The ISSB: a game changer for ESG reporting?

May 2022 | FEATURE | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

May 2022 Issue

Many companies today are confused as to how best to report their environmental, social and governance (ESG) performance in a way that will be credible to shareholders and other stakeholders. Much of this confusion stems from a plethora of sustainability reporting frameworks. For many, the answer could well be the International Sustainability Standards Board (ISSB), which could do for sustainability reporting what the International Accounting Standards Board (IASB) does for financial reporting.

The ISSB, which was introduced at COP26 in Glasgow late last year, has the potential to remake ESG reporting. In response to rising demands to monitor a variety of risks and opportunities, the ISSB aims to establish a global consensus for sustainability disclosures, simplifying a complex landscape and standardising the practice of non-financial reporting. It is unlikely to be a wholesale reinvention of the ESG reporting process; instead, it will sit alongside existing reporting processes and provide consistent standards for organisations globally.

Shifting sands

The introduction of the ISSB is not before time. Investors have been calling for, and companies have been responding to, greater availability of information on ESG matters for some years. “Initiatives, like the UN Principles for Responsible Investment, have encouraged investors to incorporate ESG issues into the investment analysis and seek disclosure of ESG matters from the entities they invest in,” says Michael Green, counsel at Latham & Watkins. “However, the rapid growth in ESG reporting has led to the proliferation of a number of voluntary standards to which companies can report and, as a result, complaints of fragmentation and a lack of comparability.

“This is changing, as the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) are increasingly considered best practice with respect to disclosure on climate change matters and are being incorporated into regulatory frameworks as well. In addition to climate change, key aspects of ESG reporting include environmental impacts, health and safety, diversity, equity and inclusion (DEI), supply chains, and approach to governance,” he adds.

“Though the introduction of the ISSB has been heralded as a watershed in the standardisation of reporting, there are challenges ahead.”

In Canada, mandatory ESG reporting has in general been limited to public reporting companies and investment funds with an ESG focused investment strategy, although several of the country’s public and private pension funds have been required to adopt ESG investment policies and to provide ESG disclosure in relation to their investment portfolios. “The Canadian Securities Administrators (CSA) have used a ‘comply or explain’ disclosure model for public reporting companies in relation to governance and social issues, such as the independence of board members and board committees, and board and executive team gender diversity,” notes Sonia Struthers, a partner at McCarthy Tétrault.

Implementation

Implementation of the ISSB standards is still at an early stage, with a draft for public consultation yet to be released. However, prototypes have been published, which do provide an indication of the direction the ISSB may take. “Companies are conscious that, particularly on social issues, there is still limited clarity on what exactly will have to be reported under the ISSB standards,” explains Mr Green. “A related concern is the fact that the standard-setting process may be very quick – for instance, it has been reported that some companies may be reporting against ISSB standards by the end of 2022, potentially limiting the extent of scrutiny being given to any proposed ISSB standards.”

According to Ms Struthers, the announced setup of the ISSB in November 2021, including a second office based in Montréal, Canada, was accompanied by two prototype standards on climate related disclosure and sustainability financial information which align with the TCFD recommendations. “In October 2021, the CSA published Proposed National Instrument 51-107 Disclosure of Climate Related Matters, (NI 51-107) which is substantially aligned with the TCFD recommendations. NI 51-107, when adopted, will impose for the first-time mandatory climate related disclosure and sustainability financial reporting requirements on all of Canada’s public reporting companies in their core disclosure documents.

“The CSA is currently consulting on whether Scope 1, 2 and 3 greenhouse gas emissions disclosure will be required and on a ‘comply and explain’ disclosure model, but has already signalled that scenario analysis will not be mandatory,” she adds.

Regional developments

Though the introduction of the ISSB has been heralded as a watershed in the standardisation of reporting, there are challenges ahead. Regulators in the US, for instance, have previously been reluctant to adopt global reporting standards, and speculation continues as to whether forthcoming proposals will be in alignment with the ISSB. Equally, the European Commission has announced plans to produce its own set of standards.

Accordingly, regional regulatory developments will have a significant role to play moving forward. “The CSRD, the EU Taxonomy and the proposed Directive on Sustainable Supply Chains will all drive reporting requirements in the EU,” notes Mr Green. “We also expect companies with listings in the US to be impacted by any rules that the Securities and Exchange Commission (SEC) implements on climate change. Regulators are in dialogue with their counterparts in other jurisdictions and are closely watching developments at the ISSB.”

The ISSB is still in its formative days, but the prospects are promising. “Given that the ISSB scheme remains under development, measures to help ensure its successful implementation might include proactive compliance and reporting strategies based on existing standards of organisations integrated by the ISSB. Such strategies can be updated and adjusted following the full-scale rollout of the ISSB scheme,” says Ms Struthers.

Though there will be a lot of work ahead for companies of all sizes to ensure they achieve compliance, the direction of travel is positive. In the near future, companies may be able to use the ISSB standards to build on the quality of sustainability disclosures which have been steadily improving in recent years.

Richard Summerfield