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Frameworks explained: What is the ISSB?

December 1, 2022
Article

The ISSB aims to harmonize sustainability reporting, reduce burdens, complexity, and confusion for companies, and spur greater uptake.

Regulations & Frameworks Explained

This post is part of “Regulations & Frameworks Explained,” a short series that covers global climate disclosure regulation, sustainability matters, and the leading voluntary standards and frameworks that underpin the evolving landscape of laws regulating climate disclosure.

Read more:

What is the TCFD?
TCFD: The common thread across climate regulation
What is the CSRD?
What is the EU Taxonomy?
What is the SFDR?

The International Sustainability Standards Board (ISSB) was established in November 2021 at the UN Climate Change Conference (COP26) to deliver a global baseline of sustainability disclosures that meet capital market needs.

The ISSB standards build significantly from existing reporting frameworks and standards, and the ISSB has pledged to enhance interoperability with other international and jurisdictional sustainability-related standards to better support adoption. This is good news for businesses using existing frameworks—they’ll be better positioned to align with the impending final ISSB standards. At their core, the ISSB standards will enable investors and other capital market participants to make informed investment decisions by providing information about companies’ sustainability-related risks and opportunities.

What is the ISSB’s primary goal when it comes to sustainability reporting?

A new standard-setter on the scene, the ISSB was created by the International Financial Reporting Standards (IFRS) Foundation in response to a global consultation in 2020. It confirmed the growing and urgent demand among investors and key stakeholders for a consistent, international set of sustainability reporting standards and disclosures. While various frameworks, principles, and standards already exist for organizations to voluntarily report on sustainability-related information, the reporting landscape is fragmented and inconsistent—to the extent that it prevents clear, concise comparisons across the global landscape.

By working with stakeholders from existing disclosure frameworks, and international government and corporate representatives, the ISSB’s global baseline addresses the information gap and concerns around the reliability, usefulness, and comparability of sustainability disclosures.

If you’re asking why the IFRS has the authority or expertise, know that the IFRS also houses the International Accounting Standards Board (IASB), which establishes globally accepted accounting standards. IFRS dictates how a company prepares financial statements and has been a globally accepted standard for over 30 years. It has facilitated greater comparability, transparency, and efficiency across financial markets. While the ISSB and IASB standards serve different objectives, they will undoubtedly be closely connected. The formation of the ISSB confirms to the global financial system that a snapshot of a company’s finances alone is no longer sufficient to demonstrate a company’s sustainable value over time.

What does the ISSB cover?

The ISSB released two exposure drafts for stakeholder input due in July 2022 and is currently reviewing and considering all feedback and comment letters received on the following:

IFRS S1 general requirements propose to create a universal structure for sustainability disclosures and borrow from sector-specific Sustainability Accounting Standards Board’s (SASB) standards. IFRS S2 climate-related disclosures are broadly consistent with the Taskforce on Climate-related Financial Disclosures (TCFD) reporting recommendations on four key areas focusing on climate: governance, strategy, risk management, metrics and targets.

Let’s unpack both drafts:

What is IFRS and ISSB? IFRS S1 and the SASB Standards

In August 2022, the Value Reporting Foundation (a merger of the SASB and International Integrated Reporting Council) and the Climate Disclosure Standards Board (CDSB) consolidated to form the ISSB. The ISSB has confirmed that organizations must consider the sector-specific SASB standards, disclosures, and metrics to fulfill the IFRS S1 requirements properly and may consider CDSB guidance. All SASB and CDSB materials are now housed within the ISSB, creating a one-stop resource for organizations.

IFRS S1 lays the groundwork and basis for ISSB to issue more specific standards on other sustainability topics in the future. It stipulates that companies must provide material information on all significant sustainability-related risks and opportunities that investors may need to assess enterprise value. By requiring companies to refer to the SASB industry-based approach, the ISSB also recognizes that not all sustainability issues are the same in each industry.

Depending on the organization and sector, disclosures may extend beyond the climate-related  proposed standards in IFRS S2 and incorporate social and governance topics (the S and G in ESG). For example, the ISSB considers how an entity in the meat, poultry, and dairy industry would apply IFRS S1—the organization would need to refer to the SASB standard for this sector and may need to disclose climate-related risks and opportunities related to food safety and health and safety of its employees. Meanwhile, a telecommunications company must consider SASB standards and disclosures for customer privacy, data privacy, and competitive behavior. Suppose a company identifies water and biodiversity-related risk or opportunity as a significant sustainability area. In that case, the company can first refer to CDSB guidance to describe how the company manages governance, strategy, risk management, and metrics and targets around these topics.

