How will the International Sustainability Standards Board's two proposed standards meet the needs of investors?
Cyrus Cheung CPA (practising), Partner, ESG Services at PwC, and Deputy Chairman of the Institute’s Sustainability Committee
The International Sustainability Standards Board’s (ISSB) two proposed standards help to set the foundation for comparable and transparent reporting. During the 2021 United Nations Climate Change Conference (COP26) in November 2021, the IFRS Foundation responded to the call for globalization of sustainability standards and announced the formation of the ISSB. Two proposed standards were published, one on climate-related disclosure requirements and one on general sustainability-related disclosure requirements. The ISSB standards are intended to cover important environmental, social and governance (ESG) topics relevant to investors – climate is a specific topic chosen given increased attention on the topic and growing focus on how climate will impact companies. Going forward, the ISSB also intends to develop thematic and industry-based requirements.
The ISSB’s two proposed standards will meet the needs of investors in three main ways:
Meeting investors’ information needs: Investors are looking beyond information in financial statements and taking into account sustainability matters affecting companies, as well as how these matters will affect a company’s long-term sustainability – from their risk management in response to climate change, to how they are attracting talent and their impact on and from surrounding communities. Topics such as these will impact investment decisions and the ISSB standards facilitate transparent disclosure of relevant ESG topics to better equip investors in their decision-making.
Ease of comparability through standardized standards: With an “alphabet soup” of frameworks and standards, the market is currently not aligned in terms of ESG disclosure. In PwC’s 2021 Global Investor ESG survey, 74 percent of investors surveyed agreed their decision-making would be better informed if companies applied a single set of ESG reporting standards. A standardized set of standards – with standardized data sources, scope and presentation – will help investors draw insightful comparisons between companies. Standardized standards will provide comparable and useful information to not only investors, but also regulators and other ESG stakeholders.
Investment growth: The proposed standards can help investors benefit from investment growth through a coherent baseline and common metrics where investors gain a clearer sense of ESG risks and opportunities from company disclosures. With growing awareness on responsible investment strategies and trends where companies with stronger ESG propositions outperform peers – what Larry Fink, Chief Executive Officer of BlackRock, referred to as a “sustainability premium” in his CEO Letter in 2021 – investments in ESG companies are expected to continue, and both transparent and comparable information will assist investors in this area.
Personally, I very much welcome increased alignment in the ESG space and the two proposed standards, and look forward to continued alignment of data for continued and greater impact.
Natalyn Pow, Senior Associate, ESG Services, contributed to this response.
“Standardized standards will provide comparable and useful information to not only investors, but also regulators and other ESG stakeholders.”
Pat Woo CPA (practising), Partner, Head of Sustainable Finance, Hong Kong at KPMG China, and member of the Institute’s Sustainability Committee
The establishment of the ISSB during COP26 was a landmark moment for the ESG space. The ISSB marks the beginning of efforts to standardize ESG reporting, and will sit alongside the International Accounting Standards Board, whose accounting standards are followed by over 140 jurisdictions globally.
In March, the ISSB issued two exposure drafts, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (S1) and IFRS S2 Climate-related Disclosures (S2). S1 is focused on general disclosures around ESG, while S2 focuses on climate-related disclosures. With S1 and S2, the ISSB has taken the approach of developing standards for short-, medium- and long-term enterprise value disclosures that are more investor-focused.
Although companies already utilize guidelines such as Global Reporting Initiative, current ESG reports tend to be freeform in format, which often makes it difficult for readers to compare between different companies, even within the same sector. Going forward, ISSB standards will make disclosures more uniform, and as such, investors will be able to compare like with like, similar to financial disclosures.
The ISSB also aims to connect financial statements to the ESG reports through its focus on enterprise value. Previously, ESG reports were standalone with little or no direct correlation to corporates’ financials. This will change with the adoption of S1 and S2, which will require corporates to determine the potential of ESG material matters and how they may impact revenues, cash flows, asset valuations, etc. These disclosures may be forward-looking, in particular in relation to climate, and will give investors comfort that the corporate understands future risks and their potential impact on enterprise value.
In the future, the ISSB also aims to develop standards on other topics around ESG, but with these new standards, it is first focusing on climate-related requirements. This is in line with what the market is currently demanding.
With S1 and S2, the ISSB has contributed to creating step change in overall enterprise reporting, which will benefit the market as a whole, giving investors additional information and data to help them make investment and financing decisions. In addition, disclosures will give greater assurance that ESG matters are being properly managed in reporting entities.
“Going forward, ISSB standards will make disclosures more uniform, and as such, investors will be able to compare like with like, similar to financial disclosures.”
Calvin Kwan, Head of Sustainability at Link REIT, and member of the Institute’s Sustainability Committee
The ISSB’s two proposed standards coalesce existing ESG frameworks and standards into a common reporting platform. This underscores the importance of ensuring consistency and connectivity between financial decision-making and material ESG issues.
The proposed broader reaching S1 serves to align and streamline the reporting of ESG data both across and within industries by establishing the minimum in ESG disclosure requirements. With emphasis on material issues, the issue of corporate greenwashing can be reduced, and investors can make more accurate and near like-for-like comparisons of target companies.
S2 requires preparers to detail the impact of climate-related physical and transitional risks and opportunities on enterprise value. With focus on the disclosure of absolute and intensity-based greenhouse gas emissions data, internal carbon pricing, emissions target setting and the capital deployment towards related risk and opportunities, investors can develop more granular assessments of a preparer’s resilience, preparedness and vulnerability to climate challenges.
These two standards represent a significant step forward for corporates and investors alike in terms of data integrity, material issue alignment and performance comparability. While still in the consultation stages until the expected formal adoption at the end of 2022, smart management perceives this as a timely opportunity to review and update the management tools and internal competencies to ensure compliance and establish global best practices. Already, leading companies are harnessing the power of artificial intelligence and other system innovations to leverage data utility. Also, internal teams in IT and ESG are being upskilled to complement the financial and governance decision-making needed to accommodate investor expectations aligned with these standards.
While there is high potential for the ISSB proposed standards to align ESG reporting and enhance disclosures, they are limited in their ability to arrive at a comprehensive solution for an industry that has developed using voluntary and competing data sets and arbitrarily chosen standards for reporting. Several key points for investor comfort remain to be addressed by the standard setters including universal adoption by regulatory bodies and unclear assurance processes.
“These two standards represent a significant step forward for corporates and investors alike in terms of data integrity, material issue alignment and performance comparability.”