Sue Lloyd, Vice-Chair of the International Sustainability Standards Board, delivered the keynote address at the Brussels BdB (Association of German Banks) Courtyard Reception on 30 August 2023.
Good evening and thank you to Bankenverband for hosting this important event and inviting me to share a few words about the work we are doing at the International Sustainability Standards Board, including how we are collaborating closely with colleagues in Europe to deliver on our goals.
The ISSB has been grateful to the support of Bankenverband and other key German stakeholders in welcoming us as we established the seat of the board in Frankfurt, where we now have a thriving office for the ISSB.
This timely event comes at a pivotal milestone in the sustainability disclosure landscape as we have the opportunity to deliver transformative improvements to the decision-usefulness of sustainability-related financial disclosures.
While sustainability reporting has of course been around for a long time now, there were specific circumstances that led to the demand for the ISSB to be established.
We know that investors need decision-useful, consistent, comparable information that enables them to understand sustainability-related risks and opportunities.
To date, the information that has been provided has been neither consistent, nor tailored to the specific information needs of investors.
There has also been confusion around the myriad standards and frameworks, with companies and investors seeking clarity and guidance. We know that this confusion has added costs and complexity for companies and for the capital markets which rely on robust information to function efficiently.
The ISSB Standards exist to enhance investor-company dialogue through addressing these challenges.
By consolidating and inheriting the resources of other investor-focused initiatives, such as the Sustainability Accounting Standards Board and the Task Force for Climate-related Financial Disclosures (TCFD), the ISSB has been able to reduce fragmentation and align international support for a global baseline of sustainability-related financial disclosures from a broad range of stakeholders around the world and from the international securities regulators (IOSCO) and the Financial Stability Board, as well as the G7 and G20.
The development of this common language for capital markets is a shared endeavour. The ISSB collaborates with jurisdictions from around the world and engages with stakeholders, ensuring our work is informed by the market.
And already we know that jurisdictions such as Australia, Japan, Singapore and the UK are looking at routes to introduce the ISSB Standards, and that jurisdictions such as Nigeria have publicly announced their intention to adopt the ISSB Standards early.
Over the next few minutes, I plan to provide you with a very high-level overview of what our inaugural Standards—IFRS S1 and IFRS S2—cover, how they have been received since we issued them in June, how they relate to the European Sustainability Reporting Standards and then briefly touch on our forward-looking plans.
IFRS S1, our general requirements standard, provides a set of overarching disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term.
To make sure information is connected with and can be considered alongside financial statements, it is disclosed as part of a company’s general purpose financial reports. The information provided, like that in the financial statements, is focused on that which is reasonably expected to influence investment decisions—so it is the targeted information that really matters to investors.
IFRS S1 also requires industry-specific disclosures so that companies can focus on reporting that better describes their business and that investors receive the industry-specific information they have consistently told us is essential.
IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1.
Just like IFRS S1, it fully incorporates the recommendations of the TCFD. This means that companies that have already used these Recommendations are well placed to apply our standards.
It sets out the requirements for a company to disclose information about physical risks—such as those resulting from increased severity of extreme weather; transition risks—such as those associated with policy action and changes in technology that can affect how a company can run its business; and opportunities—such as the products a company has that are expected to do well as a result of climate change.
It’s only been a couple of months since we issued the Standards, but we’ve been delighted by their reception. Three key examples of this which I’d like to highlight include:
First, the strong support from the investor community internationally for the consistency and comparability of information the ISSB Standards will provide for.
Second, the announcement from the Financial Stability Board that as a result of the ISSB Standards the work of the TCFD is complete, and they will transfer responsibilities for monitoring progress on climate-related disclosure to the IFRS Foundation.
Third, the Standards have been endorsed by international securities regulators, with the International Organisation of Securities Commissions (IOSCO) calling on its 130 member jurisdictions to consider how they can incorporate the ISSB Standards into their respective regulatory frameworks to deliver consistency and comparability of sustainability-related disclosures worldwide.
Taken together, these three crucial signals of support demonstrate the ever-strong demand for the implementation of an international approach to disclosure through the ISSB Standards.
We’ve welcomed the commitment from the European Commission and EFRAG to support this need for international consistency. The European Union had already embarked on sustainability disclosure standards before the ISSB was established, so unlike other jurisdictions around the world we’ve needed to engineer interoperability rather than begin with the ISSB Standards as the foundation.
Together, we have worked to improve the interoperability of our respective climate-related disclosure requirements and core concepts that underpin our respective reporting such as the approach to materiality when that relates to meeting investors’ information needs.
Our respective sets of standards have been developed with overlapping but differing mandates, with the ISSB’s remit focused on providing relevant information to investors, and the European Standards having an additional broader aspect to meet public policy goals. Working together we have managed to achieve a very-high degree of alignment in our climate disclosures.
So, while there are differences, with the European standards including a focus on impact materiality, beyond an investor’s perspective, together we have ensured that investors will receive more consistent and comparable information around climate-related risks and opportunities. By aligning common disclosures wherever possible, we have also reduced the risk of duplication in reporting for companies that are using both sets of standards.
Our work with the European Commission and EFRAG is now focused on how to jointly illustrate the interoperability between the standards to assist companies in navigating between the standards and to explain the alignment of disclosures and where there are incremental disclosures required by only one set of standards. We will also consider how digital tagging can assist not only in providing investors with information that can be consumed electronically but also in reducing the risk of duplication in reporting by companies using both our standards and ESRS. We believe that it would be of greatest benefit to our respective stakeholders if the ISSB, the Commission and EFRAG are able to communicate jointly on interoperability and to ensure that we are coordinated in developing future guidance to support interoperability in application.
In Europe and beyond, a key priority is to ensure the market is ready to apply IFRS S1 and IFRS S2 and that they are applied well.
As such, we also focused on capacity building, working with partners from around the world to deliver support and develop educational materials.
On Friday (1 September 2023), our consultation on future priorities closes and we will start to analyse closely the views of our key stakeholders on the next two-year agenda for the ISSB.
We’ve asked stakeholders to provide their feedback on four potential projects: biodiversity, ecosystems and ecosystem services; human capital; human rights—and a fourth project researching further integration in reporting.
Stakeholders have been asked to comment on the strategic direction and balance of the ISSB’s activities; the criteria for assessing which sustainability-related matters to prioritise—including topics, industries and activities; and the scope and structure of potential new research and standard-setting projects. An important consideration will be the balance of time spent by the ISSB on advancing new projects and supporting the implementation of IFRS S1 and IFRS S2.
What is clear is that through driving connections to financial statements, fostering trust in disclosure, and promoting further harmonisation of the sustainability reporting landscape, we will be well placed to ensure investors are provided with better information for better economic and investment decision making and that companies will be better able to communicate with investors and attract capital.