The sustainability disclosures landscape is evolving, and global standards are replacing the patchwork of voluntary frameworks that have existed until now
Sustainability factors are becoming a mainstream part of investment decision-making. Of the biggest public companies listed in the United States, 90% of the S&P 500 voluntarily report sustainability metrics. Investors have clearly shown that they consider sustainability risks to be financial risks, and that information on risks and opportunities is vital to making informed decisions. If a company is seeking to raise capital, it has a clear motivation to provide the information requested by the capital markets.
Indeed, the COP26 climate summit in Glasgow in 2021 marked the moment the world got serious about measuring and disclosing information about sustainability-related risks and opportunities. The creation of the International Sustainability Standards Board (ISSB), to develop a global baseline of sustainability disclosures that are both in the public interest and meet the needs of capital markets, signaled an intent to harmonize the cacophony of voluntary initiatives.
Demand for consistent, comparable, and verifiable information from companies allows the risks and opportunities presented by climate change in particular, and sustainability issues more generally, to be appropriately priced.
Why global sustainability disclosures standards were created
In the latter part of the 20th century, capital markets became globally interconnected, and as investment flowed across borders, multinational companies established operations and subsidiaries around the world. However, the global financial system was unable to cope. Most countries had their own accounting requirements – an international alphabet soup of standards which meant comparing the financial performance of a company against its international competitors was difficult.
Market regulators, led by the International Organization of Securities Commissions (IOSCO), decided to take action, and in 2000 they endorsed a new set of international accounting standards for use around the world – the International Financial Reporting Standards (IFRS). The IFRS Foundation was born under the stewardship of the legendary US central banker Paul Volcker, who served as the first chair of the Trustees – and the International Accounting Standards Board (IASB) was created to take on responsibility for developing and maintaining these international accounting standards.
90% of S&P 500 companies voluntarily report sustainability metrics
Fast-forward 20 years and we now have more than 140 countries all speaking the same financial language, while the remaining countries such as the US are highly fluent. All global regions – Africa, Asia, Europe, the Americas – are represented in the development of the reporting requirements. Decision-making is fully transparent, with all IASB meetings held in public and all board papers posted online. And everybody affected by, and with an interest in, reporting requirements has the opportunity to provide input into the standard-setting process, including through public consultations.
The information needs of investors have continued to evolve, and today much of the focus is on climate and broader sustainability factors. Like 20 years ago, there has been no widely accepted capital market sustainability standards, with a mix of voluntary sustainability reporting initiatives filling the void.
Companies and investors alike have been confused by the range of sustainability reporting initiatives in the market, which often leave investors unable to access comparable or complete information upon which they can rely, with poor data quality impeding capital flows that are informed by an understanding of the risks and opportunities arising from issues such as climate change.
Given the previous success of the IFRS Foundation in transforming the global landscape of financial information by introducing IFRS accounting standards, there were many voices urging the Foundation to step in on the sustainability issue. Encouraged by the G20, the Financial Stability Board (FSB), and IOSCO, the IFRS Foundation started work.
COP26 saw the announcement of the formation of the ISSB as well as the integration of numerous previously disparate organizations into the Foundation, thus reducing the number of organizations developing standards and frameworks. The ISSB’s prototype standards were also published.
Progress since then has been rapid. In June 2023, the ISSB published its inaugural standards – a general sustainability disclosure standard, and a specific climate disclosure standard. IOSCO gave its endorsement of these standards in July 2023, and since then, many jurisdictions around the world have taken action toward incorporating the ISSB’s global baseline into their local requirements.
Uniting the global landscape
Further consolidation of the sustainability disclosures landscape continues at pace. The international FSB disbanded its Task Force on Climate-Related Financial Disclosures (TCFD) as a result of the publication of the ISSB’s inaugural standards, and the IFRS Foundation is now responsible for monitoring uptake of the TCFD recommendations, which are embedded within the ISSB Standards.
Many companies operate across national borders, and their value chains are often global, as are their investors, and we are addressing issues that are global in nature.
In the future, companies are likely to use ISSB Standards as the equivalent of a passport to travel between different jurisdictions without a visa. The ISSB will seek to support jurisdictions’ adoption and use of the Standards by working with public authorities, including with colleagues at both the FSB and IOSCO. Already, there are 14 jurisdictions that have decided to use the ISSB Standards or that are consulting, or preparing to consult, on their use, including Brazil, Canada, Japan, Nigeria, Singapore, Turkey, and the UK.
Globally comparable information is essential in supporting the ambition for a successful transition to a more sustainable economy. Many companies operate across national borders, and their value chains are often global, as are their investors, and we are addressing issues that are global in nature.
The ISSB also has worked closely with the European Union (EU) and welcomed the commitment from the European Commission and its European Financial Reporting Advisory Group to support international consistency in climate disclosures. The EU had already begun developing sustainability disclosure standards before the ISSB was created. Thus, it has been necessary to focus on ensuring that ISSB Standards and European standards work well together so that those companies using both sets of standards can do so efficiently. This work has successfully led to a very high degree of alignment that has reduced complexity and duplication for companies applying both the ISSB Standards and European Sustainability Reporting Standards.
In the US, a new climate disclosure requirement – in the world’s largest capital market – represents a critical milestone in the journey toward a global system of climate disclosures that’s built on common principles and can deliver consistent and comparable information to investors, while avoiding duplicate reporting by companies. The ISSB looks forward to working with the US Securities and Exchange Commission and other US stakeholders in our respective capacities to that end.
Future direction
The ISSB will shortly announce its future work plan, including identifying which standard-setting projects it will tackle next. For 2024, the priority is to work, including with partners, to support companies’ implementation of the ISSB’s first two standards, and to support regulatory adoption of the standards by jurisdictions and voluntary adoption by companies.
