd. "I wouldn't say there is one that stands out. One of the things we have asked for feedback on is what existing materials we might build on and the scope we should focus on. That information will be important for us to determine whether and how to approach these projects."
The additional reporting needed for such projects could be a major challenge for companies and their accountants and auditors.
"It's clear there were concerns about the prospect of implementing not just climate disclosures, but disclosures for all material sustainability topics based on a company's own analysis," said Maura Hodge, ESG audit leader at Big Four firm KPMG. "That is especially a heavy lift for companies not already preparing a comprehensive ESG report. The ISSB's decision to allow a one-year climate-first option addresses implementation concerns but still moves forward with the standards and guidance needed to create a global baseline covering all relevant topics."
From accounting to sustainability standards
Lloyd is taking her experience from the accounting standard-setting world at the IASB into sustainability reporting at the ISSB. "I am interested in reporting as a tool for companies to communicate with investors to enable investors to make informed decisions," she said. "Bringing my standard-setting skills to a new 'topic' that is such a critical turning point in corporate reporting was a fabulous and exciting opportunity."
Sustainability reporting may evolve more into a mainstream task for accountants once the relevant reporting standards are finalized.
"Coming from an accounting background, I have to say I am particularly interested in how this information evolves in the marketplace and how we bring this reporting into the 'mainstream' of corporate reporting," said Lloyd. "The truth is, we are still at the very early stages of a journey towards high-quality reporting in this area. I look forward to seeing the market applying this information in more sophisticated ways to inform investment strategy."
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She sees an interplay between sustainability standards and accounting standards.
"The IASB and ISSB have separate but connected mandates," said Lloyd. "The IASB's focus is essentially on determining the information that should be included in financial statements, including in the notes. The ISSB's focus is on ensuring that material information is provided about sustainability-related risks and opportunities, so the boards have distinct roles. However, there are connections between the two because, for example, sustainability-related risks and opportunities can affect the amounts reported in current-period financial statements and may affect future financial statements."
The S1 and S2 standards ask for information about both current and anticipated effects, she pointed out.
"That information needs to be provided to meet the ISSB's requirements but the standards allow for cross-referencing, so it is possible that, for example, that information could be located in whole or part in the notes to the financial statements," said Lloyd. "The IASB has already provided educational materials to explain how climate-related risks already need to be considered in applying IFRS accounting standards when material, and has decided to undertake a research project about climate-related risks in the financial statements. We have technical staff of both boards involved in that project. These are just a couple of examples of where coordination between the boards and good interaction in our standards will provide opportunities to link connected information. Being coordinated to ensure that the standards work well for preparers and investors is really important, which is why we are ensuring that our processes are such that we are well coordinated in our standard-setting activities."
The ISSB has also been working with the Global Reporting Initiative, which has its own set of sustainability standards that are widely used in Europe. GRI, unlike SASB, the IIRC and the CDSB, has chosen to remain independent, but is acting as an advisor to the ISSB.
"I think that the collaboration between ISSB, SASB and GRI is speeding up," said GRI CEO Eelco van der Enden during an interview in March. "We are on the brink of renegotiating an extended memorandum of understanding. Our standards are complementary. They take care of the financial part, we take care of the impact part. We both have our sets of users and stakeholders. Within that framework, you cover all aspects of sustainability reporting."
Adoption by jurisdiction
The ISSB standards will need to be adopted by various jurisdictions before they become official in those countries, but the board has been in talks with officials in different nations and continents to ease that process.
"Since the creation of the ISSB, I have been very encouraged by the rapid progress we are making in conversations with jurisdictional authorities," said Lloyd. "There is a real drive to push forward and bring this kind of reporting to maturity. I have also been positively surprised by the very high level of interest and engagement from our stakeholders. This engagement by jurisdictions and our other stakeholders has been critically important to enable us to develop our standards in a manner that is truly global, ready for use internationally, and considering the range of capabilities and level of preparedness around the world."
Last year, the ISSB set up a working group of representatives from various jurisdictions around the world — including the SEC in the U.S., China, the European Union, the U.K. and Japan — to coordinate between the ISSB's climate disclosure proposals and those under development in different countries. The board has also been drawing on the work of other standard-setters, including groups like SASB that were merged into it, and others that have remained independent. Lloyd found them all to be supportive of the ISSB's work, which could help build acceptance globally.
"In producing our first two standards, we had the advantage of relying on the work that had already been done by others, including the VRF, CDSB and the TCFD," said Lloyd. "That meant that the content of our standards had already been market-tested in many cases and we had the insights and expertise of the technical team that had written them. We knew those areas where we needed feedback from stakeholders to make decisions on our final standards, and we were blown away by the detail and insight in the feedback we received. So I wouldn't say I was surprised by any specific piece of feedback so much as the very rich support we received. I was also really pleased with the strength of support for a global baseline."
While the SEC's proposed rule includes a role for auditors — with some climate-related financial statement metrics and related disclosures included in a note to a company's audited financial statements — the ISSB isn't trying to set auditing standards. However, it is closely following the work of the International Auditing and Assurance Standards Board. The ISSB is also leaving it up to individual jurisdictions to decide what to do about assurance.
"The question of the required assurance is for jurisdictions and not our decision," said Lloyd. "However, we of course want the information provided using our standards to be robust and 'investable.' To support that, we have worked to ensure the information is assurable and we are in close dialogue with parties such as the IAASB."
ESG backlash
The new sustainability and climate-related standards will be coming out at a time when ESG is experiencing a backlash in some parts of the U.S., with legislators in states like Florida and Texas passing laws that would discourage pension funds from investing in ESG funds. But Lloyd sees demand for this type of information from investors.
"It is important to keep in mind that the ISSB was created to meet the needs of investors," she said. "There is a clear demand for this information to be disclosed in a consistent and comparable way, and it is coming from people making investment decisions, as well as companies seeking clarity. The ISSB is not establishing policy or pushing for particular investment decisions. We are absolutely focused on meeting this specific need. Ultimately it is about getting access to more and better information to inform decision-making. How that information is used is not up to us."
With the SEC developing its own climate-related disclosure rule, the ISSB standards are likely to be used first in Europe ahead of the U.S., as IFRS standards are already widely used in the European Union. The EU is also ahead of the curve in mandating sustainability standards, with the European Financial Reporting Advisory Group delivering a set of draft European Sustainability Reporting Standards last November to the European Commission in line with the EU's Corporate Sustainability Reporting Directive.
"In building the ISSB standards, we focused on providing companies with an efficient and effective reporting system that provides a clear, identifiable set of information that meets investors' needs on a globally comparable basis," said Lloyd. "In this regard, our work with the EU is important. We have been working with the European Commission and EFRAG toward a shared objective to maximize interoperability of our respective standards and align on key climate disclosures when possible, to reduce reporting burdens. The objective of this work is to enable our stakeholders to meet the requirements of both European Sustainability Reporting Standards and the ISSB standards in an efficient manner reducing duplication in reporting. The best of both worlds is possible — an internationally comparable global baseline for investors supplemented by broader information if needed for other stakeholders."
