What is the ISSB? What do businesses need to know about it?

The International Sustainability Standards Board (ISSB) is being established to create a global sustainability reporting framework. Here’s what you need to know about it. 

The International Sustainability Standards Board (ISSB) is a proposed global standard-setting body that aims to develop and promote a unified set of sustainability reporting standards. The ISSB is being established under the auspices of the International Financial Reporting Standards Foundation (IFRS Foundation), which is responsible for the development and oversight of International Financial Reporting Standards (IFRS).

Why is the International Sustainability Standards Board being developed?

The IFRS sustainability disclosure standards, developed by the ISSB, aim to provide a comprehensive framework for disclosing sustainability information that is financially relevant. These standards are designed to complement the existing financial reporting standards and enhance the transparency and consistency of sustainability reporting across organizations.

The ISSB is a response to the growing demand for consistent, comparable, and reliable sustainability information from companies and investors worldwide. Its establishment is seen as a significant step towards achieving a globally accepted sustainability reporting framework. It aims to address the current fragmentation and lack of consistency in ESG reporting by bringing together various regional and national initiatives under one international standard-setting body.

ISSB chair Emmanuel Faber said, “We responded to capital market and G20 demand for a common language of investor-focussed, sustainability-related disclosure, working diligently to deliver standards that fulfil the global baseline.”

The work of the ISSB is widely backed, not just by the G20, but also the International Organisation of Securities Commissioners (IOSCO), the Financial Stability Board, the World Economic Forum and by Finance Ministers and Central Bank Governors from more than 40 jurisdictions.

What are the ISSB standards?

There are two sets of proposed standards – sustainability related disclosures and climate disclosures, both of which are structured around the four pillars outlined by the TCFD (governance, strategy, risk management, metrics and targets) ensuring a comprehensive and consistent approach to sustainability reporting.

General sustainability disclosures

These standards extend the framework established by the Task Force on Climate-related Financial Disclosures (TCFD) to encompass non-climate-related sustainability issues. They also set out plans for the disclosure of all material sustainability related risks and opportunities.

Climate disclosure standards

These standards primarily focus on climate-related aspects, aligning with the TCFD approach. They address crucial considerations such as physical and transition risks, climate resilience, and greenhouse gas emissions. For the remainder of this guide, we will delve into these climate-related standards.

Note that the governance and risk management pillars are closely aligned with the TCFD's recommendations. However, the ISSB calls for further information and more details on strategy, metrics and targets.

What are the ISSB's mandatory metrics?

The International Sustainability Standards Board (ISSB) has outlined several mandatory metrics that filers are required to disclose within their sustainability reporting. These metrics include:

1. Greenhouse gas emissions: Filers must report on their greenhouse gas emissions, encompassing all scopes, including Scope 1 (direct emissions), Scope 2 (indirect emissions from purchased electricity), and Scope 3 (indirect emissions from value chain activities such as suppliers and/or portfolio companies). This disclosure should include the methodologies and assumptions utilized in calculating emissions.

2. Emission intensity: Filers are expected to provide information on the intensity of their emissions. This involves relating the greenhouse gas emissions to a business metric such as revenue or production volume, providing a context for understanding emissions relative to the company's operations.

3. Exposure to sustainability-related risks: Filers must disclose the extent and proportion of their business activities that are vulnerable to climate-related risks. This includes both transition risks (related to the shift to a low-carbon economy) and physical risks (associated with the physical impacts of climate change). By assessing their exposure to these risks, companies can demonstrate their understanding of potential impacts on their operations.

4. Climate opportunities: Alongside risks, filers are also required to disclose any climate-related opportunities they have identified. These opportunities may arise from shifting consumer preferences, emerging markets, technological advancements, or other factors related to addressing climate change.

5. Climate-related financial planning: Filers must disclose their financial planning and position in relation to climate considerations. This includes assessing the impact of climate risks and opportunities on the company's short, medium, and long-term financial outlook, as well as cash flows during the reporting period.

6. Investment in climate action: Filers are expected to disclose the overall amount of investment directed towards climate-related activities. This metric provides insight into the company's commitment to addressing climate change and transitioning to a more sustainable business model.

7. Internal carbon pricing: If a company utilizes an internal carbon price as part of its decision-making processes, it must disclose the details of this pricing mechanism. This includes information on how the internal carbon price was determined and its significance in guiding investment decisions and assessing project viability.

