ISSB releases first two sustainability reporting standards

On Monday, the International Sustainability Standards Board released its first two reporting standards. Not another ESG standard you say? Aren’t there enough standards already in play, with both the US and Europe proposing or adopting mandatory standards?  Not to mention that the ISSB standards are just voluntary, although some countries, such as Canada, Japan, Hong Kong and the UK, may adopt the standards as mandatory. But take note—the WSJ suggests that the ISSB standards could well become “the global baseline” because “the advantages of using a single standard worldwide may, for many companies, outweigh the disadvantages of being more demanding than the SEC’s coming climate reporting rules.”  According to Mary Schapiro, former SEC Chair and current Head of the TCFD Secretariat and Vice Chair for Global Public Policy at Bloomberg L.P., “The global economy needs common reporting standards to reduce fragmentation and drive comparability in climate-related financial data. 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.”

The WSJ reports that the ISSB standards were “created to respond to widespread stakeholder demands for more consistent and reliable information about companies’ sustainability plans and performance amid mounting decarbonization promises, regulation and climate change impacts.” Notwithstanding these calls for a single standard, some jurisdictions have ventured out on their own—notably the U.S. (which will likely have less demanding requirements) and Europe (which seems to have more rigorous requirements).  Nevertheless, an ISSB representative told the WSJ,  “there has been real interest from the U.S. corporate and investor communities for the ISSB standards as a choice that might be voluntarily made, separate from what might be required from a regulatory perspective.” Although more stringent standards could require more disclosure, a global baseline offers the advantage of enabling investors who allocate capital internationally “to more easily compare their options and companies to clearly communicate their performance.”  Moreover, the WSJ observed, a “consistent global baseline would also make it easier for companies to estimate and report so-called Scope 3 emissions” across a global supply chain, reducing compliance costs and helping to build a common set of definitions. As summed up by a corporate representative, “you need your suppliers to be thinking about their emissions in the same way as you are thinking about your emissions if you are going to aggregate those numbers.”

Both of the new standards incorporate the recommendations of the TCFD, the Task Force on Climate-related Financial Disclosures, which was also one of the bases of the SEC’s proposed climate disclosure rules. IFRS S1 (IFRS established the ISSB) requires general disclosure about the “sustainability-related risks and opportunities” that companies “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.” 

IFRS S1 is a general standard requiring a company to disclose material information about “all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term.” As defined here by the ISSB, the concept of “materiality” here has a largely financial orientation, not the notion of “double materiality” prominent in the EU rules (see this PubCo post): “[i]n the context of sustainability-related financial disclosures, information is material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports, which include financial statements and sustainability-related financial disclosures and which provide information about a specific reporting entity.” In addition, the Standard indicates that “[s]ustainability-related risks and opportunities that could not reasonably be expected to affect an entity’s prospects are outside the scope of this Standard.” Drawing from the TCFD, the standard requires disclosure about

1. Governance—the governance processes, controls and procedures the company uses to monitor and manage sustainability-related risks and opportunities, including information about the responsible governance body, the role of management in the governance processes, controls and procedures used to monitor, manage and oversee sustainability-related risks and opportunities;
2. Strategy—the approach the company uses to manage those sustainability-related risks and opportunities that could reasonably be expected to affect the company’s prospects, business model and value chain, as well as the effects of sustainability-related risks and opportunities on its strategy and decision-making and the resilience of its strategy and business model in relation to its sustainability-related risks; this provision also requires the company to provide quantitative and qualitative information about the effects of sustainability-related risks and opportunities on the company’s financial position, financial performance and cash flows for the reporting period (current financial effects), as well as the anticipated effects or changes over the short, medium and long term;
3. Risk Management—the processes the entity uses to identify, assess, prioritize and monitor sustainability-related risks and opportunities, including whether and how those processes are integrated into and inform the company’s overall risk management process, as well as information to assess the company’s overall risk profile and its overall risk management process; and
4. Metrics and Targets—the company’s performance in relation to sustainability-related risks and opportunities, including progress towards any targets the company has set or is required to meet by law or regulation; metrics include those required by IFRS standards and other metrics the company uses, disclosing the source.

The standard includes many more detailed requirements for each aspect of the core content; the above is just a brief summary. (To compare the SEC’s proposal in this area, see this PubCo post and this PubCo post.)

IFRS S2 requires a company “to disclose information about climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term.”  The standard applies to both physical risks and transition risks, as well climate-related opportunities. (In the SEC proposal, “physical risks” refer to risks such as fires, hurricanes, sea level rise, drought and floods, including both “acute and chronic risks to a registrant’s business operations or the operations of those with whom it does business”; “transition risks” refer to  “the actual or potential negative impacts on a registrant’s consolidated financial statements, business operations, or value chains attributable to regulatory, technological, and market changes to address the mitigation of, or adaptation to, climate-related risks.” See this PubCo post and this PubCo post.) To the extent that climate-related risks and opportunities could not reasonably be expected to affect the company’s prospects, they are considered outside the scope of the standard. 

