Out-Law News 4 min. read

Sustainability disclosure standards to be published by ISSB


The imminent publication of new standards by the International Sustainability Standards Board (ISSB) will provide a welcome global baseline in relation to sustainability disclosures, but businesses should expect complexities to emerge due to other regulatory disclosure requirements across different jurisdictions, experts have said.

Michael Watson, Hayden Morgan, Sharon E. Smith and Euan McVicar of Pinsent Masons were commenting ahead of the anticipated publication by the ISSB of its first two sustainability disclosure standards. Publication is expected during week beginning Monday 26 June 2023.

The ISSB has previously said that its work on new standards is a response to calls from investors, lenders and other creditors for “more consistent, complete, comparable and verifiable” sustainability-related financial information to enable them to assess an entity’s enterprise value. 

Morgan Hayden

Hayden Morgan

Partner, Head of Sustainability Advisory

Prudent firms will respond by developing an integrated sustainability governance and stakeholder engagement framework, with defined multi-functional operational processes

The ISSB consulted on draft versions of the two standards – S1 and S2 – last year. Those proposals envisaged companies disclosing material information about all significant sustainability‑related risks and opportunities they are exposed to. Under the plans, it would involve the disclosure of information about their company’s impacts and dependencies on people, the planet and the economy when relevant to the assessment of the company’s enterprise value. Firms would also be required to provide material information about their “significant climate-related risks and opportunities” to enable investors to assess the effect of climate-related risks and opportunities on their enterprise value.

Since issuing its draft standards, however, the ISSB said it had “tentatively decided” to “remove the word ‘significant’ from the proposed requirements to describe which sustainability risks and opportunities an entity would be required to disclose”.

The finalised standards will build and expand upon the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), which concern climate-related risk and opportunities, and incorporate industry-based disclosure requirements drawn up by the Sustainability Accounting Standards Board (SASB).

The new standards are expected to be effective from 1 January 2024. They will be voluntary to adopt until such time as they are incorporated into legislation or regulation. Currently, many businesses across several jurisdictions are subject to TCFD-based obligations. It is expected that the ISSB’s standards will form the basis of fresh regulatory requirements in due course – the UK government has, for example, already signalled its intention to incorporate the ISSB standards into “new economy wide sustainably disclosure requirements”.

Watson Michael

Michael Watson

Partner, Head of Climate and Sustainability Advisory

In corporate governance terms, this requires really close and effective collaboration between various functions including finance, operations, compliance and legal

Climate and sustainability adviser Michael Watson said: “There is a current and growing maelstrom of regulation and standards driving enhanced disclosure and transparency and requiring the reporting of financial and non-financial information regarding corporate sustainability performance. The alignment of non-financial sustainability-related information – which can often be considered as more subjective compared to traditional financial reporting information that has a greater appearance of objectivity and more established approaches to assurance and verification – with financial reports, is becoming transformative in corporate behaviours.”

“The fact the ISSB along with others are driving this change presents an opportunity, but also a challenge, as firms within scope seek new approaches to ensure they have appropriate governance and reporting structures in place to source appropriate information and establish what level of assurance is possible. This requires multi-disciplinary advice and support. In corporate governance terms, this requires really close and effective collaboration between various functions including finance, operations, compliance and legal,” he said.

Hayden Morgan, who helps businesses meet their sustainability goals, said the landscape of sustainability-related standards is currently fragmented and that meeting the varying requirements adds cost, complexity and risk to both companies and investors.

Morgan said: “The emphasis of the ISSB’s work is on the development of a ‘baseline’. That is, a minimum standard of good practice sustainability disclosure. From this perspective, the ISSB standards provide a welcome level playing field for firms to develop a foundation for sustainability disclosure. Stakeholders will welcome that consistency and comparability when applied on a global basis.” 

“However, many firms in regions such as the EU should view ISSB as the minimum prescribed disclosure requirements. Such firms will very soon be required by law to meet higher, and more stringent, disclosure requirements, such as those proposed for the EU CSRD. The EU’s approach to disclosure fundamentally differs in a number of aspects. Arguably, the most significant of these is the EU’s requirement for firms to apply a ‘double materiality’ principle – ‘impact materiality’ and ‘financial materiality’. This will require firms to assess what is material to their firm’s financial performance as well as the firm’s impact on the environment or on people,” he said.

Morgan said that businesses should regard disclosure requirements as “the tip of the iceberg” and be prepared to make significant changes internally to meet the new standards.

“Below the waterline are the internal operational processes and capacities required to make evidence-based, robust and scientifically-rigorous disclosures,” Morgan said. “Firms operating internationally and/or with supply chain across multiple jurisdictions, face a maelstrom of sustainability regulation and changing stakeholder expectations.”

“Prudent firms will respond by developing an integrated sustainability governance and stakeholder engagement framework, with defined multi-functional operational processes. Such a response will help firms not only meet minimum ISSB requirements, but also comply with more stringent regional variances in disclosure, and, more crucially, equip firms to navigate the global transition to a more sustainable economy. This should drive tangible real-world outcomes for investors, the environment, and people,” he said.

Climate and sustainability experts Sharon E. Smith and Euan McVicar said that while the final wording of the standards has not yet been published, businesses will welcome the position the ISSB has taken in relation to implementation of its standards.

Smith said: “The ISSB agreed in April to provide a package of reliefs for companies, meaning that for the first year they use the ISSB standards they need not provide disclosures about sustainability-related risks and opportunities beyond climate-related information. Companies will also not need to provide annual sustainability-related disclosures at the same time as the related financial statements; provide comparative information; nor disclose ‘Scope 3’ greenhouse gas emissions. In addition, the companies will not need, during that first year, to use the Greenhouse Gas Protocol to measure emissions, if they are currently using a different approach.”

The ISSB announced in April that: “Companies will still need to apply S1 in the first year they use the ISSB standards to meet general disclosure requirements where they relate to climate, however. For example, the new S1 is expected to set out the approach to materiality and requirements for connectivity of information with that in the financial statements, which are relevant to the disclosure of climate-related information.”

Euan McVicar added: “The newly proposed phased implementation was an important concession which we believe is more likely to result in the standards being successfully implemented. What is now of paramount importance is how individual jurisdictions seek to implement the finalised standards. I suspect there is still much to come on that.”

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