ISSB aims to create a global framework for sustainability-related reporting, established in response to increasing regulator, investor and other stakeholder calls for global standardization. The main objective of ISSB is to help make sustainability data more comparable and actionable for investors, and thereby improve investment decision-making.

Several governments, including many of the G7 and G20, have publicly supported the ISSB framework and have indicated intention to align upcoming sustainability disclosure rules with the ISSB, with recommended adoption beginning in 2024. While it remains to be seen to what extent governments and/or regulators will adopt the ISSB standards — the technical detail of which span several hundred pages across various pieces of guidance — global endorsement by the regulatory community is a precursor to an effective global baseline of sustainability reporting, and the ISSB has solicited stakeholder feedback on its future work priorities, including whether to prioritize engaging national governments, regulators and accounting bodies to encourage ISSB adoption.

What is this regulation?
The IFRS announced the formation of the ISSB at COP26 in 2021, stating, “Sustainability factors are becoming a mainstream part of investment decision-making. There are increasing calls for companies to provide high-quality, globally comparable information on sustainability-related risks and opportunities, as indicated by feedback from many consultations with market participants.”

The first ISSB standards were published in June 2023. These follow the established Taskforce for Climate Related Financial Disclosure (TCFD) four-part framework for governance, strategy, risk management, metrics and targets disclosure for both general sustainability (IFRS S1) and climate related (IFRS S2) data, with additional appendices of material data required by industry — asking companies in resource-intensive industries and financial institutions to build substantial data management and reporting infrastructure. With the ISSB now fully established, monitoring implementation progress and overseeing maintenance of the TCFD framework has been transferred to the ISSB.

Who does it apply to?
ISSB is meant to apply to all companies globally, though adoption will likely be focused on financial institutions and public companies. If and when ISSB recommendations are adopted by individual countries — which could start as early as 2024 — each country will likely determine size thresholds and timelines required for various companies’ disclosures. The regulations are expected to be particularly onerous for financial institutions that must conduct the metrics and targets analysis on their entire investment portfolios, requiring a substantial data management exercise.

To date, global regulators such as the International Organization of Securities Commissions (IOSCO) and several national governments across the G7 and G20 have indicated that they plan to incorporate the ISSB into national law. Additionally, in September 2023, the ISSB also announced members of its Transition Implementation Group to support effective implementation, comprised of 13 preparers and four assurance providers, with representation from the following jurisdictions: Australia, Belgium, Brazil, Canada, China, Finland, Germany, Hong Kong SAR, Japan, Malaysia, Nigeria, South Africa, South Korea, the United Kingdom and the United States.

A key outstanding question is whether jurisdictions that do not currently utilize IFRS — instead, for example, follow the Generally Accepted Accounting Principles (GAAP) — will align with the ISSB framework.

By when should firms comply?
ISSB reporting is recommended to start in 2025 for annual reference periods beginning January 1, 2024; however, these standards will still need to be adopted into national law, either by amending existing legislation or introducing new disclosure rules for companies to be obliged to disclose. Specifically, the ISSB recommends: “Companies that are new to sustainability disclosure should use 2023 to prepare for the future application of IFRS Sustainability Disclosure Standards by evaluating internal systems and processes for collecting, aggregating and validating sustainability-related information across the company and its value chain.”

Where existing and new national disclosure requirements align with these global ISSB standards in the coming years, client action will be needed with respect to setting and tracking ESG metrics. Now that IFRS S1 and IFRS S2 have been issued, the ISSB is seeking to promote accelerated adoption through IOSCO, industry groups and national authorities.

What needs to be disclosed?
There are two sets of entity-level disclosures required: IFRS S1 and IFRS S2. Each follow the TCFD’s four-part framework for disclosures of governance, strategy, risk management, metrics and targets used by an organization, with S1 disclosures meant to assess “general sustainability” factors, and S2 assessing climate-related factors. We detail each metrics and targets section below, as most clients find this section to require the largest exercise in data management and interpretation, particularly for financial services firms that must dive into certain metrics at a holdings level within each of their investment portfolios.
 

General sustainability (IFRS S1)
Given the broad focus on “General Sustainability,” S1’s metrics and targets section is open-ended, and requires disclosure of metrics and targets for each sustainability-related risk and opportunity that could “reasonably be expected to affect the entity,” with two recommended categories of metrics to be disclosed.

• Metrics required by an IFRS Sustainability Disclosure Standard. This Standard has not yet been finalized. As an interim step, ISSB encourages firms to identify information by referring to the Sustainability Accounting Standards Board (SASB) standards, the Climate Disclosure Standards Board (CDSB) framework, the Global Reporting Initiative (GRI) or European Sustainability Reporting Standards (ESRS), to determine materiality. For financial institutions, this data requirement focuses on high-level approaches to topics such as social and human capital. However, as a best practice, this could be interpreted to measure broader impacts across the supply chain, including within portfolios. Metrics the firm uses to measure and monitor sustainability-related risk or opportunity and its performance in relation to them.

Climate-specific risks (IFRS S2)
S2 covers climate-specific risks, and because the ISSB closely mirrors the existing TCFD climate recommendations, it may be easier for those familiar with the TCFD framework for climate disclosures.

Due to the explicit inclusion of Scope 3 emissions, defined as indirect emissions throughout the value chain, and quantitative measures of assets exposed to various climate-related risks and opportunities — required metrics will include an assessment of portfolio-level holdings for financial services firms, a significant data management exercise. These metrics include:

• Scope 1-3 greenhouse gas emissions and the approach used to measure them. Scope 3 is not required until the second reporting year, and for financial services firms, will include financed emissions and emissions of portfolio-level holdings
• Amount and percentage of assets or business activities vulnerable to climate-related transition risks and physical risks, and aligned with climate-related opportunities
• Amount of capital expenditure, financing or investment deployed towards climate-related risks and opportunities
• Use of internal carbon prices in decision-making
• Use of climate-related considerations in executive remuneration
• Targets set by an institution to monitor progress towards achieving goals, and an update on those targets over time

For resource-intensive industries, including financial services, ISSB also requires that “the entity shall refer to and consider the applicability of industry-based metrics” which currently references SASB climate metrics. For asset managers, these data points include:

• Assets under management (AUM) by asset class, that employ integration of ESG issues, sustainability-themed investing and screening
• Description of approach to incorporation of ESG factors in investment or wealth management processes and strategies
• Description of proxy voting and investee engagement policies and procedures
• Total AUM and assets under custody

Conclusion
For years, investors and institutions around the globe have been plagued by the lack of consistent data to compare the performance of their investments, and monitor accountability to commitments over time. While still in the early stages of global adoption, the new standard may impose significant data infrastructure and management burdens, particularly on institutions in the financial services sector where data must be provided across complex investment books. However, the ISSB establishes a path forward for improved measurement and standardized disclosure of the financial impact of sustainability topics globally. We expect this development by the IFRS will improve corporate transparency around sustainability metrics worldwide.

For more information, reach out to us.