Regulators will decide either late this year or early next year whether to endorse the International Sustainability Standards Board’s (ISSB) reporting standards, Ashley Alder, chair of the International Organization of Securities Commissions’s (IOSCO) board, has revealed.
His comments came during a keynote address to the International Financial Reporting Standards Foundation (IFRS) conference in London on 28 June.
He said: “By endorsing the standards, IOSCO would signal to its large membership of market regulators that they should examine how they might adopt the standards in their own jurisdictions.”
The IOSCO board chair added that he “firmly believed” the ISSB was “the most credible mechanism for creating a baseline for climate disclosure standards”.
The endorsement from market watchdogs comes at a key moment for the nascent ISSB as it gears up to hold its inaugural meeting on 18 July in Frankfurt.
One of the first tasks on the new board’s agenda will be to begin redeliberating the first of its two draft sustainability standards dealing with general sustainability disclosures and climate change, which it issued in March.
The board expects to have finalised the two standards by the end of the year.
Backers say they will help to fix the current fragmented sustainability-reporting landscape. They also hope they will help to tackle the growing problem of greenwashing in sustainable finance products.
As part of its bid to achieve global acceptance of the new standards, the ISSB’s mission is to establish a global minimum baseline in sustainability reporting that individual jurisdictions can then build on with their own localised requirements.
Meanwhile, Alder also identified four key challenges to effective implementation of the new sustainability standards: data, interoperability, proportionality, and audit and assurance.
On the first, he noted the difficulty of obtaining reliable data from third parties or external parties to meet the new disclosure requirements. This problem was especially acute with “data or estimates for Scope 3 corporate value chain emissions”, he explained.
IOSCO’s Environmental, Social and Governance (ESG) Ratings and Data Products Providers report issued in November 2021 noted that: “Irrespective of how the information is sourced, the quality, reliability, and consistency of this information is an important consideration.”
Second, on the issue of interoperability, Alder said that while the International Accounting Standards Board’s (IASB) global minimum baseline approach had the potential to transform sustainability reporting, it must nonetheless achieve buy-in across Asia from which “half of global greenhouse gas emissions” emanate.
As for proportionality, the IOSCO leader noted that although smaller business entities might face challenges implementing the new standards, regulators took the view that “any scaling and phasing should be limited and should not dilute the ambition of the standards.”
“Any scaling and phasing should be limited and should not dilute the ambition of the standards”
Ashley Alder, chair of IOSCO’s board
He did, however, suggest that one area where flexibility might be appropriate could be Scope 3 greenhouse gas emission disclosures by small and medium-sized entities.
Finally, on implementation challenges, Alder said a “credible, independent assurance framework would be key to instil trust in the quality of sustainability disclosures”.
IOSCO has established a dedicated workstream in this area and is coordinating efforts by the International Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants on the issue.
The keynote conference address also underscored the increasing linkage between financial reporting and the emerging discipline of sustainability reporting.
Alder said: “The relationship between sustainability disclosures and traditional financial statements had become increasingly important.
“The ISSB proposals made it clear that investors should be able to understand the linkages between the information in a company’s traditional financial statements” and its sustainability disclosures.
He also urged the two boards to develop “the factors relevant to calculating enterprise value from a quantitative perspective, and to consider how that calculation might connect to traditional financial statements”.
During an address to the same conference, IASB chair Andreas Barckow warned constituents to expect some degree of amendments to IFRSs in future to align them with the ISSB’s standards. This interaction with financial reporting is also a factor in IOSCO’s evaluation of the new standards.
In addition to providing a basis for a credible assurance framework, IOSCO also expects the new reporting framework to act as a “bridge” with “existing accounting and financial reporting standards”.
It also wants the ISSB’s standards to “provide the degree of consistency necessary to enable markets to reliably price sustainability-related risks and opportunities and support capital allocation.