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By Dr. Nathan de Arriba-Sellier. While the first international sustainability disclosure standards have been already hailed by many, it is doubtful that they will deliver on the promise to provide high-quality, globally comparable information meeting the needs of investors.

Long awaited, the International Sustainability Standards Board (ISSB) released the final version of its very first standards regarding sustainability disclosures and climate-related disclosures. These first standards, which are intended to set the global baseline for corporate sustainability disclosures, have been already hailed by many on the day of their release. Yet, it is doubtful that the new standards will deliver on the promise to provide high-quality, globally comparable information meeting the needs of investors.

The adoption of such standards responds to the rising global demand of investors and the public in reliable and comparable information on corporate sustainability performance. This demand has heightened with the rise of sustainability risks, and particularly environmental risks. But it is also the result of the market’s failure to bring about some discipline in the quagmire that has become ESG disclosures. In this respect, the ISSB follows the global rise in regulatory scrutiny over sustainability disclosures, which prompted the SEC’s climate disclosure rule proposal in the United States and the Corporate Sustainability Reporting Directive (CSRD) in the European Union. Thus, the creation of the ISSB was announced in 2021 during the COP26 climate conference in Glasgow. The ISSB is a body of the IFRS Foundation, which adopts the International Financial Reporting Statements, and it was endorsed by the Financial Stability Board and the G20.

In many respects, the ISSB’s first two standards are a landmark. The voluntary soft law attempts to provide some regulatory harmonization at international level. Unlike the ISSB’s precursor, the Taskforce for Climate-related Financial Disclosures (TCFD), the new standards cover a broader scope of disclosures than the sole climate-related ones, are worded in mandatory terms and aim at creating the global minimum standards for sustainability standards. The ISSB is also in position to meet that objective, as the standards are expected to be endorsed by IOSCO, the international organization of securities regulators, and several jurisdictions – from the United Kingdom to Nigeria – have announced their intention to transpose them in national law. And the ISSB seeks to ensure emulation from other countries. It is further important to note that the ISSB’s work has just begun. The first standard, IFRS S1, provides the general framework for sustainability-related disclosures, while the second, IFRS S2, focuses on climate-related disclosures, reflecting the ISSB’s priorities. The ISSB will now turn to other important issues, such as biodiversity.

Both standards are built on the same model, which very much reflects the structure of the TCFD’s recommendations following four categories: governance, strategy, risk management, data and metrics. They require fair presentation and set a number of safeguards to ensure clarity in disclosures. Of particular significance is the scope of the disclosure standards, which in both cases entails the consideration of the reporting entity’s value chain. Moreover, the forward-looking nature of sustainability disclosures is reflected in the standards, which require to consider sustainability risks over the short, medium and long-term.

The ambition of the standards is further exemplified by the obligation in IFRS S2 for entities to disclose their scope 1, 2 and 3 greenhouse gas emissions. Initially, the ISSB had been more ambiguous on the need for companies to disclose scope 3 emissions (indirect emissions associated with a company’s value chain not counted in Scope 1 or 2, which account for direct emissions and emissions from purchased energy respectively). The (unanimous) decision of the ISSB to include scope 3 emissions suggests a growing consensus that such a reporting, however difficult it may be, provides a more accurate description of the entities’ exposure to climate-related risks. It will hopefully encourage the SEC to adopt a similar requirement in its final rule on climate-related disclosures, despite significant corporate and political pushback.

Nevertheless, the ISSB merely captures the low-hanging fruits of corporate sustainability disclosure and falls short of delivering on the promise to provide high-quality, globally comparable information meeting the needs of investors. Firstly, the ISSB is sticking to a single materiality approach limited to financial risks and opportunities, rather than the more ambitious double materiality approach that is embedded in the CSRD. Furthermore, the disclosure of material information is limited in several instances by the clause that businesses should use information that is available “without undue cost or effort”.

Failing to disclose the impacts of a business’s activity on climate and the environment is short-sighted given the unprecedented and alarmin extent of the environmental crisis, and could obfuscate some of the financial risks that companies are exposed to as a result of these impacts. While the ISSB will require information on climate-related targets (and sustainability targets in general), the obligations are rather general and will fall short on providing much clarity on the reporting entities’ intentions to fulfill corporate net-zero commitments. Similarly, the ISSB added an unspecific obligation to publish climate transition plans that will only apply to those entities that already that such plans.

In general, the ISSB standards fall short of actually ensuring the standardization of corporate sustainability information. Reporting entities are sole judges of what information is “useful to primary users of general purpose financial reports” and of the ways to report that information. Thus, there is no minimum set of sustainability data and metrics that companies must report, beyond GHG emissions. And as a result, there will be no methodological uniformity in the reporting of corporate sustainability information. In addition, the ISSB remarkably does not require any verification of the required disclosures. This absence contrasts sharply with the assurance requirements introduced in the CSRD and the rule proposal of the SEC.

To conclude, the ISSB does not deliver on its core promise to provide high-quality, reliable and comparable sustainability information meeting the needs of investors and the public. It is also highly unlikely that it will create a global baseline for disclosure requirements, as both the SEC and CSRD have adopted vastly different orientations at odds in their own ways with the ISSB’s.


By Dr. Nathan de Arriba-Sellier, Research Director of the Yale Initiative on Sustainable Finance

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