5 minute read 16 Nov 2021
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How to get ready for sustainability standards

By Victor Chan

International Director, Global IFRS Services, Ernst & Young Global Limited

Develops insights on applying IFRS to emerging accounting issues. Focuses on leases, crypto-assets, investment property and latest standard-setting activities. Enjoys relaxing with family.

5 minute read 16 Nov 2021

Company executives and audit committee members need to start planning now for impending changes to sustainability reporting.

In brief
  • The launch of the International Sustainability Standards Board (ISSB) is part of a “building blocks” approach to improve global sustainability reporting.
  • It is important that the ISSB works closely with global regulators and national and regional sustainability initiatives.
  • New standards will come into effect sooner than many people think, and so company executives and audit committee members need to act now.

International standard-setters have made rapid progress in recent months towards the goal of creating a more robust sustainability reporting framework based on global standards. This culminated in November 2021, just as the COP26 climate change conference was starting, with the launch of the International Sustainability Standards Board.

The ISSB will have a global, multi-location presence with offices in the Americas, EMEA (Europe, Middle East and Africa) and Asia. High-quality and globally accepted sustainability standards will provide stakeholders with useful information on sustainability performance to enable more informed decision-making. 

The IFRS Foundation (the Foundation), which is responsible for setting global accounting standards, has spent more than 12 months deliberating and planning for the establishment of the ISSB. In September 2020, stakeholders were asked, via a consultation paper, whether the Foundation should play a role in setting global sustainability standards and, in addition to its current role as a financial reporting standard setter, whether its standard-setting activities should expand into this area.

Feedback was clear – there is a growing demand to improve the global consistency and comparability of sustainability reporting and an urgent need for action. There is also broad consensus that the Foundation has a role to play in this area. A “building blocks” approach should be taken so that standards would “provide a globally consistent and comparable sustainability reporting baseline, while also providing flexibility for coordination on additional jurisdictional and multi-stakeholder reporting requirements.”

There is a growing demand to improve the global consistency and comparability of sustainability reporting and an urgent need for action.

Getting the ISSB up to speed quickly

A number of working groups had already been set up by the Foundation to lay the groundwork for the new board. For example, the Technical Readiness Working Group (TRWG) was established with two objectives: to accelerate convergence in global sustainability reporting standards focused on enterprise value; and to undertake technical preparation for the ISSB under the governance of the Foundation. TRWG participants include the International Accounting Standards Board (IASB), to ensure connectivity with financial reporting, and those from other bodies dedicated to sustainability reporting on enterprise value.

This was soon followed in April 2021 by the release of targeted amendments to the constitution of the Foundation by its trustees. The aim was to ensure that the proposed governance structure would provide legitimate oversight of standard-setting by the new board.

The global EY organization supports the creation of the ISSB, to respond to the demand for global sustainability reporting standards. It is also pleasing to see that the TRWG includes leading organizations with expertise in ESG issues and is focused on meeting the needs of investors. The TRWG will be able to assist the ISSB in getting up to speed quickly; its establishment recognizes the importance of international coordination in work on sustainability standards.

To enable the ISSB to hit the ground running, the TRWG is planning for the appropriate transfer of technical expertise, content and resources, and will provide preparatory work on technical observations and proposals. This preparatory work will provide a basis for the ISSB to consider in preparing its first exposure draft of proposed standards.

The IFRS Foundation has released two prototypes, namely, Climate-related Disclosures Prototype(pdf) and General Requirements for Disclosure of Sustainability-related Financial Information Prototype(pdf). The latter sets out the requirements for disclosing sustainability-related financial information relevant to the significant sustainability-related risks and opportunities. Companies need to evaluate and disclose such information beyond the specific climate-related disclosure requirements to claim compliance with the ISSB standards when they become effective.

The Foundation has also announced that two investor-focused international sustainability standard-setters will be consolidated in the ISSB. These are: the Value Reporting Foundation, which is home to Sustainability Accounting Standards Board standards and the Integrated Reporting framework; and the Climate Disclosure Standards Board.

This will help the new board to build on the work of existing initiatives to become the global standard-setter for sustainability disclosures for the financial markets.

As has been seen from the debates at COP26, tackling climate change is a key global issue. The Foundation has also recognized the urgency of the need to develop global standards on matters related to climate.

Global support for sustainability reporting

There is strong global support for the Foundation to take a key role in sustainability reporting from securities regulators and broader governments alike. In February 2021, the International Organization of Securities Commissions (IOSCO) Board announced its three priority areas for improvement in sustainability-related disclosures by companies and asset managers: encouraging globally consistent standards; promoting comparable metrics and narratives; and coordinating these actions across approaches. To achieve these priorities, IOSCO worked with the Foundation’s trustees as they developed a plan for the establishment of the ISSB. IOSCO is an observer in the TRWG.

In a June 2021 communiqué, the G7 Finance Ministers and Central Bank Governors expressed their agreement on the need for a baseline global reporting standard for sustainability, which jurisdictions could further supplement. They welcomed the Foundation’s program of work to develop this baseline standard.

