SOURCE: Workiva
DESCRIPTION:
The announcement of the International Sustainability Standards Board (ISSB) at COP26 earlier this week didn’t just create ripples: for those involved or interested in environmental, social and governance (ESG) reporting, the news was a tidal wave. The impact that ISSB will have, and the shift that it represents, cannot be understated. This announcement is big, but in such ESG-driven times, maybe we shouldn’t be too surprised.
Developing globally accepted sustainability reporting standards is in and of itself big news—but we knew that it was coming. What was less clear before COP26 were the plans to consolidate the Value Reporting Foundation (an organisation formed as the SASB and Integrated Reporting) and the Climate Disclosure Standards Board (CDSB) to form the ISSB. There have been calls to consolidate the diverse ESG standards landscape for years. The fact that it’s actually happening is truly remarkable, and it’s fantastic news for businesses, investors and society as a whole.
Global standards, universal simplicity
While the ISSB won’t be a panacea for all complexity attached to ESG reporting—the scale of the task will be just as big as it has always been—it will provide consistent standards for organisations across the world, significantly reduce cross-framework mapping and simplify the related painful elements of the reporting process. The Technical Readiness Working Group (TRWG) shared the first prototype disclosure requirements and the schedule of work, which was set up by the International Finance Reporting Standards (IFRS) Foundation. Six more deliverables from this group are already slated for handover to the ISSB, so expect more detail to emerge over the coming months.
Knowing that the ISSB won’t start from scratch is more welcome relief for businesses. Along with the substantial body of work brought in via the consolidation, SASB standards, Integrated Reporting Framework and the CDSB Framework, they will build on the work conducted by other leaders in the sustainability regulation field, such as the standards developed by the Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD forms part of the TRWG, and its recommendations formed the foundations of the TRWG’s initial climate prototype.
The notable omission of the Global Reporting Initiative (GRI) from this group doesn’t need to cause alarm. After the announcement of the ISSB formation, GRI shared the following statement: "GRI stands ready to engage with the IFRS Foundation in support of this aim. We look forward to hearing more about the remit and scope of their new ventures, as well as inputting to the development of the proposed climate standard.” We are at the beginning of what is going to be an exciting and incredibly beneficial journey. As time progresses, we will learn more about their plans.
In time, we will also have a firm picture of which countries are going to adopt the standard. A statement published by the UK government names the 38 jurisdictions across six continents that have signed a letter welcoming the announcement—among them Brazil, China, the European Commission and the United States.
Ultimately, all of this collaboration and consolidation means that businesses will no longer need to fumble in the dark to navigate a labyrinth of existing measurement frameworks, guidance, protocols, rankings, indices, and standards. They can clearly see the path ahead of them and have the reassurance that they can move beyond their current situation.
The ISSB will bring transparency and trust to ESG reports
As it currently stands, the sheer volume of voluntary guidance around ESG disclosures is overwhelming, complex and confusing. Despite having the best intentions, the guidance that’s currently in place is making ESG reporting more opaque for businesses, investors and stakeholders alike>. With one single set of global norms, it’s possible to achieve clarity. And, however heavy this particular crown maybe, having finance teams play a critical role in the reporting process will mean it’s possible to deliver transparent ESG reports that investors can trust.
"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."
Erkki Liikanen Chair of the International Financial Reporting Standards (IFRS) Foundation, during the announcement of the ISSB at COP26
Transparency shouldn’t be elusive. Investors need to have access to information that enables them to clearly compare one company’s sustainability performance against another. They need to clearly understand how a company’s performance relates to its value creation. Without this knowledge, it’s almost impossible to make fully informed business and investment decisions that align with globally accepted climate goals.
However, a consistent set of standards is not the only key to trust. Financial information also usually has stronger control requirements, assurance requirements and clear lines of sign-off and responsibilities. Regional laws and regulations will have a strong role to play here as well.
The ISSB will relieve significant pain for businesses
The ISSB isn’t a wholesale reinvention of the entire ESG reporting process. It also isn’t going to replace the Corporate Sustainability Reporting Directive (CSRD) and the associated EU standards that businesses across Europe are preparing for—it will complement them. And the European Commission has stated that, “The proposed EU sustainability reporting standards would build on and contribute to standardisation initiatives at the global level.“ Although it won’t make a major dent in the immense amount of data and compilation work that goes into creating an ESG report, it’s not going to add any additional pain to an already complex process.
The simplicity that it promises and the reassurance that it provides will spur businesses to do the work to create ESG reports that meet investor expectations. The reality is that it will take time for businesses to transform their end-to-end ESG reporting processes. Many are already doing the work in anticipation of the CSRD being mandated. Their priority now will be to ensure that transitions are easy and smooth. To achieve this, they need to reassess their current set-ups and not be too fixed on using the existing solutions that they have hardcoded in place.
Forbes called the creation of the ISSB, “the biggest change in corporate reporting since the 1930s.” And it’s not clickbait. It’s not hyperbole. It’s true. Businesses, and their reporting teams, in particular, will rightly be celebrating this announcement. They’ve been suffering significant pain.
The IFRS has made sure that the ISSB will make a real impact: it’s the standard board that offers real, strong pain relief. And sure, businesses know they have a lot of work ahead of them. But, in the long run, the siren sounded from COP26 that change is imminent, that global standards are coming and that ESG reporting standards are going to be consolidated and made consistent across the globe—that’s as good a reason as any to feel a sense of relief.
KEYWORDS: Workiva, NYSE: WK, ISSB, COP26
