Raising the (global) standard

Worldwide there are more than 600 sustainability reporting standards, initiatives, frameworks and guidelines for financial institutions.

Many institutions have long been calling for a standardisation of global sustainability disclosure requirements to better align reporting across jurisdictions, making it easier for investors to compare and contrast investments.

Claiming to fulfil that promise, the International Sustainability Standards Board (ISSB) has published global sustainability disclosure standards aimed at international capital markets: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information; and IFRS S2 Climate-related Disclosures.

The aim is for the ISSB to become the global sustainability standards leader, filling in gaps between the various current standards.

The UK’s Financial Conduct Authority (FCA) has accompanied the disclosures with a statement highlighting the intention to include the ISSB standards in its climate-related disclosure rules. There is a possibility that these voluntary disclosures could become mandatory in the UK.

What impact might this have on private equity sustainability reporting requirements?

The briefing
The ISSB was formed on 3 November 2021 at COP26 in Glasgow by the trustees of the International Financial Reporting Standards Foundation (IFRS), whose aim is to create and deploy accounting standards.

It was supported by the G7, G20 and the International Organisation of Securities Commissions (IOSCO) to achieve the following objectives:

• To provide a global sustainability disclosure baseline
• To sufficiently inform investors
• To help global capital markets provide clear sustainability reporting
• To streamline different jurisdiction disclosure requirements.

The ISSB standards are rooted in the SASB standards (now part of the IFRS) and the TCFD recommendations. Companies that have already adopted these are therefore well on their way to complying with ISSB.

UK firms that apply IFRS 1 and IFRS 2 should be fully compliant with TCFD recommendations.

There is also intentional alignment between the Global Reporting Initiative (GRI), with both based on the same concepts as the IFRS accounting standards.

As IFRS financial standards are required by 140 jurisdictions, there is a case for the ISSB to become a truly global standard.

The detail
Split into two categories, IFRS S1 and IFRS S2 strive to achieve different things.

IFRS S1 aims to assist fund managers with disclosing sustainability reporting to investors, detailing how sustainability matters impact the firm and not the other way around.

Similar to TCFD, IFRS 1 comprises four categories of information for investors: governance, strategy, risk management, and metrics and targets.

In accompaniment, IFRS 2 requires specific climate-related disclosures on cross-industry and industry-specific climate-related matters. It reportedly goes a step further than TCFD because it requires the reporting of more granular information, along with a developed set of disclosure requirements.

Any company applying S1 must apply S2 to identify and disclose information on climate-related risks and opportunities.

The impact
The disclosure standards will be effective for annual reporting periods beginning on or after 1 January 2024.

This means the information will be available for investors in 2025, assuming fund managers adopt the standards straight away.

Sarah-Jane Denton, consultant at Travers Smith, outlined what effect this might have on UK reporting requirements: “As it stands, the ISSB is not mandatory until a jurisdiction enacts a requirement to report using it – the UK says it will do this, but that could be some way out, and the standards have transitional provisions. The ISSB is awaiting endorsement by IOSCO (which consists of over 170 countries' market regulators) so that the standards can be used for the capital markets.”

Harrie Narain, associate at Travers Smith, added that the long-term implications of the ISSB’s disclosure standards remain unclear: “It depends on the evolution of the standards, how many jurisdictions adopt the standards, how reporting requirements are met in reality and whether there are significant stumbling blocks in reporting.”

It is perhaps premature to conclude how the ISSB standards will change the global sustainability reporting landscape, but its intentions are clear – to align the disclosure of information to investors across the world. Being well versed in the requirements might prove worthwhile further down the line.