ISSB Standards Set Global Path For Sustainability Reporting

The global business community is gradually moving towards greater transparency and accountability in sustainability practices. At the heart of this shift is the International Sustainability Standards Board (ISSB), which is poised to transform the way companies of all sizes report on sustainability. Founded by the IFRS Foundation, the ISSB will deliver a consistent, high-quality, and widely accepted global sustainability reporting standard. With companies coming under growing pressure from investors, governments, and other stakeholders to show their environmental and social performance, the work of the ISSB is more important than ever.

The sustainability reporting environment has been beset by fragmentation for a long time, with multiple standards, frameworks, and acronyms creating confusion and inconsistency. This non-conformity has been a significant challenge for companies attempting to address the myriad expectations of stakeholders. Seeing this, the ISSB intervened with the aim of establishing a more transparent and consistent reporting environment.

In June 2023, the ISSB published its first two finalized standards—IFRS S1 and IFRS S2. The standards provide a global baseline for sustainability disclosures and have been widely embraced by investors, companies, governments, and regulators alike. IFRS S1 addresses the general disclosure of sustainability-related financial information, with companies being asked to report on all sustainability risks and opportunities, their potential effects, and the management of them by the company. In the meantime, IFRS S2 is specifically focused on climate-related risks and opportunities and stresses disclosures on the financial consequences of climate issues and how these are being tackled.

The ISSB has not operated in silos. It has built on and incorporated existing frameworks and standards, including the Climate Disclosure Standards Board (CDSB), the Task Force on Climate-related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB), and the Integrated Reporting Framework from the Value Reporting Foundation. By this consolidation, the ISSB has made a significant step towards removing the duplication and complexity that was present before, thus streamlining sustainability reporting for companies and making it more comparable for stakeholders.

Among the fundamental arguments in favor of harmonizing sustainability disclosures is the impact of capital flow. Governments and investors are pinning their hopes on sustainable finance to fuel the shift to a low-carbon and fair economy. 94% of investors, as stated in a 2019 HSBC survey, viewed ESG factors as important, as PwC Luxembourg further observed that ESG funds increased tremendously in 2022. However, without transparent and uniform reporting, stakeholders cannot accurately determine which companies share their values. That is exactly what ISSB aims to address.

While ISSB standards are still not mandatory, they are likely to be a driving force for future regulation. The UK, for instance, has already signalled support for the ISSB and is in the process of implementing systems for formal adoption. This is in response, at least in part, to the European Union's Corporate Sustainability Reporting Directive (CSRD), which will become legally enforceable. ISSB standards can be adopted voluntarily by public and private companies, although the trend is that soon there will be a mandatory compliance in most jurisdictions.

Preparing for these new standards means that businesses should reassess their current ESG strategies and align them with ISSB expectations. Companies can also use disclosure frameworks like the CDP and GRI to help interpret the information they need to report under the ISSB’s guidance. Moreover, with the Financial Stability Board transferring oversight of the TCFD to the ISSB, the latter is likely to become the central authority for sustainability reporting standards going forward.

Still, not everyone is completely assured. Some stakeholders are concerned that since the ISSB is independent of government oversight, it could be more vulnerable to corporate pressure. In spite of these qualms, most view this change as a chance to place sustainability reporting under a globally accepted system.

By contrast, the EU's CSRD is a more binding and socially oriented model of sustainability disclosures. As opposed to the ISSB's attention to financial materiality—concentrating on that which impacts company performance—the CSRD encompasses both financial and societal impact in its conception of materiality. The silver lining is that the two standards are converging more and more, especially regarding climate-related factors. EFRAG, the organization behind the CSRD standards, has recognized a significant degree of interoperability with the ISSB.

As the ISSB grows, it is paving the way for a more open and comparable sustainability reporting environment. For companies, particularly those with multinational operations, complying with the ISSB framework might not just increase investor confidence but also protect their operations for a future where the world is progressing fast in the direction of sustainability.