A new set of global sustainability standards are out. While good news, Csaba Farkas of TMF Group says these standards will require companies operating in countries that adopt them to ensure sustainability is on the board’s agenda — and that’s just the start.
New global sustainability standards were released by the International Sustainability Standards Board in June with the aim of comparing the sustainability performance of different entities around the world.
The current landscape of voluntary sustainability standards is diverse, fragmented and complex. Users need to negotiate and choose among often competing alternative measurement and reporting standards, all of which are evolving. For businesses and investors, this is confusing, costly and involves the risk of investing in what may end up being a short-lived approach.
Notably, while companies domiciled in countries adopting the ISSB standards will be required to use them, many other companies will voluntarily elect to do so. Understanding and responding to the new sustainability standards is a must for entities operating in countries where these standards are required.
The ISSB standards represent the most significant change to corporate reporting since the introduction of IFRS 9, 15 and 16, establishing a high-quality, global sustainability disclosure baseline. This baseline may be added to in some regions, with additional disclosures (reflecting local stakeholder needs or public policy goals) included as a second layer or additional building block.
The standards comprise two International Financial Reporting Standards (IFRS) sustainability disclosure standards. IFRS S1, which sets out general sustainability-related financial disclosure requirements for companies about their significant sustainability-related risks and opportunities; and IFRS S2, focusing on climate-related financial information, including requirements for the identification, measurement and disclosure of climate-related physical and transition risks and opportunities.
Both S1 and S2 rely heavily on the Task Force on Climate-related Financial Disclosures (TCFD) framework, built on four themes representing the core elements of how organizations operate: governance, strategy, risk management, and metrics and targets.
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Implementation timeline for the standards
IFRS S1 and S2 have different implementation paths. There is a one-year transition relief in relation to implementation of IFRS S1, allowing companies time to get familiar with the details of the ISSB standards by only focusing on climate-related risks and opportunities.
In the second year, entities then report on all their material sustainability-related risks and opportunities. The ISSB is planning for the standards to take effect from January 2024. On this basis, the first entities reporting in line with the standards are expected to be seen in 2025.
While it will be up to regional legislators to decide when reporting under the ISSB standards will be mandatory in their jurisdictions, support is widespread, so this is expected to move fast. The UK has announced plans to adopt the standards, while Canada, Japan, Australian, South Korea, Brazil and others are already working to cooperate closely with the ISSB. The EU is focused on maximizing interoperability between the ISSB standards and the EU’s own standards. Moreover, the standards also create the next generation of norms for voluntary reporting, helping companies report what is needed by investors across markets globally.
The next steps — what companies should be doing now
On a practical level, companies seeking compliance with the ISSB standards will have to put sustainability on the board agenda, by assessing the operating environment to understand which sustainability factors are material and need to be measured and evaluated. Once defined, companies need to consider what these sustainability factors mean for their investors, customers and other important stakeholders and decide on the right strategy for integrating sustainability into company operations in the short, medium and long terms, and how this best can be implemented.
At the same time, companies will need to build capacity to report in line with the ISSB standards, deciding and detailing what specific sustainability-related risks and opportunities are the ones to assess, manage, monitor and report on over time. This will involve determining what measures should be benchmarked and how this is to be done, including the reporting mechanics, consisting of the agreed metrics and targets integrated into reporting, and what controls will need to be built in.
The final step is to take into consideration the administration of all the above — how it will all work in detail — to make sure that sustainability compliance is established and maintained in the right way to conform with the requirements of the ISSB standards. This includes what data points will need to be gathered and analyzed to enable this to happen, who in the company will be responsible for required actions and how the required actions will be tracked and project managed over time. Moreover, businesses need to sort out the technology-related processes, which may also require detailing as standard operating procedures, to ensure trackability, consistency and a proper documentation of processes.
Lastly, companies in the future will need to be audited on sustainability factors to give stakeholders confidence. Audit standards on sustainability are still being developed by the International Auditing and Assurance Standards Board, which released draft standards just this month.
Preparation is key
All of this is no small task. Given the scope of work required to implement the ISSB standards into the operations of affected companies — not to mention the tight deadline — the practical aspects of complying with the new ISSB standards are likely to be challenging for many entities. Taking this into consideration, companies need to understand and integrate the ISSB standards in a timely manner. This will involve significant effort, investment and cost.
While most actions will land within the finance function, many tasks will require the involvement of other areas, such as the HR department for matters relating to labor practices, or the legal team for ethical, anti-corruption or legal matters.
Preparation is essential.