A global standard for climate-related disclosures is no longer a pipedream. On March 31, the International Sustainability Standards Board (ISSB) released a first draft of its general sustainability-related and climate-related disclosure requirements, which have the potential to become the template for corporate sustainability reporting around the world.
The ISSB was founded last November by the International Financial Reporting Standards (IFRS) Foundation, a global organization that oversees financial accounting standards in more than 140 jurisdictions — including Canada, the UK, and the European Union. The ISSB’s mission is “to deliver a comprehensive global baseline of sustainability-related disclosure standards” that provide investors with clear, reliable, and decision-useful information on companies’ sustainability-related risks and opportunities. The board chose to start with the disclosure of climate-related information due to the “urgent need” stakeholders expressed for better information on climate change’s impact on companies’ bottom lines.
The draft standards cleave closely to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), the world’s leading framework for climate-related reporting. They also incorporate elements from other voluntary sustainability reporting frameworks, including industry-specific requirements that have been drawn up by the Sustainability Accounting Standards Board (SASB). Any information required under the climate-related and general sustainability-related standards would have to be disclosed as part of a company’s “general purpose financial reporting.” It would also have to be verifiable, meaning it would stand up to an auditor’s scrutiny.
To summarize, the standards would make companies publish information that would help investors understand their:
- Governance processes, controls, and procedures used to oversee and manage climate-related risks and opportunities;
- Strategy toward climate-related risks and opportunities that could strengthen or weaken their business models over the short, medium, and long term;
- Risk management in relation to climate-related threats, including how they identify, assess, manage, and mitigate these;
- Metrics and targets used to monitor and manage their performance regarding climate-related risks and opportunities
In a statement welcoming the draft standards, Mary Schapiro, Head of the TCFD Secretariat, said: “By building on the TCFD’s framework, the ISSB’s climate proposals will create further consistency, comparability, and reliability across climate disclosure so investors can make more informed financial decisions.”
Significantly, the draft standards also have the backing of the International Organization of Securities Commissions (IOSCO), a body of securities regulators that collectively oversee around 95% of the world’s securities markets in more than 130 jurisdictions, including Canada’s provincial securities authorities, the UK’s Financial Conduct Authority, and the US’s Securities and Exchange Commission, which published its own proposed rule on climate disclosure for US-listed companies on March 21. Ashley Alder, Chairman of the IOSCO Board, said the body would review the proposals “with the objective to endorse them for use by our member jurisdictions.”
The breadth of support for the ISSB’s work suggests its finalized disclosure standards could be rapidly adopted by IFRS and IOSCO member countries.
The ISSB is soliciting feedback on its draft standards until July 29, 2022. It then plans to review the comments it receives to inform the finalized standards it intends to issue before the end of this year.
Building on the TCFD
The ISSB standards adopt many of the TCFD’s disclosure recommendations. However, they also go beyond them in some areas in order to fulfill the specific needs of users of general purpose financial reporting.
For example, under its governance recommendations, the TCFD asks entities to describe their boards’ oversight of climate-related risks and opportunities, as well as their managements’ role in evaluating and managing them. The ISSB standards go further by telling businesses to explain how these climate-related governance duties are reflected in their entity-wide terms of reference, board mandates, and associated policies.
A series of disclosure requirements around climate resilience also expand on the TCFD’s strategy recommendations. Like the TCFD, the ISSB says companies should use climate scenario analysis so that investors can understand how robust their business models are in relation to climate change. However, the ISSB also demands specific disclosures related to these analyses, including which scenarios were used, explanations for why these scenarios are appropriate for measuring climate resilience, in addition to scenario inputs and assumptions.
Businesses that have limited their climate-related disclosures to the letter of the TCFD recommendations may have to raise their game to meet the ISSB’s standards. However, those that have fully embraced the TCFD internally should be well-placed to fulfill the additional disclosure requirements.
An emphasis on metrics and targets
The ISSB standards place great importance on the metrics and targets that businesses use to implement and monitor their climate strategies.
In line with the TCFD — and with the SEC’s recent proposed rule — the standards would require entities to disclose their greenhouse gas (GHG) emissions. They would also compel firms to report against seven cross-industry metrics that have been established by the TCFD.
When it comes to businesses’ climate targets, the standards are exacting. For every target, companies are told to disclose how they align with the latest international agreement on climate change (namely, the 2015 Paris Agreement), whether they are calculated using a sectoral decarbonization approach, and whether they have associated milestones and/or interim targets.
Businesses are further instructed to disclose contextual information on their targets. For example, they have to explain what processes are in place to review targets. They also have to describe the intended use of carbon offsets in reaching their targets, including whether the selected offsets will be validated through a third-party offset verification or certification scheme.
How to prepare
Businesses that are proficient in the TCFD recommendations should already be able to meet many of the ISSB standards. However, the requirement that this information be disclosed as part of “general purpose financial reporting” means entities should align their processes for disclosing financial and climate-related data. The stipulation that this information be verifiable also ups the ante for businesses, which should ensure their disclosures can pass the inspection of external auditors.
Companies that have announced climate-related targets and associated transition plans may have to divulge more granular information on these than they have in the past under voluntary disclosure frameworks. On the other hand, those that have yet to do this will have to carefully consider how they set their targets and be prepared to justify them to the public with supporting quantitative and qualitative data.
Businesses should not miss their opportunity to have their say on the finalized standards, either. The ISSB presented 17 questions to stakeholders on its climate-related disclosure requirements and another 17 on its general requirements. Businesses should digest these questions and provide feedback to the ISSB before July 29.
How Manifest Climate can help
Our climate intelligence SaaS+ platform combines cutting-edge technology, an industry-leading database of climate disclosures, and ongoing support from climate experts to deliver the best-in-class climate guidance at scale. We can help companies of all sizes identify and implement what’s needed to meet the ISSB’s incoming standards.
- Our technology and world-leading experts support teams to get started by identifying and implementing critical actions to achieve disclosure objectives and more.
- Our platform, which combines climate expertise with AI, can help companies understand their reporting strengths and weaknesses, as well as how they stack up against their peers.
- We help companies understand the extent of their alignment with the TCFD or other climate reporting standards/regulations, providing transparency into their climate risks/impacts and making the reporting process more efficient.
- Our world-leading climate disclosure data shows when companies understand their climate risks and impacts, they are better positioned to put a plan in place to more effectively manage and ultimately reduce emissions.
Get in touch with us now to learn more.