IFRS S2 and the TCFD

The disclosure requirements in IFRS S2 are consistent with the four thematic pillars and 11 recommended disclosures in the TCFD—again, good news given that the TCFD already has over 2,600 global supporters, including over 1,000 financial institutions.

While mostly aligned with the TCFD, the IFRS2 standard requires additional and more granular information from reporting entities:

  • The ISSB draft standard uses different wording to address the same information as the TCFD recommendations;
  • The ISSB draft requires additional, more granular information that is in line with the TCFD; and
  • The ISSB draft differs substantively from the TCFD guidance—but not the TCFD overall recommendations—mainly by proposing additional specific disclosures.

In a previous post, we explained the TCFD recommendations in detail. Below we outline where the ISSB standards expect more information from companies and where they differ. Overall, the ISSB standards place greater demands on reporting entities in the areas of strategy, and metrics and targets.

Disclosure TCFD ISSB
Climate risks and opportunities
Risk management/resilience​
Climate targets and progress
Governance​
Scopes 1 and 2
Scope 3 ⚠️ Encouraged ✅ Required
Effects on the cost of capital/financing
Effects on financial performance/cash flow
Use of carbon offsets
1.5°C transition compatible ✅ If international climate agreements advance
Strategy implementation
Information on intangibles (e.g., human and social capital) ✅ Under IFRS S1, companies might disclose on related topics if deemed material by SASB industry-based standards
Capacity to adjust and adapt
Stakeholder consideration
Double materiality

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What’s next for the ISSB?

Developments in sustainability reporting are moving at lightspeed, especially in the standards-setting world. New announcements seem to be made almost daily—for instance, the ISSB and CDP recently stated that the CDP would incorporate IFRS S2 (climate-related disclosures) into its global environmental disclosure platform. It’s good news for businesses as, in practice, it means that reporting and disclosure process will be significantly easier. Over 18,000 companies already disclose environmental information through the CDP and can continue to do so while fulfilling the global IFRS S2.

Still under discussion at the ISSB is the use of and reference to other sustainability standards such as the Global Reporting Initiative (GRI) and the European Sustainability Reporting Standards (ESRS) developed by the EFRAG (European Financial Reporting Advisory Group) that will guide companies reporting on sustainability-related impacts, opportunities and risks under the EU’s Corporate Sustainable Reporting Directive (CSRD). The GRI and the ESRS/CSRD both lean toward the double materiality approach by focusing on multi-stakeholder needs and reporting on the organization’s impact on climate and society, not just how sustainability may financially impact the company.

As the IFRS Foundation notes, G20, G7, and the Financial Stability Board have welcomed the creation of the ISSB and a global baseline. However, unlike national or regional regulations proposed by the U.S. SEC or the EU, whether ISSB standards become adopted globally and which companies must apply them is for each national regulator and authority to decide—consistent with the IASB’s approach to IFRS and financial reporting. The ISSB plans to issue the final version of the IFRS S1 and S2 for adoption in 2023. It endeavors to reduce tension and differences between other standards to further harmonize sustainability reporting, reduce burdens, complexity, and confusion for companies, and spur greater uptake.

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At Sustain.Life, our goal is to provide the most up-to-date, objective, and research-based information to help readers make informed decisions. Written by practitioners and experts, articles are grounded in research and experience-based practices. All information has been fact-checked and reviewed by our team of sustainability professionals to ensure content is accurate and aligns with current industry standards. Articles contain trusted third-party sources that are either directly linked to the text or listed at the bottom to take readers directly to the source.
Author
Sarah Gagnon
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The takeaway

• By working with stakeholders from existing disclosure frameworks, and international government and corporate representatives, the ISSB’s global baseline addresses the information gap and concerns around the reliability, usefulness, and comparability of sustainability disclosures. It endeavors to reduce tension and differences between other standards to further harmonize sustainability reporting, reduce burdens, complexity, and confusion for companies, and spur greater uptake.

• The formation of the ISSB confirms to the global financial system that a snapshot of a company’s finances alone is no longer sufficient to demonstrate a company’s sustainable value over time.

• Whether the ISSB standards become adopted globally and which companies must apply them is for each national regulator and authority to decide.