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February 21, 2023

ISSB confirms sustainability disclosure standards effective from January 2024

ISSB references European Sustainability Reporting Standards in S1 as a source of guidance, and says standards build on ‘existing market-accepted framework’.

The International Sustainability Standards Board has confirmed, at a meeting in Montreal on February 16, that its first two sets of sustainability disclosure standards, S1 and S2, will come into force at the start of 2024.

Launched in 2021, the standards are being developed to help companies report reliably on how they manage climate and environmental, social and governance issues. S1 covers general requirements for disclosing sustainability-linked financial information, while S2 focuses specifically on climate-related disclosures. They will now go through a drafting phase then approval, before being issued at the end of the second quarter of this year.

The ISSB also voted to reference a separate set of principles, the European Sustainability Reporting Standards, within the S1 appendix. The ESRS covers sustainability disclosure and targets ESG, ranging from biodiversity and workers’ interests to business conduct. It will be included “as a source of guidance companies may consider, in the absence of a specific ISSB standard, to identify metrics and disclosures if they meet the information needs of investors”, the ISSB said.

The first draft ESRS were submitted by the European Financial Reporting Advisory Group to the European Commission in November 2022. They will become mandatory for all EU companies subject to the Corporate Sustainability Reporting Directive.

Further, ISSB chair Emmanuel Faber said: “As requested by our stakeholders, we have built from existing market-accepted frameworks and standards. This means that for the thousands of companies already using the Task Force on Climate-related Financial Disclosures recommendations and Sustainability Accounting Standards Boards standards, they will be in a strong position to use S1 and S2.”

Shared objective

The ISSB standards will sit alongside other climate-related reporting standards currently being developed. Besides the ESRS, the International Ethics Standards Board for Accountants and the International Auditing and Assurance Standards Board both aim to make assurance standards available by the end of 2024.

“Together, these standards will meet an urgent need in financial markets to get away from the current fragmented situation when it comes to sustainability disclosures,” International Organization of Securities Commissions chair Jean-Paul Servais said after the ISSB’s meeting.

The ISSB said it is working with the European Commission and Efrag “toward a shared objective to maximise interoperability of their standards and aligning on key climate disclosures”, with their joint efforts now focusing on the terminology contained with their standards. 

Sonali Siriwardena, global head of ESG at law firm Simmons and Simmons, told Sustainable Views: “The end product may well result in convergence, but this will depend on how these standards are received by the wider market and whether they provide a robust framework that ‘floats the boat’ for investors looking for information.” 

In addition to the ESRS, companies will also be allowed to use metrics from the Global Reporting Initiative where they are useful to investors and where there is no equivalent IFRS sustainability standard.

According to KPMG global head of audit Larry Bradley: “This demonstrates a level of pragmatism and a keen awareness of the need to balance cost and benefit for as many companies as possible. 

“However, companies already reporting under GRI won’t be able to simply cut and paste swathes of disclosures, because they will need to apply the ISSB’s investor-focused materiality lens. For companies reporting under multiple frameworks, this will make reporting less challenging,” he added.

Common language

The ISSB also aims to increase understanding of its standards, especially in emerging economies and among smaller companies. To this end, it launched its Partnership Framework at COP27 last year with around 30 partners.

“We responded to capital market and G20 demand for a common language of investor-focused sustainability-related disclosure, working diligently to deliver standards that fulfil the global baseline,” Faber said. “Setting a 2024 effective date is consistent with this demand.”

While KPMG’s Bradley considers the January 1 2024 date “ambitious”, he added: “Importantly, it’s aligned with the EU timetable, so some companies may adopt on this date regardless of local requirements. It still remains for jurisdictions to decide whether to enforce this date. But the transition provisions, such as not requiring Scope 3 greenhouse gas emissions reporting in the first year of adoption, should smooth the path for companies.”

Lorraine Johnston, a finance regulatory partner at law firm Ashurst, told Sustainable Views that the ISSB approval of its baseline standards had faced a significant challenge due to divergence of different jurisdictional disclosure rules. “The ISSB’s decision is a strong endorsement of the EU’s emerging standards under CSRD,” she said, and added that “a better degree of interoperability [of ISSB and ESRS] will certainly be welcomed by those that intend to use ISSB standards and who may be in scope of CSRD”.

Photo credit: Getty Images

A service from the Financial Times