To ISSB or not to be

With room for divergence, will the ambitions of the first two IFRS standards fall flat?

The dust has settled on the launch of the highly anticipated first two standards from the International Sustainability Standards Board (ISSB), and while many in the sustainable investment industry have applauded this enormous feat, concerns have emerged around its applicability and take on materiality.

IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures are the first two IFRS Sustainability Disclosure Standards developed by the ISSB.

IFRS S1 prescribes how companies prepare and report their sustainability-related financial disclosures. IFRS S2 sets out the requirements for companies to disclose information about their climate-related risks and opportunities, while building on the requirements in IFRS S1.

The standards are intended to serve as a global baseline for sustainability reporting but different interpretations in different jurisdictions could cause confusion.

“My biggest fear if different legislations apply the ISSB standards is, will they all have the same point of view?” said Pierre Lechat, head of ESG services at TMF Group.

“For example, there is a difference between how Germany and France see the greenness of nuclear. The ISSB has created a framework that many people will say is clear but as soon as you need to fill it up, there will be a lot of questioning.”

Lindsey Stewart, director of investment stewardship research, Morningstar, added when disclosures start to move away from climate and into biodiversity and areas of social disclosure, “there is a lot of room for divergence”.  

As well as levels of ‘greenness’ being potentially divergent, comparability across sectors presents another challenge.

“It would be a more sophisticated approach to band companies into different sectors so you’re comparing like for like,” said Daniel Max, head of global solutions at TMF Group.

“There’s very little point comparing my [financial services] firm with a chemicals manufacturing business. I don’t know that we’ve really grappled with that particularly well. Having one set of standards is appealing because you can turn around and say, where does everyone sit? But at the end of the day, what are we trying to achieve?”

Voluntary vs mandatory

Some of these challenges arise from the fact the standards are voluntary. “At the moment the ISSB has no regulatory power behind it,” said Max.

Although countries such as the UK, Canada, Japan and Brazil have indicated they will apply the ISSB framework, it is currently up to the discretion of individual countries as to whether listed companies are required to comply.

“In future we will move towards mandatory reporting and by that stage there’ll be a best-in-class practice that from a corporate social responsibility perspective people will feel obligated to [adopt],” Max noted.

Double materiality

The biggest concerns however, are around the difference these standards will make in impacting sustainability. First because the ISSB has adopted a single materiality approach rather than a double materiality approach, meaning that the risk of businesses on environments and societies do not have to be taken into account.

“We’re just measuring how close to the iceberg we’re getting without turning the wheel,” explained Andrew Griffiths, director of community and partnerships at Planet Mark.

“So, to say it’s too little too late, it’s not far enough, it’s not aggressive enough, it’s not ambitious enough, those are fair criticisms.

“Is IFRS sufficient? No. But is it a progression on from where we were? Yes.”

But the danger of setting the bar too high, commenters say, is that companies cannot or do not comply.

“You cannot expect a coffee company in Ethiopia to do a triple materiality assessment, it’s just not going to happen,” Griffiths said. “In the short term, we need a minimum bar that everyone has to do and then absolutely, markets like Europe, UK, US should be providing an ‘enhanced’ IFRS.”

The second concern in terms of outcomes is that with all the best intentions, companies just may not provide reporting that could facilitate a moving of the dial on sustainability.  

“I’ve read way too many ESG reports over the last year, and it’s often very shocking,” Lechat said.

“Companies are reporting they have the information but that it’s confidential. So even with the ones that are already being obliged to for Europe, it’s often quality that is lacking. Also, a lot of firms are simply saying that the reputational risk is too high if they really put something in there.”

What next?

So, how could the IFRS standards develop?

Griffiths said: “IFRS and [Global Reporting Initiative] GRI, they’re going to be used as the global framework and I want to see them work together. What might make sense at some point is an IFRS S3, which brings in double materiality and they roll GRI into S3, because then we can all just lose another acronym and it avoids any duplication within GRI reporting.”

For now, however, Griffiths added ISSB should be recognised for its achievements. “I refuse to not celebrate what I see as progress into in the right direction.”


Natasha Turner

Natasha is global editor at ESG Clarity, part of Mark Allen Financial, and has been a financial journalist for seven years. She has been shortlisted for Story of the Year and Investment Journalist of the...