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ISSB's draft for first global sustainability disclosure standard - What's in store?

The goal is to drive globally consistent, comparable and reliable sustainability reporting that will allow national and regional jurisdictions to build on that global baseline to set supplemental standards that serve their specific jurisdictional needs. 

Fay Wu, Field Zhu2022-04-06

Just ten days after the U.S's SEC unveiled its sweeping climate risk disclosure requirements, the International Sustainability Standards Board, or ISSB proposed its own inaugural sustainability disclosure standards on combat greenwashing on March 31.

ISSB and the background development
ISSB is the newly created organization from COP26 last November and aims to develop sustainability disclosure standards focused on enterprise value. Established as a sister body to the International Accounting Standards Board (the IASB Board) by the London-based IFRS Foundation, ISSB is to put sustainability reporting on the same footing as financial reporting.

The goal is to drive globally consistent, comparable and reliable sustainability reporting that will allow national and regional jurisdictions to build on that global baseline to set supplemental standards that serve their specific jurisdictional needs.

Chart 1: Structure of IFRS with two sister bodies, IASB for financial accounting standard and ISSB for sustainability standard


Source: IFRS, MioTech

One and half years since IFRS Foundation first consulted on demand for a role in sustainability-related financial information for the global market, ISSB’s two exposure drafts had the inputs of climate prototype of “Group of Five” sustainability standard boards, CDP, CDSB, GRI, IIRC and SASB.

Note from Chart 2 the development of ISSB and the proposals. IFRS created the International Sustainability Standard Board (ISSB) on Nov 3, 2021 that consolidated the Climate Disclosure Standards Board (CDSB—an initiative of CDP) and the Value Reporting Foundation (VRF—which houses the Integrated Reporting Framework and the SASB Standards). ISSB proposals consolidated content from the TCFD, CDSB, SASB, Integrated Reporting, and the WEF IBC’s stakeholder capitalism metrics into a coherent whole.

Chart 2: Development timeline of ISSB and sustainability and climate drafts


Source: IFRS, MioTech

The two proposals will be focusing on the reporting of sustainability-related financial information under IFRS S1 and climate-related risk and opportunities under IFRS S2.

  • The proposed IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (General Requirements Exposure Draft) would require companies to disclose information about all of their significant sustainability-related risks and opportunities.
  • The proposed IFRS S2 Climate-related Disclosures (Climate Exposure Draft) focuses on climate-related risks and opportunities. It incorporates the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and includes metrics tailored to industry classifications derived from the industry-based SASB Standards.


IFRS S1 - General Requirements Exposure Draft (Sustainability-related)

IFRS S1, the General Requirements Exposure Draft requires the disclosure of information about significant sustainability-related risks and opportunities, consistent with the recommendations of the TCFD, but extending to sustainability related risks and opportunities beyond those related to climate. A company may also consider disclosure topics in SASB (Sustainability Accounting Standard Board), CDSB (Climate Disclosure Standards Board), other standard setters and industry practices.

As shown in chart 3, the sustainability-related financial information would be centered on governance, strategy, risk management and metrics and targets for measuring, monitoring and managing significant sustainability-related risks and opportunities.

Chart 3: Frameworks for content used in ISSB’s sustainability disclosures


Source: IFRS, MioTech

The ISSB differs from the SEC climate disclosure requirement in that instead of classifying the disclosure requirement by market value of the companies, ISSB bases its framework on SASB’s industry-specific model for reporting. (See Chart 4)

A company would be required to make a:

  1. Fair presentation and make appropriate disclosures and consider sustainability-related risks and opportunities identified by companies that operate in the same industries or geographical areas. The proposed standard provides guidance and examples for identifying appropriate metrics, including cross-industry and industry-based metrics.

  2. Information related to a company’s value chain - Defining a value chain as “full range of activities, resources and relationships related to a company’s business model and external environment it operates in,” it includes such aspects as human resources, supply chain, marketing and distribution, product and delivery, financing and geographical, geopolitical and regulatory environments where the company operates in. While definition of value chain broad, the proposed Standard would require a company to disclose those limited to information that would enable investors to assess the company’s enterprise value.

