ISSB vs CSRD: Who Will Define the Future of ESG Reporting?

The battle for whose hand will define the future of environmental, social, and governance (ESG) reporting is intensifying with the International Sustainability Standards Board (ISSB) picking up speed around the world, whereas the European Union's Corporate Sustainability Reporting Directive (CSRD) encounters political opposition and simplicity in proposals. As nations work on their ESG plans, companies everywhere lean to understand whose shape might prevail.

The ISSB, created by the IFRS Foundation and announced for the first time officially at COP26 in 2021, has progressed from idea to worldwide implementation with stunning velocity. Its foundation standards—IFRS S1 on general sustainability disclosures and IFRS S2 on climate-related disclosures—became effective in January 2024. They are already supported by over 35 jurisdictions, encompassing over 60% of global GDP and over half of global emissions. Few like Brazil and Singapore have already made ISSB standards mandatory. Others like the UK and China are adapting the ISSB framework to local reporting requirements. Even developed ESG markets like Canada and Australia are setting their standards in alignment with ISSB principles. It is narrowing down the ESG reporting gap between developing and developed economies.

On the other hand, the CSRD still heads ESG regulation in the European Union. Still, it is facing political backlash that has already caused the EU to introduce amendments under the Omnibus Directive that will make it easier to apply. Under the CSRD, companies are required to report on a double materiality model involving both the financial effects of sustainability on a company and the social and environmental footprint of the company. It also calls for sector-specific disclosure and material, standardised reporting across several areas.

The ISSB model, on the other hand, addresses financial materiality—concern about information that is relevant to investors. Its standards are principle-based with room for firms to use discretion in reporting. Both models, however, conform to the Task Force on Climate-related Financial Disclosures (TCFD), and both put emphasis on climate-related risks and goal-setting.

The global framework for ESG reporting is more diverse now. China, the globe's highest emitter, aims to bring its listed companies in accordance with ISSB standards by 2030. This will incorporate double materiality and full emissions reporting, supported by regulation and exchange listing requirements. The United States, on the other hand, is seeing a retreat of federal ESG efforts. The SEC climate disclosure rule, enacted in 2024, was shelved indefinitely. Additional federal resistance comes in the form of passing a new act, the "Prioritising Economic Growth Over Woke Policies Act," which restricts future legislation on ESG matters. In spite of these federal impediments, some states are independently proceeding to mandate ESG adherence. California SB 253 and SB 261 legislation, for instance, will mandate complete emissions reporting and climate risk disclosures by 2027 with penalties if not followed. There are similar initiatives in Colorado, New Jersey, Illinois, and New York.

The UK is also acting strategically by endorsing ISSB standards and pushing for their adoption as a requirement for listed companies by 2026. Implementation issues persist nonetheless on fronts such as assurance requirements, scope of the companies affected, and technicalities of tagging digital information. The UK's post-Brexit regulatory choices and necessity to diverge from EU policy create an additional layer of complexity as well.

Other nations such as Indonesia, Malaysia, and Brazil are also embracing the ISSB model. It is a reflection of a larger trend in the ESG reporting landscape where fragmented methodologies are increasingly creating common denominators. While the CSRD provides for greater accountability through its prescriptive approach, the ISSB is becoming a global minimum standard, most useful for multinational companies that deal on multiple borders.

For businesses, especially global ones, understanding both systems is growingly essential. The coexistence of CSRD and ISSB is not so much an indication of the multiplicity of stakeholders' needs as of the challenges of harmonizing ESG reporting in an interconnected world. Although premised on distinct philosophies—one investor-focused reporting, the other societal effects-driven—both approaches endeavor to embed sustainability in business strategy.

The fate of ESG regulation will not be monopoly-driven by a single system. As the ISSB's widespread acceptance continues, the CSRD will also emerge as a robust and comprehensive regime for the EU. Nations will have the option to merge elements of both systems or create hybrid models that address national priorities but continue to satisfy international demands.

As the future of the ESG structure unfolds, companies and investors will have to be adaptable. ISSB momentum indicates a thrust toward increasingly globally harmonized, investor-favored reporting, while the CSRD keeps raising the bar on intense transparency and accountability. Whether the frameworks end up converging, remaining in parallel, or being selectively added across the globe remains to be seen.

Source: Sustainability Magazine