Travers Smith's Sustainability Insights: Sustainability disclosure standards

Travers Smith's Sustainability Insights: Sustainability disclosure standards
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A regular briefing for the alternative asset management industry. 

Just about everyone agrees that a single set of internationally accepted sustainability disclosure standards would benefit all stakeholders. But global convergence creates significant challenges. For example, policymakers who are keen to set very high standards – the EU, for example – will be tempted to goldplate any requirements that can achieve widespread approval. That's especially likely because different stakeholders have different expectations, and some jurisdictions will want to satisfy a wide range of constituencies. Moreover, achieving widespread buy-in requires extensive consultation and due process, which takes longer than many are willing to wait.

When the International Sustainability Standards Board (ISSB) was established last year, its goal was ambitious: to create a global baseline for corporate reporting, and to do it quickly. Publication in March of two consultation draft standards, one on general requirements for sustainability disclosures and the other covering climate-specific risks and opportunities, is a big step forward. When the standards are finalised – which could be as soon as the end of this year – they will encourage many companies to make a step change in sustainability reporting. 

It will be up to individual countries to decide whether to mandate the finalised standards, and for which companies. Some will do so quickly: UK policymakers, for example, have already said that they will use the ISSB's standards as the "backbone" for UK corporate sustainability reporting requirements, perhaps, in time, applying them to large private companies as well as their listed counterparts. Other standard-setters, including EFRAG in the EU – which has just launched its own consultation on sustainability reporting standards – will take careful note, even if they ultimately opt for some divergence, as the EU certainly will.

The ISSB has been acutely aware of the challenges in delivering a globally accepted framework, and explicitly recognises that its standards will not be the complete answer. That's at least in part because it adopts a "materiality" rule: disclosures are only required when they are relevant to an entity's enterprise value. The standards will require companies to provide the information required by investors. Reports will not include the external impacts of corporate activity unless they have a financial impact on the entity.

This approach is not as narrow as it might appear: it is clear from the drafts that a very wide range of matters could be "material", including (for example) corporate reputation, longer-term regulatory risks, the stability of a company's workforce, and its "relationships with local communities and natural resources". Disclosures are therefore expected in relation to (among many other things) an entity's employment practices and those of its suppliers, wastage related to the packaging of the products it sells, events that could disrupt its supply chain, and any sustainability-related risks in the company's value chain.

The ISSB has been acutely aware of the challenges in delivering a globally accepted framework, and explicitly recognises that its standards will not be the complete answer. That's at least in part because it adopts a "materiality" rule: disclosures are only required when they are relevant to an entity's enterprise value. 

Nevertheless, the ISSB also recognises that there are limitations with its approach. Many jurisdictions (including the UK and the EU) will go further and extend the requirements to capture "double materiality" – which means including impacts that are not financially material to the reporting entity itself ("negative externalities"). The ISSB standards are therefore designed as a "global baseline", built with the expectation that some regulators will supplement them. Indeed, the ISSB has just signed a memorandum of understanding with the GRI, whose multi-stakeholder standards are widely respected, so that the two reporting frameworks will align with each other. The ISSB is also pushing for international collaboration through a new multi-jurisdictional working group.

These consultations are timely: the ISSB has balanced the need for speed with the due process that its sister organisation, the International Accounting Standards Board (IASB), is known for. The IFRS Foundation has adapted the ISSB's procedures so that these drafts could be published quickly – and, crucially, in time for them to be taken into account by the US and EU standard-setters, who are already consulting on their own sustainability disclosure rules. But the Board intends to re-consider them fully in response to stakeholder feedback later this year, following a 120-day consultation period that ends on 29 July.

In part, the rapid development of the first two draft standards has been possible because they draw heavily on existing work, which should also make global agreement easier. The standards are consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) and they build on the sector-led approach of the SASB Standards. Both the general requirements and the climate-specific standards require disclosure of material information about all significant sustainability-related risks and opportunities facing the entity using the TCFD's four themes: governance, strategy, risk management, and metrics and targets.

There is no doubt that the standards are demanding and principally aimed at large companies. On climate, for instance, they require disclosure of scope 3 greenhouse gas emissions unless the entity explains that "a faithful measure" is not available, and they mandate the use of scenario analysis, unless the company "is unable to do so" (in which case it must use another method to assess its climate resilience). For firms in the financial sector, emissions that are facilitated or financed are explicitly included, building on the GHG Protocol Corporate Value Chain Standard, which includes guidance on calculating indirect emissions resulting from investments.

The ISSB's ambition is clear: that comprehensive and internationally consistent sustainability disclosures are published with a company's financial statements and are treated by users as being on an equal footing with them. The rapid progress on this first set of standards is to be applauded, and would seem to put that ambition within reach.


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A series of regular briefings for the alternative asset management industry.

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