  3. Connected information - The proposed standard would require companies to provide information that allow investors to assess the connections between different sustainability-related risks and opportunities.
    It would also require a company to disclose how sustainability-related financial information is related to information on its financial statement. This information would be reported at the same time as the financial statements are reported.
    Example: A company that decides to terminate its contract with a supplier with subpar employment practices should disclose that it is confident about the subpar practices and the consequences for the cost of its supplies. A company deciding to close a production facility that generates high levels of GHG emissions should explain the financial consequences from revised useful economic life of affected assets, staff who will lose their jobs and the company’s expected lost business in the local community.

IFRS S2 - Climate-related Disclosures

IFRS S2 climate-related disclosures uses the same approach as IFRS S1 General Requirements exposures centering on governance, strategy and risk management of its business, and the metrics and targets used to measure, monitor and manage its significant climate-related risks and opportunities.

The proposed standard also includes a requirement for companies to disclose climate-related physical and transition risks and opportunities:

  1. Governance - The proposed Standard would require disclosure of information about the governance processes, controls and procedures the company uses to monitor and manage climate-related risks and opportunities. The company would be required to disclose a description of the governance body, such as board or committee, with oversight of climate-related risks and opportunities. It would need to address management’s role in assessing and managing climate-related risks and opportunities.

  2. Strategy - The proposed standard would require companies to disclose about how climate change could reasonably be expected to affect their business model, strategy, and cash flows (Example: Continuing to operate a business line might be harmful to its reputation and limit its ability to access financing). The company would also be required to identify physical and transition risks.
    Climate-related risks and opportunities
    Physical risks could be acute physical risks like extreme weather events (such as cyclones and floods) or chronic physical risks include rising sea levels or rising mean temperatures. The former could cause disruption to a company’s supply chain while the latter could cause the company to consider moving its production facilities.
    Transition risks are risks associated with a company’s transition to a low-carbon economy and could be policy or legal, market, technology and reputation. A technology risk or opportunity could be lower-emission substitutes for diesel vehicles.
    Strategy and decision-making
    The company should disclose how it plans to achieve any climate-related targets, how these plans would be resourced and how it will review targets. An example would be to disclose the carbon-offsetting plan, how it applies carbon pricing and disclose the price it uses for each metric tonne of GHG emissions.
    Financial position, financial performance and cash flows
    The company might disclose a material asset impairment as a result of the company’s strategy for managing a transition risk or investment in new technologies to take advantage of a climate-related opportunity. An example could be the financial accounting consequences of increased revenue from, or costs of, products and services aligned with a lower-carbon economy.
    Climate resilience
    The company would be required to disclose whether it has sufficient finance available to withstand the climate-related risks and to take advantage of climate-related opportunities. It would include how its climate-related analysis aligns with the latest international agreement on climate change such as the Paris Agreement.

  3. Risk Management - This follows the General Requirements Exposure Draft. The company would also be required to disclose how it prioritizes climate-related risks relative to other types of risks, including its use of risk assessment tools.
  4. Metrics and targets - The two main areas of climate-related metrics and targets are GHG emissions and Industry-based disclosures.
    GHG emissions - The proposed standard would require a company to disclose absolute gross Scope 1, Scope 2 and Scope 3 GHG emissions in metric tonnes of CO2 equivalent and the intensity of those emissions (Using GHG Protocol). A consolidated group would be required to disclose GHG emissions by associates and joint ventures separately from those by the consolidated group. Scope 3 emissions would require information on the company’s value chain.
    Industry-based disclosures - The proposed Standard includes 77 industry classifications across 11 sectors, such as “Alcoholic Beverages,’ ‘Appliance Manufacturing’ and ‘Medical Equipment & Supplies.” They are derived from SASB Standards. As for disclosure, there are 68 industry-based sets of requirements, with the remaining nine industry classifications not having climate-related disclosure topics. They are industries including consumer finance, securities and commodities exchanges, media, advertising, education and professional services, toys & sporting goods, biotech and pharmaceuticals, and tobacco. (See Chart 4 below).
    If an automobile company has established an emissions reduction target, it could demonstrate progress towards that target by disclosing the metrics associated with the “Fuel Economy and Use-phase Emissions” disclosure topic, which include the fuel economy of the company’s fleet and the sales of zero-emissions vehicles.

