In a "frontier-crossing" release this morning (26 June), the International Sustainability Standards Board (ISSB) has launched its long-awaited set of global sustainability-related disclosure standards for capital markets.
The International Financial Reporting Standards Sustainability Disclosure Standards, S1 and S2 (IFRS S1 and S2), are designed to enable sustainability-related reporting to be used alongside annual statements and accounts at a global level, for the first time.
Speaking at the release of the standards this morning, Sue Lloyd, vice-chair of ISSB, described the release as a response to the "resounding request from the market to bring an end to the alphabet soup" of current reporting systems.
As a result, both S1 and S2 are designed to enable TCFD compliance and are fully compatible with GAAP accounting standards.
Emmanuel Faber, the chair of the ISSB, described the new "accounting-based language" as "crossing the frontier" from formerly inconsistent, competing and overlapping sustainability-related reporting mechanisms.
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He said: "The flurry of about 500 Different ESG metrics, standards and disclosures over the last decade is evidence that despite the very comprehensive accounting systems that we operate, there is apparently something that the market participants are needing and did not find in the current system."
Now the standards have been published, the International Organisation of Securities Commissions (IOSCO) will evaluate whether to publicly endorse the standards for adoption across different jurisdictions.
Speaking today, IOSCO chair Jean-Paul Servais described the effort as "a real gamechanger for regulators worldwide".
The detail
Faber underlined the point that IFRS S1 and S2 are not just "a suite of ESG metrics or disclosures". The new standards provide, he said, "a comprehensive language, which is deemed to be consistent, verifiable, and therefore, decision-useful".
IFRS S1, the ‘General Requirements for Disclosure of Sustainability-related Financial Information', provides a set of requirements for companies to use alongside their financial statements to share forward-looking, sustainability-related risks and opportunities over the short, medium and long term.
IFRS S2, ‘Climate-related Disclosures', lays out the detail surrounding climate-related disclosures specifically and is designed to be used with IFRS S1.
Faber explained the two key ways in which the new standards will "connect the dots with financial statements".
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The first is a "conceptual" alignment, based on the concept that the value a company creates is "inextricably linked" to its wider business ecosystem.
The standards, he said, will create the ability to express the risks and opportunities relating to a firm's entire value chain - from society and business partners to the natural capital it employs.
Secondly, he emphasised the forward-looking nature of the standards due to the requirement it places on firms to disclose "the current and anticipated effects of sustainability risks and opportunities on financial statements and the company's prospects".
"It is not about a new suite of ESG standards. It is about ensuring our accounting will gradually incorporate, as part of general purpose financial reporting, information which market participants are in dire need of to have to make decisions," he said.
UK application
Also speaking at the release of the standards this morning, Baroness Penn, the parliamentary secretary with responsibility for ESG within the Treasury, shared the UK government's support for the framework.
"We will continue to make the case for its importance as the global baseline standard," she said.
"Global standards and interoperability are at the heart of minimising the costs to firms operating across multiple jurisdictions, and crucially providing investors with comparable and consistent information to inform capital allocation."
Despite the assurance, no firm timescale was given as to when the standards will come into play in home markets. She only shared that "the development of the UK framework to assess and endorse the standards for use in the UK is proceeding at pace".
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The need for a globally recognised set of sustainability disclosure standards has been "pretty obvious", according to Sacha Sadan, director for ESG at the FCA.
Also speaking this morning, Sadan asserted that progress in the space will help provide assurance across sustainable investing markets.
"As a financial regulator, it is pretty obvious that we need one single standard so that we can all talk the same language; that is the really important thing," he said.
Everyone has really good incentives and wants to do things - if they are speaking different languages, it just does not happen. It is all about trust. The investors want to make sure that they can believe in these things."
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More broadly, the FCA has said of today's release: "At its launch at COP26 in November 2021, our CEO, Nikhil Rathi, referred to the ISSB as a ‘game-changer' - and what we have seen over the past 18 months or so is that he was absolutely right.
"We have been working closely with the ISSB since the start and are hugely supportive of its mission to create a common, global language for companies around the world to communicate their sustainability stories in a consistent and comparable way. That is why we are delighted to see the final standards launched today."
UKSIF's CEO, James Alexander, welcomed the release for its role to "help to deliver the coherent, global baseline of sustainability disclosures sought by our members."
He continued to urge the UK government to consult the market "as soon as possible, on the full implementation of the ISSB's standards across the economy."
This article was originally published on International Investment's sister publication Sustainable Investment
