ISSB sustainability disclosure standards on their way to adoption in several countries – recent developments and recommendations for regulators

The International Sustainability Standards Board (ISSB) issued its inaugural standards on June 26. IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short-, medium- and long-term. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1.

Work already is progressing in several jurisdictions that is expected to lead to the adoption of the standards. Important developments announced in the last few weeks include the following:

UK publishes framework for development of ISSB-based disclosure standards  

Last week, the UK Department for Business and Trade (DBT) published information on the UK government’s framework to create UK Sustainability Disclosure Standards (SDS) that will form the basis of future UK requirements for companies to report on risks and opportunities relating to sustainability matters, including risks and opportunities arising from climate change. DBT aims to create UK SDS by July 2024. DBT has indicated that UK SDS will be based on IFRS S1 and S2.

To assist with the assessment and endorsement of IFRS S1 and S2, and the implementation of resulting UK SDS, the UK government has established two committees: the Sustainability Disclosure Technical Advisory Committee (TAC) and the Sustainability Disclosure Policy and Implementation Committee (PIC).

TAC will assess IFRS S1 and S2 on a technical basis and provide independent recommendations on endorsement to the Business and Trade Secretary. TAC members will come from a range of relevant professional backgrounds. The TAC secretariat has published a call for evidence on IFRS S1 and IFRS S2, which closes on October 11.

PIC’s members consist of UK government departments and regulators. If the Business and Trade Secretary endorses the standards, PIC will coordinate the implementation of UK SDS by the UK government and Financial Conduct Authority (FCA). Decisions to require disclosure will be taken independently by the UK government, for UK-registered companies and limited liability partnerships, and by the FCA for UK-listed companies.

IOSCO endorses the ISSB standards

On July 23, the International Organization of Securities Commissions (IOSCO) endorsed IFRS S1 and S2. IOSCO is the international body for the world’s financial markets regulators, serving as the global standard setter for the financial sector. Its members come from 130 jurisdictions and regulate more than 95% of the world’s financial markets.

IOSCO has determined that IFRS S1 and S2 are appropriate to serve as a global framework for capital markets to develop the use of sustainability-related financial information in both capital raising and trading and for the purpose of helping globally integrated financial markets accurately assess relevant sustainability risks and opportunities. In connection with its endorsement, IOSCO has called on its members to consider ways in which they might adopt, apply or otherwise be informed by the ISSB standards in a manner that promotes consistent and comparable climate-related and other sustainability-related disclosures for investors.

According to IOSCO, this is only the second time it has endorsed standards developed by a private entity working in the public interest. The first was in 2000 when IOSCO endorsed the International Accounting Standards.

Recommendations for national regulators

In addition to the UK, several other jurisdictions are working toward requiring disclosures aligned with the ISSB standards. These include among others Australia, Canada, China, Japan, New Zealand and Singapore. As jurisdictions implement disclosure requirements based on the ISSB standards (for reporting issuers or as part of financial reporting), they are urged to adhere to the following guiding principles:

Keep changes to a minimum. Local changes to the disclosures contemplated by the standards only should be made when necessary and in a manner that lessens burdens for companies.

Companies need reasonable safe harbors from liability. Some of the sustainability information that companies will be required to report will be based on third-party information and/or estimates and assumptions. In addition, some information will be forward-looking and therefore inherently uncertain. Companies should not be placed at undue risk of liability for these disclosures when made in good faith.  

Allow for higher-level consolidated reporting where applicable. For multinationals, sustainability information is typically most useful when presented for the consolidated group, rather than at the local subsidiary level. Foreign multinationals generally should be allowed to report at the parent or other appropriate intermediate holding company level.

Adoption should not be open-ended. As new ISSB standards are developed or existing standards are updated, those should go through an appropriate review and stakeholder consultation process before becoming required disclosures. For example, in April, the ISSB indicated it has identified four potential projects: biodiversity, ecosystems and ecosystem services; human capital; human rights; and integration in reporting. 

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