The International Sustainability Standards Board has announced they will begin development of corporate reporting standards for risks and opportunities relating to biodiversity, ecosystems and ecosystem services, and human capital. The new standards will build on the existing sustainability reporting standards released by the ISSB in 2023 and currently being adopted for use at the national level. The project will take approximately two years.
There has been a global push to expand the financial reporting requirements of corporations from traditional financial data, to include sustainability and other environmental, social and governance issues. The push for ESG was driven by international organizations, fund managers, and the market. The result was a rush by corporations to issue ESG and sustainability reports. However, the quick rise of reports outgrew the existing regulatory schemes, resulting in inconsistencies and potential legal pitfalls.
Jurisdictions were quick to want to adopt new reporting standards. However, the development was slow and complicated.
At COP26, the 2021 United Nations Climate Change Conference, the International Financial Reporting Standards Foundation announced the creation of the ISSB. IFRS develops global accounting standards that are used in 168 jurisdictions. Notably, the U.S. is not one of those jurisdictions, relying instead on the Generally Accepted Accounting Principles, or GAAP, as adopted by the SEC.
The ISSB worked for two years drafting sustainability disclosure standards. The IFRS Sustainability Standards were released in June 2023, and jurisdictions are currently working on amending and adopting them in compliance with their respective legal and regulatory requirements.
The IFRS Sustainability Standards are divided into two reporting tiers, IFRS S1 and IFRS S2, both went into effect January 1, 2024. IFRS S1 established sustainability disclosure requirements, while IFRS S2 set out specific climate-related disclosures to be used along with IFRS S1. Both focus on a company’s governance, strategy, risk management, and metrics and target, as they relate to either sustainability or climate.
Under metrics and target, the IFRS S2 requires the reporting of greenhouse gas emissions. These reports are divided into three scopes. Scope 1 emissions are those that occur from sources controlled by the company. Scope 2 emissions are indirect emissions from the “generation of purchased or acquired electricity, steam, heating or cooling consumed by an entity.” Scope 3 emissions are divided into 15 categories, the most notable being “purchased goods and services.”
While ESG and sustainability include environmental concerns, the primary focus of the ISSB Sustainability Standards was on climate risk. Some jurisdictions, like the European Union, have expanded their reporting requirements to include other environmental factors. However, no international standard exists.
The announcement by IFRS that the ISSB will begin work on nature-related disclosure standards will begin a two-year process of drafting, review, and input. The final standards will build off the framework of the IFRS Sustainability Standards.
The ISSB will rely heavily on the existing work of the Task Force on Nature-related Financial Disclosures. The IFRS Sustainability Standards were based on the recommendations of the Financial Stability Board’s Task Force on Climate Related Financial Disclosures. Like the TCFD, the TNFD has worked extensively in this area and in September 2023 released their own standards that are already in use in numerous jurisdictions.
While human capital is named in the release, little insight was given as to the scope of the project. However, as part of the announcement, the ISSB noted they have “decided not to embark on projects related to risks and opportunities associated with human rights—beyond risks and opportunities relating to a company’s own workforce and workers in its value chain—or integration in reporting at this time.”
As with the climate-risk disclosure standards, it is likely that the United States Securities and Exchange Commission may soon follow suit. Although that action may be delayed until the legal challenges to the climate disclosures are settled.
The ISSB will publish an agenda and two-year work plan in June.
