In February, we wrote about the IFRS Sustainability Symposium, the progress of the ISSB in developing its forthcoming International Sustainability Standards, and our optimism about the opportunities the ISSB Standards present for investors, companies, and global markets. The ISSB S1 General Sustainability-related Disclosures (S1) and S2 Climate-related Disclosures (S2) are designed to drive more consistent and comparable disclosures around the world, supporting companies in communicating sustainability-related financial information with a shared language.
The ISSB is committed to developing inclusive standards and implementing them in a scalable way. Its recent actions demonstrate that commitment, and will pave the way for companies to start communicating with confidence as soon as the standards are effective - January 1, 2024!
Many companies already have a strong foundation - the climate-related disclosure standards in S2 are squarely rooted in the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol (GHG Protocol), which have been broadly adopted around the world.
The ISSB plans to develop standards on other sustainability topics over time. To support disclosures on broader sustainability topics, S1 directs preparers to consider the Sustainability Accounting Standards Board (SASB) Standards for industry-specific metrics. While the SASB Standards are currently used by more than 2500 companies around the globe, the ISSB recognizes the need for more consistent application and reporting pursuant to the SASB standards. The ISSB is taking important steps to integrate the SASB Standards into the lexicon in an inclusive way, paving the way for preparers and users to better benefit from the industry-based approach the SASB standards offer.
Scalability: Starting with climate
To assist companies with less experience with the SASB standards, the ISSB decided in April to prioritize climate-related disclosures using the S2 Climate-related Disclosure standards in the first year of reporting.
Companies that are earlier in the sustainability reporting journey can focus first on the climate-related disclosures. This initial focus on climate will help companies to gain familiarity with the industry-based requirements and establish the necessary reporting practices and structures.
The ISSB has noted that, while broader sustainability-related information is needed and will be crucial to investors’ decision-making, investors have indicated that climate-related information is most urgent. Providing investors with more consistent, comparable information requires companies to develop their capacity in a scalable way, and this option to start with climate will give them time to do so. This option also complements the ISSB’s other efforts to enable companies to build their reporting capacity, such as the one-year phase-in of Scope 3 greenhouse gas emissions disclosure requirements.
Although climate is first on the agenda, companies that are ready to consider the SASB standards and make disclosures about broader sustainability-related information are encouraged to do so. Next, we’ll focus on the SASB standards and other important steps the ISSB is taking.
Inclusivity: Internationalizing the SASB Standards
On May 11, the ISSB launched a consultation seeking global feedback to help enhance the international applicability of the SASB Standards. In other words, the ISSB not only seeks to include the SASB Standards in S1, it intends to streamline and update them as well.
Because the SASB Standards were developed in the United States with a focus on United States market participants, the SASB Standards include some language that is not globally applicable. According to the ISSB, a small subset of the SASB Standards (around 20%) incorporates references to specific jurisdictional laws and regulations. For example, in some instances, they refer to U.S. regulations in their metrics, posing issues for international organizations to which those references are not relevant. The SASB Standards were subject to public consultation in their development, and many global market participants have seen their value and have used them for years, but they will benefit from the diverse perspectives and global input the ISSB can bring.
In addition to conducting this consultation on SASB, the ISSB will also continue its work on illustrative guidance for using the SASB standards, especially for entities that operate across multiple industries. Ultimately, the ISSB envisions a truly global, inclusive and decision-useful reporting regime – industry-specific metrics on sustainability and climate will help us get there.
In the next section, we’ll take a step back and explain what SASB is and why you should care about the SASB Standards as a company or an investor, as they will be core to future sustainability reporting norms.
What are the SASB Standards?
The SASB Standards were launched in 2011 to help businesses and investors develop a common language about the financial impacts of sustainability. The SASB Standards were developed to support companies in focusing on key issues most likely to be financially material in their industry, in turn facilitating more comparable disclosures for investors among companies in a given industry.
