Last week, you may have seen news about the IFRS Foundation’s International Sustainability Standards Board (ISSB) and the sustainability disclosure standards that it will finalize by the end of June this year. And you may have seen that they will be effective next January. But you may also be wondering what that means and why it matters. Climate change is a global problem, and markets are global too. Building a common language for companies and investors to communicate about sustainability-related risks and opportunities is crucial as we face these challenges together.
The ISSB’s announcement reflects a tremendous global milestone. These standards will help companies and investors communicate about these issues in a more consistent and comparable way, regardless of where they are in the world. That’s why I was so proud that Persefoni sponsored the first IFRS Sustainability Symposium. My brilliant colleagues Emily Pierce and Anissa Vasquez were on the ground to hear all the different voices reflecting on what the ISSB standards mean and how they will shape global markets. We are taking the liberty of a longer summary than usual to share those important perspectives. The common theme was that we are learning a new language, but we are not starting from scratch, and we are up for the challenge. Read on to learn more. For more information to help your company understand the ISSB standards and what they could mean for you, please see our Persefoni blog post, “Breaking Down the ISSB.”
1. The ISSB standards will shape the next generation of global norms for sustainability disclosures, helping global markets “speak the same language.”
To open the IFRS Sustainability Symposium, ISSB Chair Emmanuel Faber updated the audience on the ISSB’s completion of its review and the next steps towards issuing the final standards. Faber reminded the audience of the objective of the ISSB - to help markets better capture the financial impacts of sustainability and climate-related risk and opportunities, informing investors decision-making and business strategies.
To succeed at communicating these risks and opportunities in a consistent and comparable way, global markets need a shared, “new language” for investor-focused sustainability disclosure. The ISSB standards provide that language. Market participants will not be fluent on day one, but, over time, this new language will become integrated into information processes, organizational strategy, corporate culture, and market expectations.
Companies who see these standards as an opportunity to improve their communication and inform their strategic thinking will be better positioned in the marketplace. The IFRS Foundation and the ISSB are focused on helping companies of all sizes and stages be prepared and supported as they use the ISSB standards.
2. Companies will not be learning a new language from scratch. The global community has been learning by doing as companies have used the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and the ISSB standards build on that foundation.
Learning a new language has its challenges, but it helps when you build on familiar foundations. Mark Carney, UN Special Envoy on Climate Action and Finance and former chair of the Financial Stability Board (which established the TCFD), and Sue Lloyd, ISSB Vice-Chair, held a fireside chat focused on the foundation of the ISSB standards.
The cornerstone is the TCFD framework, a language for thinking about climate-related financial risk that was created by the market, for the market. The four pillars of the TCFD (governance, strategy, risk management, and metrics and targets) are also the four pillars of the ISSB standards. The Greenhouse Gas Protocol, which has been a common language for GHG emissions accounting and reporting for over 20 years, remains the primary language under the ISSB S2.
The ISSB builds on the TCFD foundation and adds “a special sprinkle of standard-setting” - enhancing the recommendations and expanding the framework to broader sustainability issues. The IFRS Foundation also joined forces with other standard-setters to inform their work on the first set of standards, and is creating a framework for incorporating other investor-focused metrics and approaches along the way.
What this means for global markets is that companies that have already been using the TCFD, GHG Protocol, Sustainability Accounting Standards Board (SASB) standards, or the Climate Disclosure Standards Board (CDSB) standards, will find that the ISSB Standards sound very familiar. And for many companies, it will be a relief to merge those disparate efforts into one common set of disclosures communicated in a shared language.
3. The ISSB standards provide a pathway for all companies to be able to communicate to the market, and will help them become more fluent over time.
Another “sprinkle” the IFRS Foundation brings to sustainability standard-setting is its robust, rigorous, and transparent approach to governance, due process, and gathering stakeholder input. On the first panel, we heard about the feedback from more than 1400 commenters, and its work to engage with countless others through outreach efforts. Investors told the ISSB about the information they need to make decisions, and companies told the ISSB about some of the challenges. The ISSB discussed this feedback in open meetings, and landed on a balanced set of standards designed to enable and advance sustainability and climate-related disclosures in an inclusive way.
Companies largely agreed that a global baseline in a common language would benefit them, but spoke up about some of the challenges, especially for scenario analysis and disclosure of Scope 3 GHG emissions. The resounding message from investors was that they need this information to fully understand a company’s resilience, strategy, risks, and opportunities.
Verity Chegar, an ISSB Board Member, explained that the ISSB focused on finding ways to bridge this gap, recognizing that as global markets learn a new language, no one will be fluent on day one.
