Five-Minute Brief: ISSB's New Sustainability Standards

Standards represent a notable step towards mandatory sustainability reporting globally

The newly created International Sustainability Standards Board (ISSB) is a standard-setting body created by the U.K.-based International Financial Reporting Standard (IFRS) to establish globally consistent Sustainability Standards with which regulators across jurisdictions can align. In March 2022, the ISSB published exposure drafts to solicit public comment on two proposed Sustainability Standards:

1) General Requirements for Disclosure of Sustainability-related Financial Information (General Requirements Exposure Draft); and

2) Climate-related Disclosures (Climate Exposure Draft).

The proposed Standards aim to set globally consistent and comparable requirements for the disclosure of sustainability and climate-related information by publicly-listed companies, thereby enabling investors and capital market participants to make more informed decisions. The proposed Standards lean heavily on existing sustainability reporting standards, including the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). The period for public comment on the exposure drafts closed on July 29, and the Standards are expected to be finalized by the end of 2022.

The General Requirements Exposure Draft sets out requirements for disclosing sustainability-related financial information that enables users to evaluate a company’s risks and opportunities, including information on governance, strategy, risk management and metrics and targets. The ISSB assumed responsibility for the SASB Standards and committed to building SASB’s industry-based approach into its standards development. In the interim, the ISSB encourages preparers and investors to continue to use SASB Standards.

The Climate Exposure Draft sets out requirements for identifying, measuring and disclosing exposure to climate-related risks and opportunities that may affect a company’s current financial position, as well as over the short, medium and long term. The proposed Standard builds on the recommendations of the TCFD, proposing more detailed disclosure of climate-related governance and risk management and requiring entities to use climate-related scenario analysis to assess climate resilience.

Both proposed Standards stem from investor demand for greater consistency and comparability of sustainability and climate information, and signal a notable step towards mandatory sustainability reporting globally.

Canada’s financial reporting is already aligned with the IFRS and is expected to adopt the ISSB’s requirements once finalized. In preparation, Canada’s accounting and auditing bodies established the Canadian Sustainability Standards Board (CSSB) in June 2022 to review and ensure the Standards are appropriate for the Canadian market. The Canadian Securities Administration (CSA) also published its proposed climate-related disclosure requirements for consultation, which will likely be influenced by the stringency of the U.S. Securities and Exchange Commission’s (SEC) proposed requirements and the release of the ISSB Standards.

The U.S. does not use the IFRS and instead uses its own Generally Accepted Accounting Principles (GAAP) standard. The SEC recently published its proposed climate disclosure requirements for U.S.-listings, which is also set to be finalized later this year.

How you can prepare

While the form of the disclosure will be mandated, the substance of what’s disclosed will be nuanced and specific to each company. To prepare, capital market participants should consider how their current sustainability and climate-related activities and disclosure practices align with the ISSB’s proposed Standards and begin addressing potential gaps in the eventuality that the finalized Standards are adopted in various jurisdictions, thereby requiring issuers to report sustainability-related information at the same time as financial statements and as part of general purpose financial reporting.