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ISSB to Navigate New Sustainability Disclosure Standards
The International Sustainability Standards Board (ISSB) is an organization that was established by the IFRS Foundation to develop comprehensive global sustainability standards for sustainability reporting. Under the IFRS Foundation, the ISSB is solely responsible for sustainability-related technical matters which include:
Complete discretion in the development of technical agenda, subject to certain consultation requirements with the Trustees as well as the public.
The preparation and the issuance of SDSs and the exposure drafts, keeping in mind the due process stipulated in the Constitution.
In recent times, ISSB has initiated some new projects which were focused on biodiversity disclosure practices and addressing sustainability risks.
Background of ISSB’s Initiatives
The Establishment and Primary Roles of ISSB
The establishment of the International Sustainability Standards Board (ISSB) was announced by the Trustees of the IFRS Foundation on November 3rd in the year 2021 at COP26 in Glasgow. The ISSB was made to meet public interest standards which will be beneficial for an extensive global baseline of sustainability disclosures which will facilitate the needs of investors and financial markets.
IFRS S1 and IFRS S2
The mutual mission of IFRS S1 and IFRS S2 is to help companies make sustainability-related disclosures.
IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information
The IFRS S1 aims to disclose all the information about sustainability risks and opportunities that might affect a company’s prospects.
IFRS S1 was crafted to provide primary requirements for sustainability disclosures that can be used with IFRS S2 and the future Standards, which are:
Requiring to disclose material information about sustainability risks and opportunities alongside the financial statements in order to meet the investor information needs.
Requiring industry-specific disclosures related to the industry-based SASB standards for guidance while identifying disclosures about sustainability-related risks and opportunities.
Referring to the sources to provide a helping hand to companies to navigate sustainability risks and opportunities and information.
Requiring disclosures helps investors to know the connection between the sustainability risks and opportunities as well as the sustainability-related financial disclosures and financial statements.
GAAP agnostic.
IFRS S2: Climate-related Disclosures
The two standards are made to be used jointly, although IFRS S2 was created to fulfil the climate-specific requirements which include:
Strategy disclosure which separates the physical and transitional risks
Disclosure of their plans to climate related risks and opportunities which comprises how climate related targets are finalized and any targets it is required to follow by law or regulation.
Companies need to perform scenario analysis to elaborate on assorted climate-related events that may affect the business in the future.
Climate-related metrics and target disclosures must have:
Cross-industry metrics which are related to all companies, like greenhouse gas emissions
Industry-based metrics which are relevant to companies within the related industries
Company-specific metrics approved by the board or management while measuring progress towards set targets.
Rationale for New Projects
The ISSB’s decision for the expansion of its scope was driven by substantial market feedback indicating the requirement for extensive and more detailed disclosures. The Chair of the ISSB, Emmanuel Faber stressed the growing investor interest in nature and human capital, highlighting the importance of these areas for corporate performance and sustainability in the long run.
“I am of the view that only human capital exists. Ideas for innovation, and collective action to create business solutions to meet needs are a human factor, which then attracts financial capital for implementation. For me, such human capital is naturally embedded into the fabric of companies and the economy.” says Emmanuel Faber when asked about human capital.
This statement clears the doubt that investors need more detailed information on how companies manage biodiversity and human capital to make constructive decisions.
Scope and Focus of the New Projects
The latest research project is predicted to concentrate on two crucial aspects:
biodiversity, ecosystems and ecosystem services; and
human capital.
These research projects will be focusing on the common information needs of investors in assessing whether and how these risks and opportunities can impact a company’s prospects.
Taking the ISSB’s inaugural Standards into consideration, the ISSB will explore how it might build from past initiatives. This also encompasses the ones under the SASB Standards and CDSB guidance, as well as the features of the work of the Task Force on Nature-related Financial Disclosures (TNFD).
Biodiversity disclosure will encompass the impact of corporate activities on natural habitats and ecosystems which provide valuable insights into how companies are handling their environmental footprint.
The human capital reporting will provide information on workforce management, employee well-being, as well as the development of human resources.
However, the ISSB has now confirmed that it will not be taking on any projects related to the risks and opportunities which are associated with human rights- beyond risks and opportunities concerning the company’s workforce and workers in its value chain. But they have said that they will thoroughly look into the developments of these crucial areas and might count them in a future agenda consultation.
“Beyond climate, we are committed to building out the global baseline of sustainability-related financial disclosure to meet the needs of investors. Feedback indicated a significant and growing need among investors for improved disclosures around biodiversity, ecosystems and ecosystems services as well as human capital, as a key source of value for companies,” says the ISSB Chair, Emmanuel Faber.
Linkage to Previous Standards and Initiatives
The new projects will be built on the previously existing IFRS S1 and IFRS S2 standards which will ensure the continuity and coherence in sustainability reporting.
The Taskforce on Nature-related Financial Disclosures (TNFD) has openly accepted the decision of the International Sustainability Standards Board (ISSB) to start working on nature related concerns with the help of the recommendations provided by the TNFD. This is an important point to consider for the development of the global baseline for sustainability reporting after the announcement of its IFRS S1 and IFRS S2 sustainability reporting standards in the year 2023. TNFD has also expressed their excitement to work with the ISSB on the research and development of its nature-related standard-setting work.
With this release of the TNFD recommendations, the ISSB announcement is the next most crucial stage towards nature-related corporate reporting. The next incorporation of nature-related issues in the global reporting baseline drawing on the work of the TNFD will support the investors and report preparers to have a better understanding and approach across governance, strategy, risk management and metrics and targets.
The TNFD’s recommendations have been crafted in such a way that they have a matchless level of consistency in the structure, approach and language which is used by the TCFD and also by the ISSB’s existing IFRS S1 and IFRS S2 standards.
Potential Impact and Importance
The introduction of these new IFRS S1 and IFRS S2 standards is predicted to have a comprehensive impact on global corporate reporting and investment decisions.
The development of IFRS S1 and S2 by the ISSB had a straightforward mandate: to create global standards which will ease the approach to disclosing sustainability and climate-related information which will thereby help companies report their ESG impacts and strategies with good clarity and uninterrupted consistency.
Improved biodiversity disclosure and human capital reporting will offer investors a clearer picture of a company’s sustainability risks and opportunities. This, in turn, will drive more informed investment strategies which will foster better accountability and transparency.
Future Directions and Stakeholder Engagement
The ISSB is dedicated to engaging with a wide array of stakeholders to ensure that the new standards will meet the assorted needs and expectations and has confirmed the motive of the search for public interest objectives and is poised to engage proactively as jurisdictions and other stakeholders commence their evaluation of ISSB’s standards. This inclusive approach will assist in the betterment of the standards which will make them increasingly effective and widely accepted. The ISSB has analyzed this feedback from the stakeholders and the collaborators which will deliberate the strategic direction and balance of its activities and the new research and standard-setting projects which can be added to the work plan. The ISSB is planning to finalize the work plan in the first few months of this year, 2024.
To sum up, the ISSB’s new initiatives on biodiversity disclosure and human capital reporting display remarkable advancements in the field of global sustainability standards. These efforts will improve corporate transparency, enhance accountability as well as provide important information for the investors. By looking into the key sustainability risks, the ISSB is setting new standards for corporate sustainability risks and also contributing to the bigger goal of sustainable development in the global business and financial communities.
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