ISSB Takes Reins on Transition Reporting
Chair Emmanuel Faber reflects on two years of rapid standard-setting at this year’s IFRS conference, as NBIM chief compliance officer warns against regulatory “soup”.
The IFRS Foundation’s International Sustainability Standards Board (ISSB) will continue to push for cohesion across the sustainability reporting space, as it extends its reach to transition plan disclosures and deepens partnerships with other standard-setting bodies.
“It’s critical that there is one way of doing [transition plans] disclosure and not 20 different ways, so it is comparable and reliable,” said ISSB Chair Emmanuel Faber, speaking at this year’s IFRS Foundation Conference in London. “We have decided to lead on this, not to wait. We want to be ready for the future.”
The IFRS Foundation announced this week that it would take over responsibility for transition plan disclosure resources originally developed by the UK’s Transition Plan Taskforce (TPT). Faber said the decision formed part of efforts to streamline and consolidate frameworks and standards, though the board is not currently planning to make transition plans mandatory.
“We [are taking] responsibility for the disclosure side of this work […] as there are more and more regulators, investors and companies being asked to, or that want to, develop such plans,” he added.
Future disclosures
The TPT’s Disclosure Framework was published last year and is made up of five pillars: foundations, implementation strategy, engagement strategy, metrics and targets, and governance. It is aligned with key components of the Glasgow Financial Alliance for Net Zero’s (GFANZ) 2022 transition-planning guidance for companies and financial institutions.
The TPT’s work will be incorporated into the ISSB’s IFRS S1 and S2 standards, launched last year. IFRS S1 requires companies to report information about their sustainability-focused governance, strategy and risk management processes, while S2 sets out rules for entities to report exposures to climate-related risks and opportunities.
While the ISSB does not currently require companies to have a transition plan, entities reporting under S2 are expected to make certain disclosures if they do have a strategy in place.
“Transition plans are increasingly being considered by investors as part of their broader review of climate disclosures and, where they are published by corporates, would benefit from a level of consistency and comparability to assist investors in their decision-making,” said Jean-Paul Servais, Chair of the International Organization of Securities Commissions (IOSCO). “In that context, the ISSB providing further educational material on its existing language will be helpful to market participants.”
He noted that IOSCO would be undertaking its own engagements on transition plan disclosures and consider the role of markets regulators.
The desire for, and publication of, transition plans has been gaining momentum globally – but the low level of comparability and credibility has been challenging for investors.
In January, analysis of 26 international frameworks published by French non-profit Reclaim Finance noted a continued lack of a standardised approach to companies’ transition targets, which creates significant greenwashing risk.
In the meantime, legal environmental charity ClientEarth has proposed legal guide rails for policymakers to plug the global regulatory gap on climate transition financing, while mitigating ‘transition-washing’ risk. These include preparing national or regional Paris-aligned transition plans to guide corporate iterations and building capacity in the market for external verification of transition finance instruments.
Strengthening ties
In its push for cohesion, the ISSB has also deepened its partnerships with the GHG [greenhouse gas] Protocol, CDP, the Taskforce on Nature-related Financial Disclosures (TNFD), and the Global Reporting Initiative (GRI).
“We’ve been told to be ‘climate first’, but not ‘climate only’,” said Faber. “We’ve been told not to reinvent the wheel, but to use what exists already – we extended that notion to our partnerships, because the idea is not to become a monopoly, but to organise an ecosystem that will create a global baseline.”
The IFRS Foundation and GHG Protocol have also signed a memorandum of understanding to ensure the ISSB is actively engaged in any updates and decisions made in relation to the GHG Protocol’s standards and guidance.
Environmental disclosure platform CDP’s climate questionnaire has said it would draw on IFRS S2 as its foundational baseline from this year. The group has previously claimed that 60% of listed companies disclosing on its platform were already responding to the majority of the ISSB’s climate standard data points.
In addition, the ISSB will be collaborating more closely with the TNFD and GRI as the board extends its work on interoperability, biodiversity, nature and human capital.
The IFRS Foundation previously co-published interoperability guidance with the European Financial Reporting Advisory Group to illustrate the degree of alignment between the ISSB standards and European Sustainability Reporting Standards (ESRS).
Also speaking at the conference, Carine Smith Ihenacho, Chief Governance and Compliance Officer at Norges Bank Investment Management (NBIM), said the sovereign wealth fund had undertaken over 3,000 engagements with portfolio companies last year. Less than 50% had proper disclosures on climate-related themes, such as emissions, she said.
“We don’t know our exact portfolio emissions, and we don’t know from which assets or countries these emissions are coming from – there’s still a long way to go on disclosure,” she said. “Improved connectivity between financial and sustainability information will help investors understand how key factors contribute to long-term value creation and risk.”
Regulatory “soup”
The ISSB is now embarking on its next two-year work plan, following market input on its evolved strategy.
“The ISSB has been nothing less than a paradigm shift,” said Smith Ihenacho. “We are now at a turning point where we’re seeing great momentum in the regulatory adoption of the standards. We are moving away from a world of voluntary [reporting] fragmentation, but we now don’t want to see a regulatory ‘soup’.”
Lindsey Stewart, Director of Stewardship Research and Policy at data and research provider Morningstar Sustainalytics, warned that risks of fragmentation remained high as some regulators choose to either delay or “cherry-pick” implementation of the ISSB standards.
Twenty jurisdictions representing over half of global GDP and GHG emissions have so far announced plans to implement the standards in some capacity.
“Investors and reporters can only hope that improving collaboration between the various bodies often described as the ‘alphabet soup’ will help drive better alignment of international sustainability reporting requirements in the second half of the 2020s, compared with what we’ve seen in the first half,” Stewart said.
Last month, the IFRS Foundation published a guide to help countries plan their implementation of the standards – including for partial adoption.
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