Today, the SASB Standards provide businesses across 77 industries with guidance as to the subset of environmental, social, and governance (ESG) topics and metrics that are most relevant within a given industry. The standards are also widely used around the globe. As of 2020, SASB Standards were being used by over 2,500 companies. In addition, over 300 institutional investors representing $82T AUM and 28 markets globally support SASB Standards.
While SASB initially was a separate standard setter, it became part of the ISSB in 2022. As part of the broader effort to address the varied sustainability reporting frameworks in the market, SASB first consolidated with the International Integrated Reporting Council to form the Value Reporting Foundation (VRF), and as of August of last year, the VRF consolidated within the ISSB.
Why care? The SASB Standards will be core to ISSB and future sustainability reporting norms
With the resources and experience of the SASB Standards joined with the ISSB, the questions arose about how best to use those resources to support the ISSB’s overall objectives. After considering public feedback on this issue, the ISSB confirmed at its November 2022 meeting that it will include the SASB Standards in the S1 General Sustainability-related Disclosures. That means that preparers will be expected to consider the SASB standards as they identify their sustainability-related risks and opportunities and to help them identify material information and industry-based metrics. They will also be permitted to consider other standards, such as the Climate Disclosure Standards Board (CDSB), Global Reporting Initiative (GRI), and European Sustainability Reporting Standards (ESRS), but the SASB Standards will be the primary source, driving more comparability. The S2 Climate-related Disclosures also point to SASB Standards as illustrative guidance for additional climate-related disclosure topics and industry-based metrics.
In the future, the ISSB will consider issuing more detailed standards on sustainability topics beyond climate, but this process will be the subject of an Agenda Consultation, development of exposure drafts, public consultation, and final deliberations. Some of that has already begun.
A second consultation is also in the works with the ISSB, as they seek feedback on their latest two-year work plan. In response to the informational needs of investors, the ISSB has identified four potential research projects for consideration and is seeking feedback on the proposed strategy, criteria, scope and structure that could inform the ISSB’s work plan and approach to future projects. The four projects include: “three sustainability-related research projects—1) biodiversity, ecosystems and ecosystem services; 2) human capital; 3) human rights—and a fourth project researching integration in reporting.”
What does this effort mean for companies?
The effort to enhance the SASB Standards to better serve global needs will help companies to report the sustainability issues most important to them. With ISSB incorporation of the SASB Standards, companies will have the tools and proper vocabulary to speak the same language on sustainability and tell their stories to investors and other stakeholders globally. As companies’ information becomes easier to digest and analyze for sustainability-related risks and opportunities, more avenues of capital will open to them, boosting the advantages and outweighing the costs associated with reporting.
Many companies have already been using the SASB Standards globally, so as they begin to use the ISSB standards, they will not be starting from scratch. These companies will be ready to take full advantage of the opportunities the ISSB standards will create.
Companies that are newer to the SASB Standards will find that the standards make the sustainability disclosure journey more efficient and effective. Industry-based standards allow a company to focus their efforts on what matters most, both to them and to investors. By enhancing the international applicability of the SASB Standards, the ISSB is on a path toward more proportionate, scalable, and inclusive standards for companies of all shapes and sizes.
For investors?
For investors, industry-based disclosures will lead to better comparability of companies within an industry. Industry-based standards allow companies within the same industry to examine common risks and opportunities and disclose comparable information. With that information in hand, companies, their investors, and other stakeholders will be better able to assess the financially relevant ESG-related risks and opportunities across companies that operate in similar industries.
Next steps? Make your voice heard
Feedback will be accepted on the consultation to help enhance the international applicability of the SASB Standards until August 9th, 2023. With that input in hand, the ISSB will then consider proposed updates and amendments along the path to internationalizing the SASB Standards, following ISSB “due process.” To support the ISSB’s efforts to be inclusive, market participants should participate - the users of the new language will have many opportunities to help shape the evolution of the SASB lexicon.
The journey begins with helping to map the path forward!
