Environmental, Social, and Governance (ESG) topics—such as sustainability, environmental justice, and the effects of climate change—are now recognized as sources of risk to financial markets. At the same time, how companies evolve to meet these risks is creating opportunities for value creation and differentiation. As BlackRock CEO Larry Fink put it recently, “Every company and every industry will be transformed by the transition to a net zero world. The question is, will you lead, or will you be led?”
Stakeholders are also looking for better data to help them identify how companies are integrating ESG into core operations. But this drive for greater transparency is not without complications. ESG data remains a complex, emerging field, even as data taxonomies and tools continue to improve. Companies must navigate a global landscape of different, sometimes overlapping reporting frameworks, many of which have been voluntary. And even as frameworks formalize, they often leave large decisions up to the individual firms, e.g., what is material.
To satisfy calls for additional transparency and simplicity, regulators and industry standard-setters globally are working to align on standardized reporting for sustainability metrics for corporate entities. There has been substantial consolidation among standard-setters in the past 12 months—combining the heft of several global standards. In June 2021, the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council merged to form the Value Reporting Foundation (VRF), with the goal of facilitating improved interoperability for organizations reporting on sustainability. Then, in November 2021, VRF and the Climate Disclosure Standards Board, an initiative of the CDP for reporting climate-related financial information, announced they would merge to form the International Sustainability Standards Board (ISSB), a sub-organization to the International Financial Reporting Standards (IFRS)1.
This merged standard-setting entity, ISSB, on March 31, 2022, issued proposed standards for reporting that cover both industry-specific sustainability disclosure requirements based on previous SASB guidance (hereinafter named IFRS S1), as well as climate-specific disclosure requirements aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) (hereinafter named IFRS S2).
Although the IFRS-proposed requirements are geared to an audience outside the United States, it is worth noting that the publication of IFRS S1 and S2 occurred shortly after the US Securities and Exchange Commission (SEC) issued their long-awaited proposed rules for climate-related disclosures.
SASB is a non-profit organization that developed standards for reporting financially material sustainability information by companies. SASB’s objective is to provide decision-useful information to investors, and SASB developed a subset of ESG issues most relevant for specific industries, as well as relevant disclosure topics and metrics for each identified issue.
IFRS S2 acknowledges that it is based in large part with the Taskforce for Climate-related Financial Disclosures (“TCFD”) Framework, a framework created by the Financial Stability Board that has rapidly become the most commonly applied international standard for reporting climate-related risk and opportunities. The framework asks reporting organizations to describe their approach to identifying, assessing, monitoring, and managing climate-related financial risks for different climate scenarios. IFRS S2 aligns closely with TCFD, and while TCFD is not prescriptive in how organizations should approach each recommended action, it provides structure for standardized climate-related disclosures. This implicit adoption of TCFD is consistent with global trends—in many countries, such as New Zealand and the UK, TCFD reporting is now mandatory, and the SEC’s proposed rule also aligns closely with TCFD.=
The Greenhouse Gas Protocol (GHGP), a joint initiative of World Resources Institute and the World Business Council for Sustainable Development, provides a globally recognized set of accounting standards, sector guidance, trainings and calculation methodologies for measuring emissions from private and public sector operations, value chains, products, and policies. The aim is to help entities make better-informed decisions on how best to reduce the GHG outputs of their operations and social behaviors. In terms of the IFRS standards, the IFRS S2’s GHG emissions disclosure requirements are explicitly modeled on this GHGP.
Companies in IFRS-governed countries should start to prepare by ensuring that (1) relevant personnel throughout the organization, including executives and senior management, understand the proposed rules and implications; (2) establish appropriate governance and internal controls to ensure those responsible for decision-making regarding sustainability risks have the information they need; (3) create a detailed roadmap and begin taking the steps necessary to prepare to meet the proposed requirements. This will include (3a) starting the process of identifying and beginning to collect the data required to meet potential disclosure obligations, including data required to account for Scope 1, 2, and 3 GHG emissions.
It will also include (3b) developing the necessary systems and processes to ensure the accuracy and precision required by the proposed disclosures. Reporting of sustainability-related risks will now require a degree of internal and external confidence that can only be derived from a robust reporting infrastructure similar to what companies have in place for other regulated disclosures. Finally, (4) companies should use this transition toward increased scrutiny of sustainability risk management to identify and drive benefits within the firm. Assessing impacts can provide business opportunities for new, differentiated products and services, and may generate increased efficiency, improved resilience, and employee engagement.
1 The IFRS is a non-profit that governs financial disclosures of public companies in most countries other than the US.