The International Sustainability Standards Board (ISSB) has issued its first-ever standards related to sustainability disclosures by companies.
The standards, known as IFRS S1 and IFRS S2, “create a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects,” according to the ISSB. The standards will ensure companies provide sustainability-related information alongside financial statements.
IFRS S1 specifically communicates to investors the sustainability-related risks and opportunities faced over the short, medium and long term. IFRS S2 sets climate-related disclosures, designed to be used with IFRS 1.
Both standards incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which was created by the Financial Stability Board (FSB) to develop recommendations on information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing a specific set of risks related to climate change.
ISSB said it created the standards with extensive market feedback and in response to calls from the G20, the Financial Stability Board and the International Organization of Securities Commissions, as well as business and investor community leaders. The standards create a global baseline of sustainability-related disclosures, enabling a consistent understanding of how companies’ prospects are impacted by sustainability.
They are applicable globally.
“Today represents the outcome of more than 18 months of intense work to deliver an inaugural set of sustainability disclosure standards for the global capital markets,” Emmanuel Faber, ISSB chair, said in a statement. “The ISSB Standards have been designed to help companies tell their sustainability story in a robust, comparable, and verifiable manner. We have consulted closely with the market to ensure the standards are proportionate and will result in disclosures that are relevant for investment decision-making.”
The ISSB acknowledged a few challenges related to the standards and their implementation, including the lack of precedence. The costs of the added disclosures will also fall on the preparers, and the costs will likely vary between companies and jurisdictions. That’s compared to the benefits, which may be more subdued and will need to be evaluated over the longer term, ISSB noted.
Benefits of the standards to investors include greater consistency, comparability, and verifiability of disclosures. Companies are likely to benefit from improved data quality, which can have a positive effect on areas such as governance, strategy, access to capital, cost of capital, reputation, and employee and stakeholder engagement.
The announcement of the standards was applauded by the World Business Council for Sustainable Development, calling the move an “important milestone.”
“In the spirit of what gets measured, gets managed, the launch by the IFRS Foundation and the ISSB of IFRS S1 and IFRS S2 is a momentous step forward in the urgent need to advance sustainable business transformation and decarbonize our society,” WBCSD CEO Peter Bakker said. “This will allow companies to manage their carbon performance and show their investors their progress on the existential transformation to a net-zero business model. I call on all governments to make the IFRS S1 and IFRS S2 the global baseline to hold businesses everywhere accountable.”
To implement the standards, ISSB will work with jurisdictions and companies, as well as form a Transition Implementation Group. The group will support companies that apply the standards and launch “capacity-building initiatives to support effective implementation.”
“The global economy needs common reporting standards to reduce fragmentation and drive comparability in climate-related financial data,” Mary Schapiro, head of the Task Force on Climate-related Financial Disclosures, vice chair for Global Public Policy at Bloomberg and former chairperson of the U.S. Securities and Exchange Commission, said in a statement. “Built upon the foundation of the TCFD framework, the ISSB Standards provide a global baseline for companies to disclose decision-useful, climate-related financial information—information that is critical for creating more transparent markets, helping achieve a smooth low-carbon transition, and building a more resilient and sustainable global economy.”