Push for International Reporting Standards for ESG Disclosures Gains Momentum
For stakeholders and corporate directors fatigued by the “alphabet soup” of acronyms used in environmental, social and governance disclosures, the International Sustainability Standards Board’s release this summer of long-awaited standards had to be welcome news.
The ISSB, an arm of the International Financial Reporting Standards Foundation (IFRS), designed the standards to provide a global baseline for sustainability disclosure requirements. The goal is to allow companies to include sustainability-related information with financial statements in the same reporting package. The first standard provides disclosure requirements to help companies communicate to investors information about sustainability-related risks and opportunities, with the second standard setting out specific climate-related disclosures to accompany the first.
Regulators, corporate leaders, and the global business community seem pleased by the news. Many have praised the standards for bringing clarity to inconsistent sustainability data tracking and reporting rules, which can vary considerably between jurisdictions.
Key governance authorities around the world have signaled their support for the new standards, too. Countries that appear to back the ISSB’s proposal include the United Kingdom, Canada, Hong Kong, Singapore, Nigeria, Japan, New Zealand, and Australia. But will that support translate into action?
The UK government announced in August that it has developed a framework for adopting the ISSB sustainability reporting standards, intending to finalize its approach by the end of 2024. The new UK requirements would apply to financial years beginning on or after January 1, 2025, with the first required reporting beginning in 2026.
As for the United States, in March 2022 the SEC issued proposed rule changes that would require companies to include certain climate-related disclosures in their registration statements and periodic reports. Information would include “climate-related risks that are reasonably likely to have a material impact on their businesses, results of operations, or financial conditions as well as certain climate-related financial statement metrics in a note to their audited financial statements.” The agency has postponed the process of finalizing the proposed rules until October, and some have speculated that the final proposal may be partially influenced by the ISSB’s rules.
All in all, the international situation feels pretty kumbaya. The SEC and European Union worked with the IFRS to develop the new ISSB standards. In late July, the International Organization of Securities Commissions (IOSCO), which includes the SEC and EU regulators, endorsed the ISSB standards. The organization called on its 130 member jurisdictions to consider how they can incorporate the standards into their respective reporting frameworks “to deliver consistency and comparability of sustainability-related disclosures worldwide.”
Within days of the IOSCO endorsement of the ISSB standards, the European Commission released its new European Sustainability Reporting Standards (ESRS), effective in 2024. Additionally, it announced it is working with the European Financial Reporting Advisory Group and the ISSB to improve the “interoperability” of their respective climate-related disclosure requirements. Those efforts have led to a “very high degree of alignment, reduced complexity and duplication for entities wishing to apply both the ISSB Standards and ESRS,” according to the International Financial Reporting Standards Foundation.
In terms of what’s ahead for standard setters, some stakeholders appear intent on making human and worker rights part of the agenda. A trillion-dollar coalition recently wrote the ISSB urging it to prioritize researching human capital and human rights disclosure standards in its upcoming two-year plan. “Tackling these issues can only be achieved when there is transparency around corporate practices – something the ISSB is perfectly positioned to deliver,” the 21-member coalition wrote.
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