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IFRS Foundation creates sustainability standards board

The IFRS Foundation has announced a new board to develop international sustainability disclosure requirements to address greenwashing. Rashim Arora gives an overview into the organisation, its draft standards, and what they mean for financial services firms.

The IFRS unveiled the International Sustainability Standards Board (ISSB) at COP26, to begin work in 2022. The board will develop a global standard of robust sustainability-linked disclosure requirements. The board hopes to consolidate the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) into the ISSB.

The foundation also published two prototype standards to give an idea of how international expectations could look. One focuses on climate and the other on general disclosure requirements. The board will issue the IFRS’ Sustainability Disclosure Standards, laying out sustainability-related reporting requirements and providing investors with guidance on the relevant metrics.

The ISSB was formed to meet the demand for globally consistent and accepted ESG disclosures. It will sit alongside the International Accounting Standards Board (IASB) and be overseen by the trustees of the IFRS Foundation and the Monitoring board.

Firms within the financial services sector should take special notice of the ISSB and any draft standards, as they are linked to other disclosure initiatives, such as the Taskforce for Climate related Financial Disclosures (TCFD) and will influence the development of other national measures.

Prototype standards give direction

These standards were drawn up by the Technical Readiness Working Group (TRWG) to lay the foundations for the ISSB and lead the development of official guidelines. These drafts look at climate-related disclosure and general requirements for disclosure of sustainability-related financial information.

It's important to note that these prototypes have not been subject to the due process that measures must undergo. The ISSB will carry out public consultations on any proposals and will follow the IFRS Foundation’s approval framework. The foundation also published these skeleton standards:

Climate-related disclosure:

This sets out recommendations from existing standards and frameworks, including the TCFD along with industry disclosure requirements. The prototype standard requires firms to provide sufficient information to allow investors to clearly see a company’s ESG governance, strategy, risk management, metrics and targets.

It also provides a technical protocol for reporting requirements - including metrics that provide guidance on definitions, scope, implementation, compilation, and presentation. Additionally, it examines activity metrics that help firms quantify the scale of their activities, and are intended for use in conjunction with accounting metrics to normalise data and facilitate comparison.

General requirements for disclosure of sustainability-related financial information:

This prototype standard looks at the broader requirements for firms disclosing sustainability-linked financial information relevant to the potential risks and opportunities. It includes:

  • disclosure of a firm’s significant sustainability risks and opportunities
  • defining materiality in a way that follows the Conceptual Framework for Financial Reporting
  • consistency in disclosure that stems from governance, strategy and risk management, supported by metrics and target
  • further reporting obligations and guidance to support information sharing

The TRWG also highlighted that the ISSB should consider financed emissions and portfolio alignment, which will have a direct impact on financial firms. It also asked for the organisation to resolve issues around:

  • international applicability - metrics that cite jurisdiction-specific regulations or standards
  • climate scope - metrics indirectly related to climate change, such as water quality
  • duplication of governance, strategy, or risk management requirements - metrics that duplicate or counter disclosures required in the main body of the standard, such as descriptions of risks
  • duplication of cross-industry metrics - the same as or similar to required cross-industry measures

Firms should seek guidance in familiarising themselves with these drafts as the ISSB is likely to proceed quickly with developing drafts that become standards soon. Companies should also understand existing sustainability-related requirements - set out in various regulatory bodies' guidance.

Depending on countries’ climate policy, some companies will need to comply with these standards while others may do so voluntarily, but entities should take this early adoption step to ensure they are prepared for eventual global standards.

We can help companies understand these recommendations and ensure their ESG frameworks and strategy are robust. We support stakeholders in a wide range of activities; developing solid foundations for climate scenario analysis, supporting through strengthening the governance framework, and help build a cross-functional climate analysis team. 

Firms preparing for climate-related reporting should seek guidance now in creating scenarios, reviewing internal models, and strengthening disclosures.

To find out more on how we support firms to prepare and manage their climate-related disclosures, please contact Rashim Arora.