The two new bodies are expected to help harmonise standards in different jurisdictions to meet investor demand for comparable ESG information.
By Paul A. Davies, Sarah Fortt, Nicola Higgs, Betty M. Huber, Michael D. Green, and James Bee
On 27 April 2022, the International Sustainability Standards Board (ISSB) announced the formation of two bodies that it hopes will assist in providing enhanced compatibility between the ISSB’s corporate sustainability reporting standards (ISSB Standards) and ongoing jurisdictional initiatives to develop ESG disclosure standards.
These two bodies, a Sustainability Standards Advisory Forum (SSAF) to be formed later in the year and a working group of jurisdictional representatives to be formed immediately, will seek to facilitate dialogue with regulators worldwide to help the ISSB ensure that it can achieve its goal of producing a widely accepted global baseline of ESG disclosure standards, with an initial focus on climate requirements.
The ISSB was established by the International Financial Reporting Standards (IFRS) Foundation (responsible for issuing globally recognised accounting standards) at COP26 in November 2021. The ISSB announced exposure drafts of its first two standards in March 2022, which were:
- IFRS S1 on General Requirements for Disclosure of Sustainability-related Financial Information (General Requirements Standard); and
- IFRS S2 on Climate-related Disclosures (Climate Standard).
For more information on the General Requirements Standard and the Climate Standard, please read Latham’s previous blog post.
The ISSB intends to produce a number of additional standards, based on further ESG-related topics (e.g., diversity, equity, and inclusion, and environmental impacts), and has previously announced that it will be consulting on its future standards setting priorities later in 2022.
A key challenge for the ISSB in ensuring that the ISSB Standards receive international recognition and adoption, is the ongoing development and proliferation of jurisdiction-specific ESG reporting standards. As regulators and legislators in many of the leading global economies are continuing to recognise the increasing investor demand for high-quality, comparable ESG information about companies, a number of legal, regulatory, and other proposals have been tabled to impose ESG reporting requirements at the national (or in the case of the EU, supranational) level. Many of these proposals, like the ISSB Standards, are still in development stage (e.g., the Securities and Exchange Commission’s (SEC’s) proposed climate rule in the US and the EU’s Corporate Sustainability Reporting Directive (CSRD)), and therefore the exact shape of such requirements is in many cases still to be determined.
While these jurisdiction-specific reporting standards may help to harmonise ESG reporting within national (or continental) economies, the risk is that – given the international nature of the global economy – investors will still be faced with ESG reporting that is inconsistent and not easily comparable because companies in different countries will be reporting to different standards. This is especially true given the significant differences between the proposed reporting regimes in areas such as the definition of materiality, and whether disclosure rules will focus on climate issues alone or a wider range of ESG topics.
Purpose of the Working Group and SSAF
The ISSB recognises that as a number of the jurisdiction-specific reporting standards are still in development, this offers an opportunity for the ISSB and national regulators to ensure alignment between their respective standards (to the extent possible). Such a solution would be beneficial not just to the ISSB but also to national regulators, who likely appreciate international comparability of ESG disclosures as an issue that will be important to investors in their jurisdictions.
Certain jurisdictions have already publicly indicated their support for or acknowledgement of the ISSB Standards. The UK announced in October 2021 that the ISSB will play a key role in underpinning its proposed ESG disclosure regime, and the SEC specifically named the ISSB as the example organisation when asking stakeholders about potential bases for alternative reporting frameworks as part of its consultation on the proposed climate rule.
As part of this dialogue, the ISSB will create the SSAF during the next quarter to facilitate regular dialogue with, and high-level advice from, a broad set of jurisdictions. In the shorter term, the working group will discuss compatibility of the developing jurisdiction-specific ESG disclosure initiatives to establish how the ISSB Standards, fully responding to the needs of global market participants, can contribute to optimising reporting efficiency for companies in those jurisdictions, and how those jurisdictions can build upon the ISSB Standards according to their needs.
Members of the working group are the Chinese Ministry of Finance, the European Commission, the European Financial Reporting Advisory Group, the Japanese Financial Services Agency, the Sustainability Standards Board of Japan Preparation Committee, the UK Financial Conduct Authority, and the SEC.
The ISSB indicated that working group meetings will take place later in in May and July 2022, and meeting summaries will be published on the IFRS Foundation website.
Latham & Watkins will continue to monitor developments in this area.
 The working group’s meetings will be open to the public and further information can be found on the IFRS website.