The International Sustainability Standards Board (ISSB) has finished deliberating the content of its nature practice statement, clearing the way for an exposure draft this autumn on a 120-day comment period running to roughly the end of the year.
Much of the work was done in Frankfurt in June, where the board agreed unanimously to describe the things companies depend on as ‘environmental resources’ rather than ‘environmental assets’.
Staff were clear that the elements in question would not necessarily meet the accounting definition of an asset. ISSB members also agreed to define both nature-related physical and transition risk, based on the split in IFRS S2 on climate.
They also dropped the requirement for a physical change in the environment to trigger reporting. As ISSB chair Emmanuel Faber saw it, a company’s exposure can shift through competition for resources alone, with nature itself unchanged.
Investors respond
Meanwhile, investors who shared their views with IPE broadly welcome the ISSB’s efforts. But what remains to be seen is whether the practice statement adds much to IFRS S1 practice as it stands.
APG, a major Dutch institutional asset manager and pension provider managing approximately €639bn in assets, takes the view that IFRS S1 and S2 disclosures are already connected to the financial statements “in principle and by design”, and sees the practice statement as strengthening that link by supplying more technical guidance aligned with Taskforce on Nature-related Financial Disclosures (TNFD).
As for terminology, the choice of environmental resources over environmental assets, APG says, “reflects both a conceptual and practical reality”, because “nature can be financially material to a business without meeting the requirements for asset recognition in financial statements”.
And in a nod to Faber, who told the June meeting he would like to use ‘assets’ at some point, they explain that “as natural capital accounting evolves, this understanding may change over time”.
APG notes that leading companies are already running natural capital and environmental accounting exercises themselves, much as they earlier identified their major emissions sources, neatly raising the question of who the guidance is for.
Connectivity, but…
Hing Kin Lee at NextEnergy Capital, a TNFD early adopter, gets to the same place – arguably from the opposite direction. He doesn’t quibble with the ISSB directionally on connectivity but notes instead that there is evidence to suggest the link is a good deal less direct than it looks.
What his firm wants to know is what might hit future revenues, costs, project delivery and asset performance, and to know it before it reaches the accounts. Nature-related risks arrive through planning outcomes, project timelines, community acceptance and supply-chain resilience, which, he notes, “rarely show up immediately in the financial statements”.
TNFD’s own evidence review found the pathway from dependencies and impacts to financial outcomes complex and hard to trace, perhaps feeding his argument for more forward-looking disclosure.
On the practice statement itself, though, he is blunter. The organisations already leading on nature will carry on “regardless”, because they see the risks as financially material. The difficulty is wider market buy-in.
A practice statement, in his assessment, helps those already engaged but will not deliver the consistency and market-wide adoption a standard would. Nature, he adds, “is not a niche issue sitting next to climate, it underpins it”.
Little appetite for a standard
Jonathan Bailey, global head of stewardship and sustainable investing at Neuberger Berman, backs the ISSB’s approach and is direct about it. He does not want a mandatory nature standard at this stage: IFRS S1, the general requirements standard, and S2 already hand companies the infrastructure, including a materiality framework paired with SASB’s industry-level metrics, to report nature-related risk.
He also welcomes the resources label because it “avoids a potential narrowing of the scope of consideration to assets that a preparer owns or controls”. After all, a beverage company might depend on a shared water basin it does not own just as a seafood producer could rely on fisheries in the open ocean.
Resources or assets? Setting the mood
The London Pensions Fund Authority (LPFA), managing some £8bn in assets for over 100,000 members, strikes a subtly different tone. Where Neuberger Berman’s Bailey and APG talk about what the words technically capture, Paul Hewitt, the fund’s responsible investment manager, talks about what the words imply.
“Assets” infers financial ownership, he says, “and the potential for a ‘right of exploitation,’ which in my opinion sits uncomfortably with the concept of sustainability”, whereas “resources” carries a sense that nature is finite.
It’s a genuinely different stance. Bailey and APG are asking whether the word changes what gets reported, whereas Hewitt is asking what the word prompts people to think they’re entitled to.
Lee at NextEnergy Capital cares less about the terminology than about what it’s for. For him, what matters is not the label but “whether the disclosures help investors understand how nature can affect financial outcomes and long-term value protection and creation”.
