Companies face stricter sustainability disclosures

London — The newly created International Sustainability Standards Board (ISSB) has published the first set of global guidelines on corporate disclosures for public consultation.

What is the ISSB?

It was launched at the UN’s COP26 climate summit in November 2021 after calls from world leaders, investors and regulators for a more rigorous approach to companies’ climate disclosures to combat greenwashing, or exaggerating green credentials. It is a sister body of the International Accounting Standards Board, whose accounting rules are used in more than 140 countries.

What are its draft standards?

The overall aim is for the two-part standards to show investors how sustainability-related risks and opportunities from environmental, social and governance (ESG) factors affect a company’s enterprise value, or its shares and net debt.

The first part sets out general sustainability-related financial disclosures by assessing all types of risks and opportunities, and how they are managed and controlled.

The second standard focuses on climate and covers Scope 1, 2 and 3, respectively, of a company’s direct emissions of carbon dioxide in metric tonnes, indirect emissions from the energy it has bought, and all other indirect emissions, such as from suppliers.

Companies could assess specific social and governance risks by using standards from other recognised bodies.

Won’t there be duplication?

Time will tell. The EU has its own corporate sustainability reporting directive (CSRD) that comes into force in January 2023, with the first set of mandatory annual sustainability reports expected in 2024.

The CSRD goes beyond the ISSB by including “double materiality”, meaning the impact of a company on the environment and not just how climate affects a company.

In a similar way to the ISSB, the US Securities and Exchange Commission (SEC) has proposed requiring US-listed companies to disclose various climate-related risks and greenhouse gas emissions, covering Scope 1-3. They are likely to be finalised later this year.

The ISSB hopes that all jurisdictions will acknowledge its standards as a global baseline for foreign companies, as the SEC is already indicating, to dovetail with their own rules.

How will ISSB norms be applied?

The aim is to combine the qualitative information from the first ISSB standard with the quantitative data and targets on emissions from the second standard into one sustainability report. That will be published at the same time as financial information, meaning at least annually, with guidance on half-year updates for those who want it.

Companies will have to provide information in a form that is verifiable, meaning it can be checked by external auditors, crucial for instilling investor confidence in the new norms.

Are the ISSB standards mandatory?

It will be up to each country to decide whether to adopt the ISSB standards. IOSCO, the global body for securities regulators from the US, Europe, Asia and elsewhere expects to endorse the standards, which should encourage uptake. Fixing a start date is part of the public consultation, though companies could voluntarily move earlier.

What next?

The ISSB will consult later in the year on other standards that may be needed, such as on social or governance, or other environmental areas like biodiversity.

Reuters