Similar messages of support were expressed in the communiqué published by the G20 Finance Ministers and Central Bank Governors in July 2021 and the G20 Rome Leaders’ Declaration released in October 2021. Having such strong support from governments globally makes it at least possible, if not likely, that the ISSB standards could become the foundational, or required, building block for sustainability reporting in many jurisdictions.

National and regional efforts on sustainability reporting

In addition to global support, there are also national and regional initiatives on sustainability. Specifically, in April 2021, the European Commission adopted a legislative proposal for a Corporate Sustainability Reporting Directive that would require companies within its scope to report in compliance with European sustainability reporting standards adopted by the European Commission for financial years beginning on or after 1 January 2023. The European sustainability standards are currently being prepared by a project task force under the European Financial Reporting Advisory Group and the first standards are planned for release in October 2022.

The European standards aim to be compatible with ISSB standards, while requiring high-quality sustainability information to foster better comparability. The proposal would also require assurance of sustainability information.

It is important that the ISSB works closely together with national and regional initiatives on sustainability reporting work so that the standards emerging from each of these bodies are harmonized on the fundamental concepts and foundational technical elements to ensure the building blocks approach will succeed. This collaboration should be carried out not only at the strategic level, but also at the technical level.

Close connection between the IASB and the ISSB is necessary to achieve the connectivity and synergies of sustainability reporting with financial reporting and promote the interconnection of financial and nonfinancial information.

Connecting the ISSB and the IASB

In addition to the steps taken by the Foundation described above, work is also being undertaken to ensure that the key requirements for success can be satisfied. One such step is the Foundation’s plan to develop a structure and culture that seeks to build effective synergies with financial reporting. Given that IFRS standards are applied in nearly 150 jurisdictions around the world, the Foundation is uniquely positioned to drive synergy between sustainability reporting and financial reporting.

In his inaugural speech as the newly appointed chairman of the IASB, Andreas Barckow made a commitment to devote IASB and staff time to ensure connectivity between the two boards. He added that there would be joined-up standard-setting, enabling the two boards to work together to develop requirements from joint principles and concepts.

Close connection between the IASB and the ISSB is necessary to achieve the connectivity and synergies of sustainability reporting with financial reporting and promote the interconnection of financial and nonfinancial information. Moreover, it is critical that the ISSB is able to set up its own operating model, taking into consideration the difference in the nature of the topic it is dealing with, the maturity of the sustainability reporting standards and the environment within which the sustainability reporting standards will have to be implemented.

As this is a key requirement for success, company executives and audit committee members need to monitor the measures to be put in place that will connect the two boards in practice.

Sustainability reporting is not a compliance program; it collects, analyzes and interprets data to provide both internal and external stakeholders with useful information on sustainability performance to enable more informed decision-making.

What company executives and audit committee members should focus on

Companies should carefully align their sustainability reporting efforts to support corporate strategies. Both directors and employees need to embrace sustainability and recognize that it is now tied to the very success of their organizations. Sustainability reporting is not a compliance program; it collects, analyzes and interprets data to provide both internal and external stakeholders with useful information on sustainability performance to enable more informed decision-making.

To achieve this objective, many companies will need to implement new systems and processes within a limited timeline. Getting this work started early and making available suitably qualified professionals with the right experience will be vital for project management, especially when the relevant expertise is likely to be in short supply.

Companies will also need to provide training and educational courses to many of their employees in addition to those responsible for financial reporting given that sustainability reporting cuts across corporate functions. For example, sustainability will represent a significant element in stakeholder communication in addition to financial and other reporting. Companies will need to revamp or build infrastructure, controls and procedures to support the initiatives.

There is also increasing pressure from investors and other stakeholders, such as regulators in some jurisdictions, for more consistent and reliable information on sustainability. Companies in many jurisdictions will need to report in line with the sustainability reporting standards and provide external assurance of sustainability information in the near future.

This means that there will be increased responsibilities for the audit committee to ensure the effectiveness of the company’s internal quality control and risk management systems as well as the assurance of sustainability reporting. Sustainability reporting will be subject to the scrutiny of securities regulators, and so an appropriate governance structure needs to be put in place to provide oversight on the implementation and subsequent reporting on sustainability.

With continued efforts by all parties, global sustainability reporting standards will come into effect, requiring companies to apply them, sooner than many people think. This will have significant impact on a company from its strategic direction to its operation, bringing new challenges and even more opportunities. Company executives and audit committee members need to act now and plan ahead in order to reap the full benefits from this journey.

Summary

COP26 has shown that tackling climate change is a global issue that has wide support. The IFRS Foundation launched the ISSB at COP26 in recognition of the need for global standards on sustainability matters including climate. It has undertaken preparatory work as a basis for new sustainability standards; next, a close relationship between the IASB and the ISSB is needed to achieve synergies in sustainability and financial reporting to meet the needs of investors and other stakeholders. Executives and audit committee members need to plan ahead to reap the benefits.

About this article

By Victor Chan

International Director, Global IFRS Services, Ernst & Young Global Limited

Develops insights on applying IFRS to emerging accounting issues. Focuses on leases, crypto-assets, investment property and latest standard-setting activities. Enjoys relaxing with family.