Exposure drafts of the International Sustainability Standards Board's (ISSB) IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) are currently the subject of public consultation which closes on 29 July 2022.

As previously discussed the European Financial Reporting Advisory Group (EFRAG) is also currently carrying out a public consultation on its proposals in respect of European Sustainability Reporting Standards (ESRS) which closes on 8 August 2022.

In addition, the United States Securities and Exchange Commission also recently published a proposed rule on climate-related disclosure as announced here.

In light of these proposals and consultations, large companies operating across several jurisdictions are advised to begin (if they have not done so already) to monitor developments in respect of these proposals. As companies engage with the draft standards they will form an understanding of the similarities and differences across the proposals which will assist them with streamlining their adoption of relevant standards as they begin to apply.

Companies may also wish to avail of the limited window of opportunity to comment on the proposals while still under consultation.

Background

The formation of the ISSB was announced at the 2021 United Nations Climate Change Conference (COP26). It was set up in response to a communiqué issued by the G20 Finance Ministers following from their meeting in Venice in July 2021 which included the below statement:

"We will work to promote implementation of disclosure requirements or guidance, building on the FSB’s Task Force on Climate-related Financial Disclosures (TCFD) framework, in line with domestic regulatory frameworks, to pave the way for future global coordination efforts, taking into account jurisdictions’ circumstances, aimed at developing a baseline global reporting standard. To that aim, we welcome the work programme of the International Financial Reporting Standards Foundation to develop a baseline global reporting standard under robust governance and public oversight, building upon the TCFD framework and the work of sustainability standard-setters, involving them and consulting with a wide range of stakeholders to foster global best practices."

The ISSB was also welcomed by the International Organisation of Securities Commissions (IOSCO) who upon publication of the ISSB's draft standards commented:

"These exposure drafts will help clear the way for corporates to accelerate progress towards disclosing complete, consistent and comparable information on sustainability matters, and we encourage all stakeholders to engage constructively with the ISSB during the consultation."

In describing the standards, the IFRS has noted that:

"[the ISSB's proposed standards when finalised] will form a comprehensive global baseline of sustainability disclosures designed to meet the information needs of investors in assessing enterprise value. The ISSB is working closely with other international organisations and jurisdictions to support the inclusion of the global baseline into jurisdictional requirements."

It is the EU's view that the adoption of double materiality reporting for the ESRS will protect a broader range of stakeholders than the other standards discussed which are fundamentally geared towards protecting investors. Acknowledging, however, that market participants operating in other jurisdictions will be familiar with these standards, EFRAG has prepared a comparison between the existing exposure drafts of the ESRS and the IFRS standards intended to allow market participants to review and compare standards applicable to disclosure in respect of particular activities.

Consultation responses

While respondents to the ISSB consultation are still in the process of making their responses available, the UK's Financial Conduct Authority (FCA) has published its response, which is evaluated against various criteria including:

  • clarity of purpose including, user focus and materiality;
  • connectivity with financial reporting;
  • interoperability between ISSB baseline and jurisdiction-specific requirements;
  • ease of adoption (both for jurisdictions and preparers); and
  • the inclusion of investor-focused, industry-based content.

The FCA found that the proposals generally meet its expectations in each of these areas and concludes that the draft standards will "enhance market quality and integrity and ... are strongly supportive of the proposals" and remain "committed to consulting on and adopting the ISSB's standards into [the UK's] rules, once finalised ... subject to the usual cost-benefit analysis."

In its response the FCA highlighted certain points for consideration by the ISSB, which include:

  • refining certain definitions;
  • developing guidance to improve the consistency of implementation by preparers; and
  • providing for some limited flexibilities/ scaling/ phasing of requirements.

These items are intended to encourage the widespread adoption of the draft standards internationally by recognising different levels of familiarity with climate and sustainability reporting among corporates in different jurisdictions. The FCA in acknowledging the importance of interoperability with other jurisdiction specific standards also requests that the ISSB consider providing examples to demonstrate how the standards act as a global baseline that can interoperate effectively with additional jurisdiction-specific requirements via a 'building blocks' approach.

Similarly, in early responses to the EFRAG consultation, commentators have stressed the importance of interoperability among the various frameworks. For example, in its high level advice of 11 July, the Securities and Markets Stakeholder Group (SMSG) writing to the European Securities and Markets Authority notes that it "supports the objective of effective coordination with other standard setters including [the ISSB] .. to avoid unnecessary regulatory fragmentation that may have negative consequences for companies that operate globally." The SMSG goes on to urge the European Commission "to encourage the ISSB to work closely together with EFRAG on their building block approach to ensure that the global baseline standards are sufficiently clear and ambitious to ensure appropriate convergence and full compatibility with the EU framework. This is key to avoid “duplicative reporting” for EU undertakings with a global footprint."

A common theme among responses is to stress the importance of bringing standards into interoperation and acknowledging the global dimensions that ESG initiatives will be required to take on going forwards if they are to deliver sustainable economic models.

Next Steps

Engaging with the current proposals at this stage will allow companies who wish to do so to make their opinions on the proposals known. In addition, reviewing the proposals will assist companies to ensure their preparedness to comply with relevant requirements as they become applicable and put companies in a good position to achieve possible efficiencies in reporting going forwards.

We will continue to monitor responses to the consultations for material developments.

  • Michelle McLoughlin is a knowledge lawyer in the corporate department. Michelle has more than 20 years’ experience as a corporate transactions lawyer in Ireland.
  • Liam is a knowledge lawyer in the corporate department. Liam has more than 12 years' experience as a corporate transactions lawyer in the UK and offshore.
  • Anne joined the firm in January 2017. As Senior Knowledge Executive, she provides research support to the Knowledge team and the firm as a whole. Anne produces internal know how, tracks legal and regulatory developments and implements knowledge management practices, with a particular focus on the firm's Corporate Transactions team.