The ISSB Has Released New ESG Reporting Standards: Now What?
Disclosure requirements for companies have become more complex and a lack of standardization has created challenges for entities reporting on their sustainability performance.
The International Sustainability Standards Board (ISSB) released in June two new disclosure standards for companies reporting on climate and sustainability-related risks and opportunities. The standards were created to promote better global alignment, but controversies surrounding the standards remain.
What are the new standards?
The ISSB was created by the International Financial Reporting Standards Foundation (IFRS), a non-profit responsible for global accounting standards, in 2021 at the COP26 climate change conference. The group was formed to develop sustainability disclosure standards for companies reporting sustainability-related information to investors.
The ISSB’s two new standards – IFRS S1 and IFRS S2 – were designed for companies to use together with their financial reporting, to report on their exposure to and management of climate and sustainability-related risks and opportunities. IFRS S1 encompasses general sustainability disclosures, which apply the Task Force on Climate-related Financial Disclosures (TCFD) approach to non-climate-related sustainability issues, such as overuse or misuse of water resources.
IFRS S2 encompasses climate disclosure standards, which apply the TCFD approach to climate-related considerations like physical and transition risks, climate resilience, and greenhouse gas emissions. It requires companies to disclose information on Scope 1-3 emissions, including financed emissions.
What is the difference between disclosure standards and due diligence regulations?
Internal reporting, external reporting, disclosure standards, due diligence regulations: we understand the headache of wrapping your head around these ESG concepts that seem to get more convoluted, especially for businesses operating across multiple regions. And now with actual mandates like new reporting requirements (e.g. the CSRD) or due diligence regulations, the difficulties in getting it right seem to only rise.
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Here are the key differences between ESG disclosure standards and supply chain due diligence regulations:
| Disclosure Standards | Due Diligence Regulations |
|---|---|
| Usually voluntary, however increasing number of mandatory reporting requirements (e.g. CSRD in the EU) | Often mandatory, legal requirements |
| A set of guidelines that companies follow to report their environmental, social, and governance (ESG) strategies, governance, and performance to stakeholders | A set of rules and guidelines that companies must follow to ensure that their supply chains are free from human rights abuses, environmental damage, and other negative impacts |
| Establish a process for reporting ESG information | Establish a process to mitigate risks related to ESG issues |
Entities may use sustainability disclosure standards to guide their overall ESG reporting, while also complying with specific supply chain due diligence regulations relevant to their industry or the regions in which they operate.
What are the challenges of disclosure standards?
- Complexity of global supply chains: Modern supply chains often span multiple countries and involve numerous intermediaries. Tracking and reporting on every stage of this process can be a challenge, particularly for small and medium-sized enterprises.
- Lack of standardization: Different jurisdictions may have different disclosure requirements, and there are various additional voluntary, reporting frameworks that companies can choose from. Different reporting revisions globally create a challenging landscape for companies reporting their sustainability efforts to their stakeholders. This lack of standardization can make it difficult for companies to know what information they should disclose and how to present their strategy and performance.
- Resource intensive: Developing and maintaining a robust disclosure process can be resource-intensive, requiring significant time, money, and expertise. This can be a particular challenge for smaller companies.
The upside to disclosure standards
Although challenging, disclosure standards do promote best practice for businesses. With effective disclosure standards, companies can display greater transparency in their operations. Consumers and investors place increasing pressure on businesses to prove that they operate ethically and sustainably. By adhering to globally-recognized disclosure standards, such as GRI or the above-mentioned IFRS S1 and S2, companies can demonstrate that they are maintaining sustainable operations.
Disclosure standards also help companies identify and manage the risks in their supply chains and comply with regulatory requirements. Some jurisdictions legally require companies to disclose aspects of their supply chain operations. Standards help companies meet these requirements.
We can expect to see further evolution in disclosure standards as companies, regulators, and stakeholders continue to grapple with the challenges and opportunities of sustainable development. While the ISSB and other organizations are taking steps toward better global alignment, the path to get there may still be difficult to navigate.
We’re here to help make the process easier. Speak with us to learn more about how you can effectively align your company to the right set of standards.
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