Global Sustainability Disclosure Standards: the Creation of the International Sustainability Standards Board at COP26
On November 3, 2021, the International Financial Reporting Standards (“IFRS”) Foundation announced the creation of the International Sustainability Standards Board (“ISSB”). The ISSB is tasked with developing a comprehensive set of baseline sustainability standards for global use. Such a set of standards would facilitate the harmonisation of sustainability disclosures across jurisdictions and replace the use of existing voluntary standards. The ISSB announcement came at the 26th United Nations Climate Change Conference of Parties (“COP26”) that occurred in Glasgow, Scotland.
Two prototype standards and a summary prepared by an IRFS working group, the Technical Readiness Working Group (“TRWG”), were released concurrently with the ISSB announcement and provide recommendations to the ISSB for consideration.
The ISSB headquarters will be located in Frankfurt, Germany. The ISSB’s second office will be located in Montreal and it will be responsible for supporting key functions of the ISSB and facilitating the cooperation of regional stakeholders. San Francisco and London will also have offices focused on regional efforts, with other global offices proposed in Beijing and Tokyo.
ISSB consolidates ESG-focused organizations
The creation of the ISSB was accompanied by a statement that prominent investor-focused sustainability disclosure organisations committed to consolidating into the ISSB, including the IFRS Foundation, the Climate Disclosure Standards Board (“CDSB”), and the Value Reporting Foundation (“VRF”). The CDSB is an initiative of CDP (formerly the Carbon Disclosure Project), a non-profit organization. The VRF is also a non-profit organization which currently houses the Integrated Reporting Framework (“IRF”) and the Sustainability Accounting Standards Board (“SASB”) Standards. The consolidation of the IFRS Foundation, CDSB, and VRF is expected to occur by June 2022. Following the consolidation, the ISSB will house the convergence of the environment, social and governance (“ESG”) frameworks and standards produced by these organizations. The ISSB has encouraged the continued use of, among others, the CDSB, IRF, and SASB Standards until its own standards are published.
The TRWG provides the ISSB with a running start
The ISSB will benefit from work undertaken prior to its creation by the TRWG. The TRWG will ultimately provide the ISSB with eight recommendations or deliverables for its consideration:
- General Requirements for Disclosure of Sustainability-related Financial Information (General Requirements Prototype);
- Climate-related Disclosures Prototype (Climate Prototype);
- Conceptual guidelines for standard-setting;
- Architecture of Standards;
- Other items to inform standard-setting agenda;
- Due process characteristics;
- Digitisation strategy; and
- Connectivity between ISSB and the International Accounting Standards Board (“IASB”).
The ISSB announcement was accompanied by the TRWG’s release of the first two deliverables, the General Requirements Prototype and the Climate Prototype (the “Prototypes”) which may be found here and here, respectively. The Prototypes are not exposure drafts but are instead provided for informational purposes and without any binding effect on the ISSB. The Prototypes provide the ISSB with its initial recommendations as it develops global baseline sustainability disclosures. The TRWG participants involved in producing the Prototypes include the CDSB, the VRF, the IASB, the World Economic Form, and the Task Force on Climate-related Financial Disclosures (“TCFD”). The International Organization of Securities Commissions (“IOSCO”) which includes four securities regulators from Canada, British Columbia, Alberta, Ontario and Quebec also participated in the TRWG as an observer.
A. An overview of the General Requirements Prototype
The General Requirements Prototype sets out the requirements for sustainability-related financial information disclosures relevant to the significant sustainability-related risks and opportunities of an entity. The disclosures must be complete, neutral and objective, with the objective being to provide end-users with information that may inform their investment or business decisions. This prototype is aligned with TCFD recommendations and incorporated content from the IASB’s IAS 1: Presentation of Financial Disclosures. Entities within the scope of this prototype are those preparing and disclosing sustainability-related financial information in accordance with IFRS sustainability disclosure standards.
This General Requirements Prototype includes four key points for those preparing disclosures:
- The concept of materiality: Entities must disclose all material sustainability-related financial information. Information is material if its omission, misstatement, or obscurity could reasonably be expected to influence the decisions made by the users of an entity’s financial reporting. This means that materiality is entity-specific, based on the nature, magnitude, or both, of the items to which the sustainability-related information relates. The prototype does not predetermine materiality in any circumstance or provide a uniform quantitative threshold for materiality. Materiality should be reassessed at each reporting date, in light of an entity’s circumstances changing over time.
- The general disclosure requirements: The requirements focus on four matters critical to an entity’s operations: a) governance; b) strategy; c) risk management; and d) and metrics and targets. These four matters are discussed further below. It is intended that the requirement of information in respect of these four aspects should enhance consistency and comparability of disclosures across entities.
