“Everyone in the system is aware that we need to be realistic: investors acknowledge the fact that they don’t want to ask the impossible from companies,” explains Sue Lloyd, vice-chair of the International Sustainability Standards Board (ISSB).
Euromoney sits down with Lloyd after the lengthy consultation period, during which the ISSB received feedback and worked with advisory groups on its inaugural sustainability disclosure standards.
It has been more than 18 months since the board was created at COP26 in Glasgow and given the responsibility of creating a global methodology with which companies could report the sustainability risks and opportunities of their business models to investors – and on June 26 the board published IFRS S1 and S2.
S1 requires companies to communicate to investors the sustainability-related risks and opportunities they face over the short, medium and long term. It covers governance, strategy and risk management, as well as metrics and targets related to the sustainability risks and opportunities that a company faces.
S2 sets out specific climate-related disclosures and is complementary to S1. It includes cross-industry metric categories beyond GHG emissions and climate-related targets.
Both standards include some “application guidance” on what type of information is considered material and comparable, as well as illustrative examples to help corporates navigate this task. The question is whether application is easy enough to get companies on board, and meticulous enough to actually create a benchmark on sustainability-related risks and opportunities for the market.
Proportionality
Establishing a global baseline of sustainability disclosure standards was always meant to be based on moderation. “We needed to make sure the standards were inclusive and that they aren’t just usable for sophisticated companies but by all, irrespective of the availability of resources or maturity on sustainability topics,” explains Lloyd.
The point, she adds, is to get as many companies on board as possible across multiple jurisdictions. To do that, the disclosure process needs to be achievable without costing too much to corporates.
The project summary states that key areas of IFRS S1 and S2 disclosure requirements should be based on “reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort”.
The ISSB also addressed demand for a gradual disclosure process that companies can ease into.
“The other feedback we heard was that getting started is a big task, so we have transition reliefs in place to help get companies started,” she says. These transition reliefs are in effect time extensions on some of the more challenging disclosure requirements, including reporting Scope 3 GHG emissions, publishing the information at the same time as financial statements, or reporting on any sustainability-related disclosure that goes beyond climate.
Everyone in the system is aware that we need to be realistic: investors acknowledge the fact that they don’t want to ask the impossible from companies
Sue Lloyd, ISSB
One could be forgiven for thinking that as far as requirements go, these standards are a little soft. If companies are given too much wiggle room to determine what counts as “reasonable information” and do not start disclosing the same information at the same time, it defeats the purpose of having a standardized… standard.
But the market is comfortable with a certain level of flexibility. “There is an important condition to this notion that companies might be doing slightly different things based on their circumstances, that there is visibility about what those things are,” says Lloyd.
Investors have come to understand that mapping out sustainability-related risks and opportunities involves a lot of estimating. What they want is visibility on how the company views the risks and opportunities its own business model is exposed to, in a way that is comparable at a global scale.
When asked about whether the reliefs could jeopardize the necessary homogeneity for the information to be comparable, Lloyd points to the legacy of the IFRS itself, and its approach to accounting standards. “People think this ‘softness’ is unique to sustainability reporting, but actually making estimates and using forward-looking information is also a feature of more traditional reporting; we have been able to build on ‘tried and true concepts’ from financial statements literature,” she adds.
The ISSB has armed its standards with a set of guidelines about the parameters of the standards, suggestions and examples about what “reasonable information” looks like, and what companies need to do to be able to say that they are IFRS S1 and S2 compliant. These guidelines create a basis for robustness.
“It’s not reasonable for a larger, well-resourced company not to try harder, relatively speaking,” says Lloyd.
It is transparency that facilitates market discipline, not perfection.
Interoperability
Another important part of the process has been the ISSB’s work with the Jurisdictional Working Group (JWG) to enhance compatibility of the global standards with other country or regional legislative initiatives. This includes representatives from the UK, the US, Japan and China, as well as the EU.
To reduce reporting burdens, the ISSB focused on increasing the interoperability of its standards with the European Sustainability Reporting Standards (ESRS) and plans to do the same with Global Reporting Initiative (GRI) standards, among others. “It’s about driving efficiency; we want the global baseline to be an anchor,” says Lloyd.
It helps that the standards were built on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) from the start. If a company has already begun looking at applying the TCFD, chances are it will be halfway to being ISSB compliant as well. “It’s a less complex environment for the company, and less noise in the system for investors to understand the information,” she adds.
Yet being part of the JWG has not stopped those same countries and regions from creating more advisory groups and committees to manage their own disclosure frameworks.
There’s going to be lots of after-sales service, so that we can assist with capacity building and make sure we are supporting the implementation of these standards
Sue Lloyd
In its 2023 Green Finance Strategy, the UK government stated that it “intends to establish two advisory committees, [of which] the second committee, which will be supported by the Financial Reporting Council and independently chaired, will have a technical focus and […] be responsible for considering how the standards fit alongside existing reporting requirements for UK companies in scope”.
And late last year, the European Financial Reporting Advisory Group (EFRAG) – which is developing the ESRS for the Corporate Sustainability Reporting Directive – said that it would be setting up an ESRS Taxonomy Consultative Forum to “provide views and recommendations to EFRAG on the content and technology of the draft XBRL Taxonomy of the ESRS”, according to a press release.
The ISSB might be working hard to reduce the alphabet soup, but it will not be able to prevent the advisory groups from multiplying in this already crowded landscape.
However, some operational complexity is necessary to ensure interoperability. In an ideal world, jurisdictions will have contributed to the ISSB’s standard setting to then make informed decisions on what their own reporting requirements should be, allowing their domestic companies to align to local and global standards by default.
And the ISSB is prepared to help achieve this. The board has set up a transition implementation group to support companies through the process. “There’s going to be lots of after-sales service, so that we can assist with capacity building and make sure we are supporting the implementation of these standards,” affirms Lloyd.
