Out-Law News 2 min. read

ISSB faces call to provide more clarity over sustainability disclosure proposals

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The International Sustainability Standards Board (ISSB) must provide greater guidance and support to businesses over new draft sustainability and climate-related disclosure standards, according to one legal specialist.

Sharon E Smith, expert in climate change and sustainable finance at Pinsent Masons, welcomed the ISSB’s proposals, but warned that “the scale of the challenge facing reporting entities – particularly those who have historically conducted no or very limited climate or sustainability-related reporting – cannot be under-estimated”.

Her comments come as the ISSB prepares to publish finalised disclosure standards later this year following a consultation. The standards build upon the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and incorporate industry-based disclosure requirements drawn up by the Sustainability Accounting Standards Board (SASB).

The ISSB said the proposals respond 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. It said the separate climate-related standards were intended to acknowledge that, although climate change affects all economic sectors, “the degree and type of exposure… are likely to vary by sector, industry, geography and entity.”

Smith Sharon

Sharon E. Smith

Head of Learning & Knowledge (Climate & Sustainability)

The scale of the challenge facing reporting entities – particularly those who have historically conducted no or very limited climate or sustainability-related reporting – cannot be under-estimated

Under the proposals, companies would need to disclose material information about all significant sustainability‑related risks and opportunities they are exposed to. The proposals would require disclosure of information about a 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.

Smith, who drafted Pinsent Masons’ response (44 pages / 644KB PDF) to the ISSB consultation, called for a staggered implementation timetable to allow the standards to be most effectively implemented and applied. She said: “Enough time must be given for entities to familiarise themselves with the standards and consideration given as to whether the most challenging reporting aspects could be introduced – at least to begin with – on a ‘comply or explain’ basis”.

She also recommended that the effective date of each sustainability disclosure standard be at least 12 months after the relevant final form of standard is published.

Euan McVicar of Pinsent Masons said: “There is a significant risk that the general requirements for sustainability-related disclosures are currently so broad that they will not be implemented consistently” and said there was a concern from individual jurisdictions and regulators  that the current proposals might “overwhelm a significant number of reporting entities”.  McVicar suggested bringing in the requirement to report on sustainability-related financial information related to specific disclosure topics only when the relevant specific topic disclosure standards have been published “so as not to overwhelm companies who may only now be coming to grips with climate-related financial disclosures”

Smith also said that the ISSB should prioritise the completion of its climate-related disclosure standards due to the immediate challenge posed by the global climate emergency, and urged the board to build on the work of the Taskforce for Nature-related Financial Disclosures (TNFD) by drafting standards for nature-related disclosures to help tackle the loss of biodiversity around the world “as early as practicable”.

Smith called on the ISSB to publish more guidance on several areas of the proposed disclosure standards that reporting entities could find particularly challenging, including how to collect and analyse climate-related and sustainability-related data across the value chain, transition planning and carbon offsets, and financed and facilitated emissions for financial institutions. She said the ISSB should clarify several terms used throughout the proposals, including the use of “materiality” in relation to enterprise value, as well as the meaning of “sustainability-related”, and “significant” in the context of risks and opportunities.

Smith said more guidance was also needed on the assessment of trade-offs between different sustainability topics. “This is something which most reporting entities will not have considered before in reporting, and there are uncertainties as to how they can meaningfully assess and quantify trade-offs between very different sustainability topics.”

The consultation has now closed and the ISSB is reviewing the feedback it received. It said it plans to publish new standards by the end of 2022.

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