The International Sustainability Standards Board (ISSB) has released two long-awaited draft sustainability standards for public comment.

The first of the two standards deals with general sustainability-related disclosure requirements while the second addresses climate-related disclosures.

ISSB chair Emmanuel Faber said: “Rarely do governments, policymakers and the private sector align behind a common cause. However, all agree on the importance of high-quality, globally comparable sustainability information for the capital markets.

“These proposals define what information to disclose, and where and how to disclose it. Now is the time to get involved and comment on the proposals.”

The International Organization of Securities Commissions (IOSCO) also welcomed the release of the two exposure drafts.

Erik Thedéen, chair of the IOSCO Sustainable Finance Task Force, said: “These exposure drafts will help clear the way for corporates to accelerate progress towards disclosing complete, consistent and comparable information on sustainability matters, and we encourage all stakeholders to engage constructively with the ISSB during the consultation.”

The proposals in the two exposure drafts build on the work of the Climate Disclosure Standards Board, the International Accounting Standards Board, the Value Reporting Foundation, Task Force on Climate-Related Financial Disclosures, and the World Economic Forum.

The International Financial Reporting Standards (IFRS) Foundation heralded today’s development last November with the merger of the Value Reporting Foundation – the host organisation of the Sustainability Accounting Standards Board – and the Climate Disclosure Standards Board to form the ISSB.

At the same time, the Foundation also said its Technical Readiness Working Group – set up in March 2022 – had been tasked with publishing “prototype climate and general disclosure requirements”.

This latest announcement represents the culmination of that effort.

Emmanuel Faber at ISSB

Emmanuel Faber, ISSB

The first of the two exposure drafts – IFRS S2 General Requirements for Disclosure of Sustainability-related Financial Information – sets out the broad requirements for disclosing sustainability-related financial information to primary users of financial statements.

The 2018 iteration of the IFRS Conceptual Framework describes primary users as present and future investors, lenders and creditors.

The core disclosure objective in the standard is to require entities to disclose “information about its significant sustainability-related risks and opportunities that is useful to the primary users of general purpose financial reporting when they assess enterprise value and decide whether to provide resources to the entity”.

The second of the two standards, IFRS S2, Climate-related disclosures, describes the requirements for identifying, measuring and disclosing climate-related risks and opportunities.

The exposure draft explains that this information will complement an entity’s general purpose financial reporting and assist “users of the information in assessing the entity’s future cash flows, including their amounts, timing and certainty, over the short, medium and long term”.

The disclosures in both exposure drafts are subject to a materiality test and as a starting point must address governance, strategy, risk management and metrics and targets.

In addition to the linkage with financial reporting, IFRS S1 notes that “an entity shall refer to and consider the applicability of the interrelationships among each of these four core elements, including between IFRS [S2].”

The ISSB and the IFRS Foundation have also committed to follow a robust due process despite its membership comprising just its recently appointed chair Emmanuel Faber and the current vice-chair of the International Accounting Standards Board, Sue Llloyd.

The trustees of the IFRS Foundation cleared the release of the two draft standards last week, subject to a commitment to subject the proposals to the Foundation’s full due process.

Minutes prepared for a meeting of their Due Process Oversight Committee reveal the ISSB is expected “to be quorate by the third quarter [of this year] which is when deliberation on the responses to the exposure drafts can begin”.

The minutes continue that Faber and Lloyd “are still targeting to finalise the standards on General Requirements and Climate-Related Disclosures around the end of 2022”.

Alongside the launch of the two draft sustainability standards, the International Accounting Standards Board is currently reviewing feedback on its 2022 to 2026 agenda consultation. The board has so far shortlisted a project on climate-charge reporting for further consideration at its April meeting round.

IASB member Bruce Mackenzie said during the board’s March meeting round that it was essential for the IASB to align its work with the ISSB.

Citing the example of climate change, he said it made no sense for the IASB to proceed “without the ISSB addressing some of the issues on their side”, because it could result in “a very disjointed process”.

Further complicating the landscape in sustainability reporting are potentially competing initiatives in both the European Union and the US. The US Securities & Exchange Commission released its own proposals for climate change-related disclosures covering topics such as greenhouse gas emissions and transition planning information.

Meanwhile on 30 March, the European Financial Reporting Advisory Group (EFRAG), which advises the EU on financial reporting matters, set out its next steps for tackling sustainability reporting.

Under this latest roadmap, EFRAG has pledged to conclude its own internal reorganisation and finalise and consult on draft sustainability reporting standards.

Interested parties have until 29 July 2022 to contact the ISSB with their comments.

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