Chart 4: ISSB Industry groups (compared with SASB)


Source: ISSB, MioTech

The proposal will enter into a 120-day consultation period (closing 29 July 2022) versus the 60-day comment period of the SEC’s climate disclosure. The final rollout however, will both likely start next financial year in 2023. The disclosure reporting dates are expected to coincide with companies’ financial reporting dates as well.

A webinar is scheduled on April 28 to discuss the two draft proposals and following the consultation period, ISSB will announce the effective dates of the guidelines.

Our insights

ISSB is a new kid on the block but rich in management and backing:

Incorporated barely five months ago at COP26, ISSB has the support of a new consolidated corporate structure as well as high-profile management.

As mentioned above, the IFRS Foundation had announced the consolidation of Climate Disclosure Standards Board (CDSB) and Value Reporting Foundation (VRF) along with the incorporation of ISSB at COP26 last November. These two established frameworks come with a long operating history and network. CDSB was founded in 2007 and SASB (under Value Reporting Foundation umbrella) was founded in 2011. With 27 years of operating experience in sustainability and climate risk disclosures now a part of IFRS, the parent organization, ISSB starts off on an experienced foundation.

Chart 5: Organization structure of IFRS and ISSB brings together different sustainability standards


Source: KPMG, MioTech

ISSB’s newly appointed management should also bring deep experiences from the corporate and capital markets side. The ISSB made its first high profile for the organization by appointing Emmanuel Faber, the former CEO and chairman of Danone, as its first chair last December. Faber previously had 24 years of experience at Danone with the last seven as the CEO.

ISSB also announced Sue Lloyd, the current chair of IASB, as ISSB Vice-Chair. Lloyd has served as a Member of the IASB since 2014, and Vice-Chair since 2016 but will give up the post when transitioning to ISSB. As Vice-Chair, Lloyd will support the Chair and will focus particularly on the ISSB’s work on technical standard-setting issues and developments.

IFRS expects a quorum of eight board members, six more than the current board, to be appointed before the deliberation of the current draft proposal. Once the recruitment of the quorum is complete, a further six would be recruited by the third quarter of 2022 to complete the full board of 14 members. In IFRS’ words, the ISSB board would represent a professionally and geographically diverse group of senior experts— including preparers, investors, standard-setters, regulators, auditors, specialists in environmental and other sustainability matters and academics—who have experience in sustainability and its reporting. Particular attention will be paid to the representation of emerging economies and smaller companies.

We believe this would be the strongest talent to understand and connect the governments and corporates to bring accountability to different stakeholders.

Well-positioned parent IFRS and sister board IASB

With the adoption of both sets of standards, shareholders and the public will gain more transparency around companies’ social and environment impacts. This would help investors and companies track climate-related risks and opportunities, to reward those companies that manage risks well and avoid those that do not.

IFRS was first established in 2001 to provide a common accounting language and standard and is now adopted by more than 140 countries. It has a history and track record of standardizing and regulating the capital markets’ reporting, for both public and private companies. ISSB will also benefit from its equal footing with its sister board IASB, the International Accounting Standard Board. The level of attention the ISSB required disclosures will have an unparalleled impact on the global climate agenda.

Global reach / Company reach:

Guideline model would have farther reaches globally: Whereas the SEC’s climate disclosure rule would be mandatory by US-listed companies, the ISSB’s rule would announce effective dates at the end of the year and it would be open to “immediate voluntary adoption.” The framework would be adopted by various jurisdictions much like the IFRS accounting standards now used in over 144 countries. This gives the various jurisdictions much more flexibility in adopting and adapting the disclosure frameworks and would reach more areas beyond the US.

