Group Proposes Standards for the ‘E’ in ESG (2024)

The ISSB is pushing sustainability disclosure standards for the “E” in ESG.

While a major backlash is underway against investment strategies based upon environmental, social, and governance (ESG) issues, the International Sustainability Standards Board (ISSB) released in late June a proposal for global sustainability disclosure standards that could bring some clarity to investing based on environmental concerns — the “E” of ESG.

If adopted, the standards will be overseen by the IFRS Foundation, “a not-for-profit, public interest organization established to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards,” IFRS officials explain. IFRS standards are developed by the standard-setting boards the International Accounting Standards Board (IASB) and ISSB.

ISSB officials argue that the proposed standards — IFRS S1 and IFRS S2 — will “create a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects. … The standards will help to improve trust and confidence in company disclosures about sustainability to inform investment decisions.”

At a high level, “IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium, and long term,” ISSB officials say. “IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1.”

Among other aspects, “IFRS S1 requires an entity to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term (collectively referred to as ‘sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects’),” according to the ISSB.

Both standards overlap with the IFRS S2 proposal applying to “climate-related risks to which the entity is exposed, which are:

• climate-related physical risks; and
• climate-related transition risks; and
• climate-related opportunities available to the entity.”

The standards were officially launched by Emmanuel Faber, chair of the ISSB, at the IFRS Foundation’s annual conference “and through a week of events hosted by stock exchanges around the world, including those in Frankfurt, Johannesburg, Lagos, London, New York, Santiago de Chile; the ASEAN Capital Markets Forum is also hosting a launch event in Singapore.”

Both potential standards “fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD),” according to the ISSB.In addition, the ISSB applied “extensive market feedback … from the G20, the Financial Stability Board and the International Organization of Securities Commissions (IOSCO), as well as leaders in the business and investor community.”

“The ISSB Standards are designed to ensure that companies provide sustainability-related information alongside financial statements — in the same reporting package,” according to the ISSB. “The standards have been developed to be used in conjunction with any accounting requirements. They are also built on the concepts that underpin the IFRS Accounting Standards, which are required by more than 140 jurisdictions. The ISSB Standards are suitable for application around the world, creating a truly global baseline.”

The ISSB will be promoting the new standards to “jurisdictions and companies to support adoption. The first steps will be creating a Transition Implementation Group to support companies that apply the standards and launching capacity-building initiatives to support effective implementation,” officials say.

“We know that better information leads to better economic decisions,” Faber says.The publication of the proposed standards “is just the starting point as we consult on our future priorities, beyond climate.”

More details about the standards can be found here: https://bit.ly/3D3kwsw

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