IFRS board to provide global sustainability standards

As COP 26 closed its first week, the International Financial Reporting Standards (IFRS) Foundation Trustees officially launched its International Sustainability Standards Board (ISSB) which aims to provide a baseline for sustainability disclosure standards for companies in order to provide ESG information to the financial markets.

The ISSB will work in close co-operation with the International Accounting Standards Board (IASB) which will continue to oversee the standards governing financial statements.

The aim is to ensure connectivity and compatibility between the IFRS Accounting Standards and the IFRS Sustainability Disclosure Standards as well as help streamline and formalise corporate sustainability disclosures.

The new board will also bring together the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF), the name behind the Integrated Reporting Framework and the SASB Standards, by June 2022.

The frameworks of the CDSB and VRF as well as the Tsk Force on Climate-related Financial Disclosure (TCFD) and the World Economic Forum’s Stakeholder Capitalism Metrics will provide the basis for the technical work undertaken by the new board.

The standards will include disclosure requirements that address companies’ impacts on sustainability matters relevant to assessing enterprise value and making investment decisions.

They will be developed to be used alongside any sustainability reporting standards that are jurisdiction-specific or aimed at a wider group of stakeholders such as the European Union’s planned Corporate Sustainability Reporting Directive.

In addition, the IFRS Foundation’s Technical Readiness Working Group (TRWG) has undertaken the preparatory work for the ISSB’s prototype climate and general disclosure requirements. Several organisations such as TCFD and the World Economic Forum and the International Organisation of Securities Commissions have contributed input.

Erkki Liikanen, chair of the IFRS Foundation Trustees.

“To properly assess related opportunities and risks, investors require high-quality, transparent and globally comparable sustainability disclosures that are compatible with the financial statements,” said Erkki Liikanen, chair of the IFRS Foundation Trustees.

He added, “Capital markets can have an essential role to play in reaching net zero. But that can only happen when sustainability information is produced with the same rigour, assurance of quality and global comparability as financial information.

Establishing the ISSB and building on the innovation and expertise of the CDSB, the Value Reporting Foundation and others will provide the foundations to achieve this goal.”.

It has been well documented that sustainability universe is a confusing patchwork of standards, definitions and frameworks.

Institutional and regulators have been looking to the IFRS Foundation to develop accounting standards that introduce comparable reporting on sustainability issues for financial markets.

The ISSB’s board will be based in Frankfurt but will also have offices in Montreal, London and San Francisco, allowing it to secure funding from governments and businesses in several countries. Discussions to secure a presence in Beijing and Tokyo are continuing, the IFRS Foundation said.

The IFRS Foundation has also published prototypes covering climate-related and other sustainability disclosures, which the ISSB will consider and intends to consult on next year.

The news by the IFRS Foundation, whose standards are used in over 140 jurisdictions globally, has been welcomed by companies and financial institutions.

As a spokesperson at EFAMA, said “The investment management industry is keen to actively engage in its governance and technical work, as it develops.”

The European asset management trade body added that “asset managers can still not fully integrate climate change considerations in their investment decisions, due to the global fragmentation of climate-related disclosures, the modest comparability of disclosed information and the absence of a single, global mandatory reporting framework.

It is essential that the ISSB focuses on converging the numerous existing standards into a common basis for a mandatory global sustainability reporting framework. Given that certain jurisdictions, such as the EU with its standard setting body EFRAG, may adopt more ambitious frameworks, we commend the ISSB´s announcement of a formal coordination mechanism with such jurisdictions.

In this context, we would also welcome a commitment by the ISSB to widen the IFRS’ approach to materiality in sustainability reporting by including companies’ positive and negative climate impacts on top of how environmental risks impact companies (i.e. ‘double materiality’).

Professor Lucrezia Reichlin, London Business School.

London Business School’s Professor Lucrezia Reichlin, a trustee of the Foundation and chair of the steering committee of the project, called the move “a real game changer.”

He noted that all major sustainability private standard setters are consolidating to form the international sustainability standard board under the umbrella of the IFRS.

This will be a powerful organisation, which combines the experience and credibility of the IFRS on financial reporting with that of those organisations that pioneered the idea that accounting needs to reflect risks and opportunities linked to the transition to net zero and physical risks related to climate.

“The transition needs public and private capital, but to mobilise private capital we need reporting rules that can provide transparent and comparable information on enterprise value. We also need them to be mandatory and auditable. This is the new plumbing needed for a sustainable financial system. I am very proud of what we have achieved.”.

The movement to establish the ISSB was initiated in October 2020, with the launch of a consultation process by the IFRS Foundation, seeking input on the potential formation of a global sustainability reporting standards board, and on the Foundation’s own place in that process.

©Markets Media Europe 2021

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