In essence, this standard applies the four core concepts discussed in IFRS S1 specifically to climate:

1. Governance—the governance processes, controls and procedures the company uses to monitor and manage climate-related risks and opportunities, including information about the responsible governance body, the role of management in the governance processes, controls and procedures used to monitor, manage and oversee climate-related risks and opportunities; however, companies are directed to avoid duplication with IFRS-S1 by “providing integrated governance disclosures instead of separate disclosures for each sustainability-related risk and opportunity.”
2. Strategy—the approach the company uses to manage climate-related risks and opportunities that could reasonably be expected to affect the company’s prospects, business model and value chain, as well as the effects of climate-related risks and opportunities on its strategy and decision-making and the climate resilience of its strategy and business model in relation to its climate-related risks. This provision requires companies to:
   • describe climate-related risks and opportunities that could reasonably be expected to affect the company’s prospects; explain, for each identified climate-related risk, whether the risk is a physical or transition risk; provide the time horizon over which the climate effects are expected to occur and how these time horizons are used by the company for strategic decision-making;
   • disclose how the company “has responded to, and plans to respond to, climate-related risks and opportunities in its strategy and decision-making, including how the entity plans to achieve any climate-related targets it has set and any targets it is required to meet by law or regulation,” including potential changes to business model, mitigation and adaptation efforts, and quantitative and qualitative information about the progress of plans disclosed in response to the item;
   • provide quantitative and qualitative information about the effects of climate-related risks and opportunities on the entity’s financial position, financial performance and cash flows for the reporting period (current financial effects), as well as the anticipated effects or changes over the short, medium and long term;
   • disclose information, using climate-related scenario analyses, about the resilience of the company’s “strategy and business model to climate-related changes, developments and uncertainties, taking into consideration the entity’s identified climate-related risks and opportunities.”
3. Risk Management—the processes the entity uses to identify, assess, prioritize and monitor climate-related risks and opportunities, including whether and how those processes are integrated into and inform the company’s overall risk management process, whether and how the company uses climate-related scenario analyses to inform its identification of climate-related risks and opportunities, and how the company assesses the nature, likelihood and magnitude of the effects of climate-related risks. Here again, companies are directed to avoid duplication with IFRS-S1: “if oversight of sustainability-related risks and opportunities is managed on an integrated basis, the entity would avoid duplication by providing integrated risk management disclosures instead of separate disclosures for each sustainability-related risk and opportunity.”
4. Metrics and Targets—information about the company’s performance in relation to its climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation;
   • information about climate-related metrics (including cross-industry and industry-based metrics) to be disclosed includes:
     • Scopes 1, 2 and 3 absolute, gross greenhouse gas emissions in accordance with the GHG Protocol,
       • climate-related transition risks—the amount and percentage of assets or business activities vulnerable to climate-related transition risks;
       • climate-related physical risks—the amount and percentage of assets or business activities vulnerable to climate-related physical risks;
       • climate-related opportunities—the amount and percentage of assets or business activities aligned with climate-related opportunities;
       • capital deployment—the amount of capital expenditure, financing or investment deployed towards climate-related risks and opportunities;
       • an explanation of whether and how the entity is applying an internal carbon price in decision-making, and the price for each metric ton of GHG emissions the entity uses to assess the costs of its GHG emissions;
       • whether and how climate-related considerations are factored into executive comp and the percentage of executive comp recognized in the current period that is linked to climate-related considerations.
   • Information about climate-related targets to be disclosed includes quantitative and qualitative climate-related targets the company has set “to monitor progress towards achieving its strategic goals, and any targets it is required to meet by law or regulation, including any greenhouse gas emissions targets.”  For each target, the company must disclose, among other things, the metric used to set the target, the objective, the applicable period, milestones and interim targets; whether a quantitative target is an absolute or intensity target and the impact of the latest international climate agreement.
   • information about the company’s approach to setting and reviewing each target and monitoring progress, as well as the company’s performance on reaching targets.
   • Information for each GHG target about, among other things, which gases are covered, the applicable Scope, whether the target is gross or net, and details about the use of carbon credits to offset GHG emissions.

As with IFRS S1, this standard also includes many more detailed requirements for each aspect of the core content; the above is just a brief summary.  (To compare the SEC’s climate disclosure proposal, see this PubCo post and this PubCo post.)