The International Sustainability Standards Board (ISSB) has released its first two finalized standards, marking a significant milestone in global reporting for ESG investors. These standards provide a framework for companies to report on and disclose their climate and sustainability practices. This development is a culmination of 18 months of work and aims to establish a uniform and comprehensive global baseline for sustainability disclosures, addressing a long-standing demand from investors.
The two frameworks, known as IFRS S1 for sustainability reporting and IFRS S2 for climate reporting, represent a new era of ESG reporting and disclosures in capital markets. ESG, which stands for environmental, social, and governance, has become a prominent factor for investors when evaluating companies. It has gained widespread recognition and popularity, with an estimated $41 trillion in global ESG assets projected for 2022 and $50 trillion by 2025, according to Bloomberg.
However, the ESG market has been marred by the issue of greenwashing, where companies misrepresent their ESG products. This has raised concerns among both companies and investors. The ISSB aims to address this issue by publishing long-awaited ESG reporting standards. These standards will influence the information companies include in their financial reports, encouraging them to reflect ESG risks. They build upon existing standards and frameworks, such as the Climate Disclosure Standards Board (CDSB), Task Force on Climate-related Financial Disclosures (TCFD), Value Reporting Foundation’s Integrated Reporting Framework, and industry-based guidance from the Sustainability Accounting Standards Board (SASB).
One significant aspect of the ISSB standards is that they require companies to provide ESG information alongside their financial statements within the same reporting documents. This creates a common language for companies to disclose the climate-related risks and opportunities they face. Previously, the lack of a global baseline for ESG reporting made it challenging for investors to compare companies accurately.
Under the ISSB climate standards (IFRS S2), companies will need to determine their greenhouse gas (GHG) emissions, including all sources, and disclose the amount and percentage of assets or activities prone to climate-related risks. They will also be required to report on their capital expenditure related to climate risks and opportunities, disclose their use of internal carbon pricing, and report on climate-related targets.
The ISSB sustainability standards (IFRS S1) mandate that companies report information significant to financial prospects that may impact investment decisions. They must also discuss how they identify and monitor sustainability-related risks and explain their governance processes for tracking these risks.
The new ISSB standards align with the concepts underlying the IFRS Accounting Standards, which are required by 140 jurisdictions worldwide. This establishes a truly global baseline for sustainability reporting. While the European Union has already initiated its own standard-setting activities, the US Securities and Exchange Commission is still working on implementing regulations to ensure businesses disclose their carbon emissions. The SEC currently requires companies to report on their absolute carbon emissions, including scope 3 emissions.
During the finalization of the ESG reporting standards, the ISSB considered over 1,400 comment letters. One significant feedback received pertained to scope 3 emissions, which pose a challenge for many companies. Scope 3 emissions require corporations to map their entire value chain to report on their emissions. In response to this concern, the ISSB has granted companies an additional year to report on their scope 3 information and provided support and guidance for measuring and reporting these emissions.
Companies will be able to start applying the final version of the ISSB reporting standards next year. This means that the first reports using these frameworks will be available to investors in 2025. It will be up to individual countries to decide whether to make the ISSB standards mandatory. Ultimately, these global standards aim to enhance trust and confidence in companies’ climate and sustainability disclosures, enabling informed investment decisions.