8. Climate-related executive remuneration: Filers are required to disclose the percentage of executive pay that is linked to climate considerations. This metric highlights the alignment of executive incentives with the company's climate goals and indicates the importance of climate-related performance within the organization.

It's important to note that these mandatory metrics may evolve and be subject to updates as the ISSB continues to refine its standards and requirements.

What are the main benefits of the ISSB standards?

The ISSB standards are designed to improve the quality of every company's sustainability disclosures – and importantly establish a global baseline of sustainability.

They'll also play an instrumental role in improving ESG evaluations and improving the decision-making of market participants – as they are focused on enterprise value - i.e. understanding the link between sustainability performance and company valuation.

Some countries are going as far as creating their own sustainability standards boards to improve their cooperation with the ISSB.

What requirements does the ISSB have in terms of targets?

The International Sustainability Standards Board requires filers to disclose specific regarding their targets:

1. Target nature: Filers are required to disclose the nature of their targets, including whether they represent absolute reductions of total emissions or relative reductions compared to a baseline period.

2. Baseline numbers: Filers need to disclose relevant baseline numbers that serve as a reference point for measuring progress towards their targets.

3. Time periods: Filers must disclose the time periods associated with their targets. This includes separate indications for interim and long-term targets, allowing stakeholders to understand the timeframe and urgency of the goals set.

4. Metrics for progress assessment: Filers should disclose the metrics they use to assess progress towards their targets. These metrics provide a quantitative measure of performance in relation to goals.

5. Comparison with international agreements: Filers should disclose how their targets align with international agreements on climate change, primarily referring to the Paris Agreement.

6. Sectoral decarbonization approach: If you adopt science based targets, you should disclose this information. This approach ensures that targets align with the emission reduction pathways required for specific sectors to contribute to global climate goals.

7. Third-party validation: Filers must disclose whether their targets have been validated by a third party.

8. Accounting for offsets: Filers should disclose their approach to accounting for offsets. This includes providing commentary on the types of offsets used, how they were verified, and why they should be considered credible in the context of the organization's sustainability goals.

How will the ISSB work with other standards?

The ISSB will work collaboratively with other standard-setting organizations and stakeholders to develop high-quality sustainability standards. It will take into account existing frameworks and standards, such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), to ensure compatibility and minimize duplication of efforts.

What does the ISSB mean for EU companies?

The Corporate Sustainability Reporting Directive (CSRD) will be closely aligned with ISSB. However, it will also incorporate the idea of double-materiality – the concept that companies should consider both their impacts on the environment and society, as well as the potential impacts of environmental and social factors on their financial performance and long-term viability.

What does the ISSB mean for UK companies? 

The UK government has announced that the International Sustainability Standards Board standards will play a crucial role in shaping future obligations under company law and the Financial Conduct Authority (FCA) requirements for listed companies. Once the ISSB standards receive endorsement for use in the UK, the FCA plans to consult on amending its disclosure rules to reference these standards.

The UK government also intends to conduct a review of the non-financial reporting framework to assess its alignment with the UK Sustainable Disclosure Regulation (SDR). This review will examine the thresholds for reporting obligations, with the aim of minimizing burdens for the majority of companies reporting.

What are the implications of the ISSB worldwide?

The ISSB is poised to establish itself as the prevailing standard for both general sustainability and climate-related disclosures. This is evident from the actions of regulatory bodies like the Canadian Securities Administrators (CSA), who are contemplating a delay in the release of their regulated climate disclosures to align them with the ISSB's requirements. The goal is to ensure compatibility and integration between the CSA's disclosures and the ISSB's standards. Moreover, even in regions where climate-related disclosures may deviate substantially from the ISSB's standards, investors are expected to increasingly demand disclosures that adhere to the ISSB's guidelines.

How can companies prepare for the ISSB? 

You can take proactive steps to prepare for the implementation of ISSB standards. Firstly, you should familiarize yourself with the draft standards and get a comprehensive grasp of the four pillars: governance and risk management, strategy, metrics, and targets. 

You should then assess your existing sustainability reporting practices and identify any gaps that need to be addressed to align with the ISSB standards. It's crucial to establish robust data collection and management systems to capture relevant sustainability information, including greenhouse gas emissions, climate risks, and opportunities. 

By proactively preparing and aligning your reporting practices with the ISSB standards, you can enhance your transparency, credibility, and responsiveness to investor demands and regulatory requirements.

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