In the final standards, there will be a spectrum of approaches to scenario analysis that allow companies to start with qualitative approaches, explain their thinking, and, when ready, conduct a more quantitative analysis over time in a scalable way. For Scope 3, the ISSB standards will include a series of “safety rails” to support companies as they develop their own capacity and as market capacity evolves. This includes at least an additional year before Scope 3 disclosures are expected, and the ISSB will develop additional guidance for applying the GHG protocol to Scope 3, such as which categories to focus on. The standards are also clear that estimates and assumptions are not only accepted, but an expected part of the process - the standards require disclosures about the estimates and assumptions used.
At the Symposium, two globally-active investors explained how they use this information, even if a company is in the earlier stage of the spectrum. Tom Seidenstein, Chair of the International Accounting and Audit Standards Boards (IAASB) reminded the audience that global markets (and assurance providers) are inherently comfortable with estimates that are based on robust control processes and accompanied by disclosure.
In the words of an investor who also has to walk the walk as an issuer, Scope 3 represents the largest exposure to transition risk, and reporting on it is “a matter of when, not if.” Global markets will have to get comfortable with estimates and companies will need to establish reliable processes to support those calculations; this issuer will be doing that too.
4. Regulators around the world can support investors and companies by using the ISSB standards as the basis for new or enhanced disclosure requirements.
After the ISSB standards are finalized, regulators around the globe will have the opportunity to embed this new language in the fabric of their regulatory framework.
In April 2020, the International Organization of Securities Commissions (IOSCO) issued a report identifying the proliferation of third-party reporting frameworks as a risk to investor protection and highlighted a global “need to improve the comparability of sustainability-related disclosure” to support investors. IOSCO followed up in mid-2021 with a more detailed analysis of investor needs and issuer concerns. At COP26, the IFRS Foundation established the ISSB, supported by IOSCO and welcomed by the G20. IOSCO identified a need, the G20 agreed, and the ISSB delivered.
It was appropriate that Martin Moloney, IOSCO Secretary General, kicked off this discussion, reiterating the importance of the ISSB’s laser focus on meeting investors’ needs for decision-useful information. IOSCO announced that it will begin a review of the ISSB standards to consider whether the standards meet these needs, and will be supporting its members in thinking through ways to use the ISSB standards to serve their domestic markets.
Moloney emphasized that the ISSB’s focus on investors will lead to more comparable, consistent, and reliable information in the market to support more efficient pricing and valuation.
We then heard from regulators from Singapore, Chile, and Canada about how they are approaching sustainability disclosures and how the ISSB standards can support their efforts. Different countries will have different approaches to translating these global standards into rules, and different challenges depending on their market circumstances. That may mean that different regulators will have different rules for who is required to report and when those requirements will be effective. The crucial message is that there is a shared “why” - to promote consistent, comparable, and reliable sustainability disclosures for investors around the globe. That shared “why” requires a common “what” - the ISSB standards.
These regulators also recognized that implementation of the ISSB standards is not only an investor protection imperative, it is also a capital formation opportunity. Once final, companies around the world will be able to seize the opportunity to report using ISSB standards on a voluntary basis. Regulators around the world now have the chance to catalyze that opportunity within their economies, attracting foreign investment and building more resilient businesses.
5. The ISSB standards will unlock opportunities for investors and companies of all sizes and in all markets. Technology will help make these opportunities accessible.
The last two panels were reminders of how learning a new language can unlock opportunities and shift mindsets. Practitioners from South Africa, Singapore, and IFC reminded the audience to focus on opportunity. Speaking the language of the ISSB standards will help companies in emerging markets communicate their risks and opportunities to global investors, and will help global investors get the sustainability information they need to support their decisions.
Standards drive information gathering, information drives business strategy and resilience, a resilient business with a data-backed strategy attracts capital, and capital enables action.
Just like learning a new language has become more accessible with technology, technology will enable better data and data sharing, resulting in better information. Supply chain information is interconnected, and technology already exists to facilitate sharing of that information. Global markets will develop new technology to further support sustainability reporting. The global challenge is to be sure that technology is accessible across all markets.
What’s Next for Global Markets?
Guidance. Training. Capacity-building. Regulatory readiness. Technology development. Assurance standards for sustainability reporting.
All of these are on our collective to-do list. The ISSB will need ongoing global support for its forward agenda, and global market participants should join in wherever they can. Companies can start using the ISSB standards. Investors can start asking for ISSB-compliant reporting. Providers and practitioners can support preparers. The ISSB and IOSCO can convene capacity-building initiatives. Regulators can catalyze compliance. And capital providers can allocate in ways that “align capitalism with what society wants from it.”
As Emmanuel Faber reminded Symposium attendees, it is up to all of us to embed this language into the markets and build the kind of markets we want to have for the future.