What every CFO needs to know about the new sustainability reporting standardDr. Jane Thostrup Jagd, Deputy Director, Net Zero Finance
At COP26 a new initiative was launched, contributing to the veritable alphabet soup of abbreviations in the world of sustainability. The ISSB – International Sustainability Standards Board – is special because it reduces the amount of frameworks, and merges an array of existing major international frameworks, including TCFD, CDSB Framework; Integrated Reporting Framework; SASB Standards; WEF Stakeholder Capitalism Metrics. ISSB is one abbreviation that every CFO needs to know about.
ISSB will be the sister of International Accounting Standards Board (IASB) and both will be governed by the IFRS Foundation on equal terms.
CFOs need to take note of the new initiative, because ISSB and IASB will also work in close cooperation to establish connectivity between the standards via existing guiding principles of integrated reporting. The basis for the ISSB’s standards, which will be called IFRS Sustainability Disclosure Standards (IFRS SDS) will be drawn from the Taskforce on Climate Related Financial Disclosures (TCFD). That means evaluating both the financial and non-financial resilience of the business to the impacts of climate change, which can impact on the financial values and liabilities. See more in our TCFD Good Practice Handbook.
As the dust settles on the announcements from COP26 and the Glasgow Climate Pact, business leaders, including CFOs are now asking a series of questions about what comes next. Here I will do my best to provide some answers.
Will IFRS SDS be universal, and will it be mandatory?
Each individual jurisdiction will need to decide in the coming months whether to mandate the use of the IFRS SDSs. Similar decisions were made two decades ago, when the vast majority of countries around the world opted to use IFRS for their company reporting standards. At the time the United States declined to adopt IFRS – thus, today American companies are still following Financial Accounting Standards Board’s (FASB’s) US GAAP when making their financial reports.
There are positive signs that the same thing will not be repeated with the ISSB, as SASB (the sustainability-sister to FASB) has also been incorporated into ISSB. The US Securities and Exchange Commission, which regulates American financial markets, has been coming under pressure from some US companies and politicians to reject increased sustainability reporting. The major risk is therefore that US regulators accept IFRS SDS reporting but do not make it mandatory.
Another player to be aware of is the European Financial Reporting Advisory Group (EFRAG), which has chosen to maintain their work on Corporate Sustainability Reporting Directive (CSRD) assisted by the framework Global Reporting Initiative (GRI), which is the most prominent international framework not included in the ISSB. The hope is that EFRAG will advise the European Commission to use a building block methodology, setting IFRS SDS as the base level for companies reporting, and then make additional special EU-requirements on top of this to meet higher CSRD standards. This approach would maintain a degree of global comparability across standards, which businesses and capital providers have been calling for.
It is also impossible to predict what reporting requirements will be adopted at the various stock exchanges globally, but we should advocate for the greatest possible degree of consistency. As Robert Eccles, professor of management practice at Oxford and a founder of the International Integrated Reporting Council explained to GreenBiz: “I see no rational reason why jurisdictions wanting to protect investors wouldn’t seek to achieve a global baseline of consistent standards.”
When will the standards be issued, and when will companies need to start reporting?
The plans announced in Glasgow included a public consultation in 2022. This will give stakeholders across the world an opportunity to provide feedback both on the new board’s first proposed standards and on which items the ISSB should initially work. This workplan could include a focus on both thematic and industry-based requirements. Based on this plan, companies could be reporting their environmental performance in a comparable way according to the IFRS SDS earliest in 2023 – but more likely 2024.
What action do companies need to take now?
As a starting point, companies should look at the current Climate-related Disclosure Prototype from the ISSB and then compare with their own current internal reporting regulations and practices. There might be some surprises, and identifying which parts are new and different will give forward-looking businesses a distinct advantage when it comes to reporting under the new system.
An issue for many companies is likely to be collecting data and explanations from subsidiaries or joint operations. A good practice to begin now is identifying which parts of the report can be produced at headquarters and which will be dependent on input from subsidiaries and joint operations. Recognizing that data collection and reporting from those is likely to require more time and support, companies may need to extend their chart of accounts in the consolidation systems, and extend the controlling and compliance functions to meet the new standards. It may be worth practicing with the consolidation systems this year, so all colleagues in the affiliates have experience using the systems, as well as a baseline set of data, before the new standard becomes mandatory. This will also be helpful, as audit/review will likely be mandatory and therefore evidence must be in place.
Finally, companies should nurture deeper connections between financial and sustainability colleagues – departments that may not regularly work together at present – but should, if they want to make the most out of each other’s skills. Financial teams are good at establishing a strict reporting process with solid evidence on the data side, while Sustainability teams will be key for validating the explanations expected as part of IFRS SDS.
The ISSB has potential to provide a universal gold standard for corporate sustainability reporting and usher in an era of accountability and transparency around the emission reduction pledges made by business. Now is the moment for business leaders, CFOs and accounting teams to embrace this opportunity and act today to help keep the 1.5ºC target of the Paris Agreement alive.