Dual-headquartered ISSB tackles disclosures from global to local: The ISSB with its dual headquarters model had chosen Montreal as its North American headquarters and Frankfurt as its EMEA (Europe, Middle East and Africa) headquarters for a broad reach globally. In addition, IFRS is currently also seeking an Asian headquarters by the end of next year and the IFRS chairman Erkki Liikanen said at COP26 that the foundation is currently considering China or Japan. The multi-headquarters approach is also complemented by its San Francisco office (where SASB and its umbrella Value Reporting Foundation is based) and London office (where IFRS foundation is located).

Company reach: We also see the new ISSB proposal being applied to different types of businesses in addition to its international geographic reach. Just as IFRS accounting standards are currently popular among private companies who would like to demonstrate to investors and other stakeholders' their financial strength, many have also released climate-related sustainablity reporting under the TCFD frameworks or other industry related specifics under the SASB model. They will likely adopt the new standard under a global baseline. New credit and financing terms from lenders and credit facilities may also refer to them for due diligence.

A more updated SASB and TCFD:

SASB’s industry-specific model rather than SEC’s market size-based approach: The ISSB draft requires industry-based metrics to be disclosed in addition to the cross-industry metrics modeled after Sustainability Accounting Standards Board (SASB), with slight variations. Like SASB, the ISSB proposal breaks the guideline into 11 industry groups, but takes out 9 subgroups from SASB’s 77 total. Details are shown in our Chart 4 above. This is a big departure from SEC’s most recent climate risk disclosure draft where the emissions disclosure requirement would be rolled to companies of different float size under different timelines, with the largest companies the first to be required to disclose while the small reporting companies would not be immediately required to disclose Scope 3 emissions.

Departure from TCFD’s model: While IFRS S2 Climate-related disclosures bear many similarities to the existing TCFD frameworks, there are a few areas of differences. The ISSB draft mandates the disclosure of Scope 1, 2, and 3 emissions for all entities whereas the TCFD only requires Scope 1 and 2 and Scope 3 if appropriate. For Scope 1 and 2 emissions, IFRS S2 also explicitly requires disclosures of its consolidated entity and all the JV’s, subsidiaries and affiliates.

The draft however does not explicitly mention the weighted average carbon intensity (WACI) of asset managers, or demand the use of the methodology developed by the Partnership for Carbon Accounting Financials (PCAF). The draft also comes with explicit requirements around disclosure of emission reduction targets and use of carbon offsets.

In target-setting, the ISSB proposal has much more detailed requirements than TCFD. It requires how the company’s set target compares with the latest international ones created in the latest international agreement on climate change (such as Paris Agreement) and whether it has been validated by a third party and whether the target was derived using a sectoral decarbonisation approach.

More likely to be adopted by Mainland China and Hong Kong:

Mainland China and Hong Kong (along with 144+ other jurisdictions) have already modeled the financial reporting standards after IFRS, which oversees ISSB, and is more likely to adopt the new draft proposals on sustainability. (See Chart 2).

In mainland China, the Chinese Account Standard has been modeled after the IFRS standard since 2007 (expanded from listed companies to state owned enterprises in 2008 and small and medium enterprises in 2009). Chinese central bank governor Yi Gang said last year that China also intends to impose mandatory climate disclosures on companies. However, it will only do so after testing the system with a limited set of banks and businesses.

Hong Kong Exchange uses Hong Kong Financial Reporting Standards (HKFRS), which are virtually identical to IFRS Standards, with the following exception: A company that is domiciled in Hong Kong but that is incorporated outside of Hong Kong is permitted to use either HKFRS or IFRS Standards as issued by the Board. Hong Kong Exchange had already mentioned the possibility of adopting ISSB’s standards last year (July 2021).[1]

In December 2020, the Green and Sustainable Finance Cross-Agency Steering Group announced that climate related disclosures aligned with the TCFD recommendations will be mandatory across relevant sectors no later than 2025. The Hong Kong Exchange is already aligning with the TCFD recommendations and collaborating with the Securities and Futures Commission (SFC) and other regulators to potentially adopt the new standard.

Chart 7: Existing accounting standards GAAP vs. IFRS


Source: MioTech, IFRS