The release of international standards rarely makes global headlines, but they are an essential backdrop to our everyday lives. Without international standards on postage, telecommunications or aircraft control, the modern world would be even more chaotic. And as the world adapts to the challenges presented by climate change, setting international standards will only become more important.
That job falls to the International Sustainability Standards Board , or ISSB. Two recent decisions are particularly notable as a significant step forward in global efforts to expand the risk disclosure for climate change for corporations.
The ISSB is part of the independent International Financial Reporting Standards (IFRS) foundation, which writes accounting rules used in more than 140 countries. The standards are designed to be reported alongside other public financial information. ISSB Chair Emmanuel Faber describes them as an “accounting-based language” which is, “consistent, verifiable and therefore decision-useful”.
Beyond mere accounting rules, the new standards could be a powerful catalyst for accelerating the transition to global net zero carbon emissions by increasing transparency of climate change risks for corporate investors.
The S1 General Requirements standard focuses on reporting sustainability risks across four areas; governance, strategy, risk management, and metrics and targets. It also requires reporting entities to disclose any material information about sustainability-related risks and opportunities, using the same definition of “material information” as the IFRS accounting standards. Significantly, this exposes reporting entities to liability risk should they fail to make adequate disclosures, making them more likely to comply. The S2 Climate standard requires additional scenario analysis and reporting of climate risks and opportunities, including that reporting entities quantify emissions throughout their entire value chain. This will be a significant effort for many companies, particularly those with offshore supply chains.
They are designed to be interoperable with other jurisdictional sustainability reporting standards such as the EU Taxonomy, or the SEC standard being developed in the United States. The Australian government has flagged using the ISSB standards as a baseline for climate-related disclosure, while it finishes developing its own national disclosure standard and undertakes a National Climate Risk Assessment.
Commencing in 2024, the standards will create a global baseline for investor-focused sustainability reporting. They streamline and supersede a range of existing voluntary sustainability disclosure frameworks, including the G20 Taskforce on Climate Related Disclosure (TCFD), the Sustainability Accounting Standards Board (SASB) and World Energy Forum (WEF) metrics.
Why are the ISSB standards significant? There are four main reasons.
First, they are stringent and significantly increase the transparency and quality of sustainability and climate information available to investors. At present, only 42% of the world's top 4,000 companies make emissions data publicly available.
Second, the standards will require companies and investors to better understand climate change investment risks. Companies cannot manage risks they do not know exist. These risks can be physical, for example infrastructure at risk from rising sea levels, or transitional such as stranded assets. Modelling climate change risk is complex and there is a need for public investment in scenario analysis as businesses seek to better understand how risk translates across the investment spectrum.
Third, investors are hopeful the ISSB standards may unlock additional private capital for sustainability and climate change investments in developing country markets where it has so far failed to materialise. The IPCC estimates that global investment for climate change mitigation needs to be three to six times higher than current spending. Having multiple sustainability and climate reporting formats across national jurisdictions is inefficient and not conducive to unlocking the capital investment needed to address climate change.
Finally, ISSB progress has been rapid, and its work appears to have ongoing momentum. This contrasts with other climate developments in international forums (e.g., the United Nations Framework Convention on Climate Change, International Civil Aviation Organisation, International Maritime Organisation), which often feel like they are moving slower than the glaciers they are seeking to protect. The ISSB was formed in November 2021 at Glasgow COP26 and in less than two years, has fostered widespread support for the standards within the G7 and G20. The International Organisation of Securities Commissions (IOSCO), of which Australia is a member, is expected to endorse the ISSB standards in coming months. There are already calls to make the ISSB’s standards mandatory by 2025. The ISSB is currently undertaking consultation to prioritise future standards for biodiversity, ecosystems, ecosystem services, human capital, and human rights.
Ultimately, improved corporate disclosure of climate change risks and opportunities will provide global investors at all levels the transparency needed to better value the climate change impacts of investment decisions. In a fortnight where Norway announced more than US$18 billion in new oil and gas investment and sea surface temperatures continued to break records, the ISSB standards are a welcome development.