- The use of other standards: This prototype requires from the outset that entities disclose all material information about significant sustainability risks and opportunities. The ISSB will, over time, develop both thematic- and industry-specific standards. Until such standards are published, entities must use their judgment to prepare relevant, neutral, and honest disclosures guided by this prototype, other IFRS standards, or other standard-setting bodies whose requirements satisfy accepted industry practices and meet the needs of the users of general financial reporting.
- The appropriate reporting channel: This prototype does require that entities make their sustainability-related financial disclosures in a specific location, other than as part of general purpose financial reporting. This means that the information may be provided in various locations, including as part of management’s commentary. Management’s commentary may be found in a management discussion and analysis (“MD&A”), strategic reports, or operating and financial reviews. Irrespective of location, disclosures should be made for the same period on which the financial statements are based and at the same time as those statements.
The General Requirements Prototype also includes appendices that define key terms, provide guidance on implementing materiality, and describe the qualitative characteristics of useful sustainability-related financial information.
B. An overview of the Climate Prototype
The Climate Prototype is a climate-related disclosure framework setting out the requirements to identify, measure, and disclose climate-related financial information. The objective of this prototype is to elicit relevant information concerning an entity’s exposure to climate-related risks and opportunities, allowing users to make informed business and investment decisions in respect of the providing entity. Climate-related risks within the scope of the prototype include physical risks from climate change as well as risks associated with the transition to a lower-carbon economy. This prototype incorporates TCFD recommendations and further sets out industry disclosure requirements at Appendix B that are derived from SASB Standards.
This prototype’s requirements are intended, in particular, to allow an assessment of the following four critical operations of an entity:
- Governance: The processes, controls, and procedures used to monitor and manage climate-related risks and opportunities;
- Strategy: The climate-related risks and opportunities that may enhance, threaten or change the business model and strategy over the short, medium and long term including:
- whether and how information about climate-related risks and opportunities inform management’s strategy and decision making;
- the current and the anticipated effects of climate-related risks and opportunities on its business model;
- the impact of climate-related risks and opportunities on the entity’s financial position, performance and cash flows, both at the end of the reporting period and the anticipated effects over the short, medium and long term; and
- the resilience of the entity’s strategy to climate-related risks;
- Risk management: How climate-related risks are identified, assessed, managed, and mitigated; and
- Metrics and targets: Metrics and targets used to manage and monitor the entity’s performance in relation to climate-related risks and opportunities over time.
It is proposed that requiring information about these four matters should result in greater consistency and comparability of sustainability-related disclosures across entities.
The Climate Prototype also includes appendices defining key terms and setting out summaries of industry-based disclosure requirements, organized by sector and industry with a set of accounting metrics associated with each disclosure topic. These requirements are set out in full in a supplementary 581-page document, stating technical protocols for disclosure requirements in eleven different sectors ranging from consumer goods to transportation.
What’s next for the ISSB?
The ISSB will commence its work early in 2022, with its first steps to include consideration of the Prototypes as well as other TRWG recommendations. The ISSB expects to release its first proposed standards for public consultation later that year, a process that will be overseen by the IRFS Trustees’ Due Process Oversight Committee.
IOSCO will assess the ISSB’s disclosure standards following release, with the goal of approving their use by the end of 2022. IOSCO’s approval will be an important milestone for the ISSB standards, as IOSCO’s membership is comprised of organisations regulating more than 95% of the world’s securities and futures markets.
The ISSB intends to develop its standards in such a way that adopting jurisdictions may mandate their use by reporting entities. Although the ISSB standards will not be mandatory (leaving it to individual jurisdictions to adopt their use) a recent statement from the government of the United Kingdom welcoming the ISSB’s creation was joined by 40 other jurisdictions. Among others, those welcoming the ISSB included finance ministers and central bank officials from Canada, the European Commission, the United States, France, Germany, India, China, Russia, South Korea, Netherlands, and Switzerland.
The bottom line
The ISSB announcement is a significant development in the global movement towards greater ESG reporting. In particular, the imminent development of a global baseline for sustainability- and climate-related disclosures is expected to bring needed consistency to ESG-related disclosures, making them more useful to investors and other end users. Reporting issuers will also benefit from the convergence of ESG-reporting standards, as the development of a single global standard facilitating their disclosures across jurisdictions will allow markets to price sustainability- and climate-related risk accurately.
The announcement of a significant ISSB office in Montreal is also a tremendous development for ESG in Canada. The office location underscores Canada’s importance to the global dialogue around ESG and Montreal’s status as a significant hub for sustainable finance. The announcement of the Montreal office is the latest significant ESG development in Canada. In October, the Canadian Securities Administrators published a proposed National Instrument that would introduce climate-related disclosure requirements for reporting issuers in Canada, with limited exceptions. Our analysis of that proposal can be found here.
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