In the last decade, standards and frameworks used to report material environmental, social and governance (ESG) topics have become quite crowded, leading to an alphabet soup of sustainability reporting standards. In fact, there are an estimated 600 ESG reporting standards globally, leading to a call for standard-setters to improve the global consistency and comparability of sustainability disclosures that stakeholders — most especially investors — rely on.
Given the International Financial Reporting Standards (IFRS) Foundation’s experience in setting global accounting standards, there had been calls for the Foundation to play a role on harmonizing the multiple global sustainability reporting standards and frameworks. The Foundation responded by amending the constitution of the Foundation in April to accommodate the formation and operation of a sustainability standards setting board. On Nov. 3, during the Finance Day of the 2021 United Nations Climate Change Conference (COP26) in Glasgow, Scotland, UK, the IFRS Foundation formally announced the establishment of the International Sustainability Standards Board (ISSB).
The ISSB’s main mandate is to develop sustainability reporting standards that will provide a high-quality, comprehensive baseline of ESG information that will meet the needs of investors and capital markets. While remaining independent, the ISSB will work alongside the IFRS Foundation’s International Accounting Standards Board (IASB), which sets accounting standards that are mandatory for most listed entities in over 140 jurisdictions, including the Philippines, to ensure that the standards developed by both boards will complement each other.
BUILDING ON EXISTING SUSTAINABILITY REPORTING FRAMEWORKS AND GUIDANCE
To give the ISSB a running start, the IFRS Foundation has set up a Technical Readiness Working Group (TRWG) composed of representatives from the Task Force for Climate-related Financial Disclosures (TCFD), the Value Reporting Framework (VRF) which houses the International <IR> Framework and the Sustainability Accounting Standards Board (SASB) Sustainability Accounting Standards, the Climate Disclosure Standards Board (CDSB), the World Economic Forum (WEF), and the International Accounting Standards Board (IASB). They announced at the same Glasgow event that the technical expertise, content, staff and other resources of the VRF and the CDSB will be consolidated under the IFRS Foundation.
The TRWG has two objectives: to accelerate convergence in global sustainability reporting standards focused on enterprise value; and, to undertake technical preparation for the ISSB under the governance of the Foundation. The International Organization of Securities Commissions (IOSCO) and its Technical Expert Group of securities regulators support the work of the TRWG, with the IOSCO stating that it will provide independent oversight of the standard-setting activity in its role as chair of the Foundation’s Monitoring Board and will perform an in-depth technical assessment of the draft sustainability reporting standards.
THE IFRS SUSTAINABILITY DISCLOSURE STANDARDS
ISSB’s sustainability reporting standards will be named the IFRS Sustainability Disclosure Standards. These standards will build upon the prototypes developed by the TRWG, which focus on climate-related disclosures and general disclosures on other material ESG matters that affect enterprise value. The climate prototype is built on the TCFD recommendations, which require entities to provide information on climate-related risks and opportunities, climate-related governance, strategy and risk management, and metrics and targets in relation to climate-related risks and opportunities. Meanwhile, the general disclosures prototype will require entities claiming compliance with ISSB standards to disclose all material sustainability-related information.
It is expected that the ISSB will release its first set of draft standards for public consultation in the first quarter of 2022, with the goal to release the standards and have these ready for use by the second half of 2022. Per the IFRS Foundation, the application of the IFRS Sustainability Disclosure Standards is not linked to the application of IFRS accounting standards, so an entity applying IFRS accounting standards for financial reporting purposes is not required to also apply the ISSB standards and vice versa.
However, the Foundation has clarified that only local jurisdictions can determine if it will be mandatory for entities to report on sustainability and climate-related matters using the IFRS Sustainability Disclosure Standards. It remains to be seen if the Philippine regulatory authorities will adopt ISSB’s sustainability reporting standards, similar to how we adopted the IASB financial reporting standards.
WHAT COMPANIES SHOULD DO NEXT
As the pressure from investors and other stakeholders for consistent and reliable sustainability reporting increases, we anticipate that local jurisdictions will soon require disclosures in line with sustainability reporting standards and the relevant external assurance. This also raises the question of whether an appropriate governance structure needs to be put in place to provide oversight on the implementation of sustainability initiatives and the subsequent sustainability reporting process. Perhaps boards can consider whether a committee, separate from the audit committee, should be formed to take charge of the sustainability report assurance and ensuring the effectiveness of the company’s internal quality control and risk management for non-financial disclosures.
While reporting using the IFRS Sustainability Disclosure Standards is not yet mandatory, local entities can start building on their capabilities to report on sustainability and climate-related matters using voluntary sustainability reporting frameworks and guidance, as applicable, and adopt the following measures.
They can establish executive management-level oversight and accountability of sustainability and the sustainability reporting process. It will be important to align ESG initiatives and sustainability reporting efforts to support corporate strategies, as well as provide training and educational courses to employees as sustainability reporting cuts across corporate functions. Companies will also need to assess and incorporate ESG and sustainability reporting risks in the enterprise risk management framework. Moreover, they need to articulate the company’s long-term value creation story in the sustainability report.
The IFRS Foundation’s formation of the ISSB and the development of the IFRS Sustainability Disclosures Standard have shown that sustainability reporting will be a mainstay of the annual corporate reporting cycle. It is no longer a compliance program, as investors and capital markets increasingly rely on ESG disclosures to enable more informed decision-making.
As the global sustainability reporting standards evolve, so too should an organization’s understanding, management, and reporting of the material ESG matters that impact their long-term enterprise value creation.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Benjamin N. Villacorte is a partner and Yna Altea D. Antipala is a manager from the Climate Change and Sustainability Services team of SGV & Co.