Over the past decade, trillions of dollars have flowed into sustainability investments that tout environmental, social, and governance factors as part of their decision-making. However, the practice has long been plagued by a lack of transparent and comparable data across industries and regions.
Greater transparency for sustainability reporting
A major step has been taken to address this challenge. The International Sustainability Standards Board (ISSB) has issued its first sets of standards on sustainability-related disclosures for corporations and financial institutions worldwide. The group has created a common language for disclosing the impact of climate-related risks and opportunities on a company’s prospects. The goal is to “improve trust and confidence in company disclosures about sustainability to inform investment decisions,” according to the ISSB.
Voluntary reporting versus standardized data
Up until now, most sustainability-related reporting has been voluntary. As a result, the information available is selective and fragmented. This has made it difficult for investors to accurately assess companies’ sustainability-related risks, and has led to widespread concerns about “greenwashing” from regulators, as companies and investment funds claim the benefits of ESG credentials without actual impact.
Efficient capital markets as a result
“High-quality data is necessary to support price discovery and capital formation, and facilitates efficient capital markets,” says Richard Manley and Carine Smith Ihenacho, chair and vice-chair of the ISSB Investor Advisory Group, in a statement. The new Standards will assist preparers in communicating sustainability information to their investors and other providers of capital.
The ISSB and Its Role in Global Sustainability Disclosure
The International Financial Reporting Standards Foundation responded to growing calls from the investing and business communities for a comprehensive global baseline of sustainability disclosures by creating the International Sustainability Standards Board (ISSB) in 2021. This move builds on the foundation’s widely adopted IFRS accounting standards, required by over 140 jurisdictions worldwide.
The ISSB is designed to provide climate reporting standards for corporations, requiring them to report on scope 1, 2, and 3 greenhouse gas emissions, disclose their level of vulnerability to climate issues, and quantify capital expenditures connected with climate-related initiatives. Sustainability information can be shared alongside traditional financial statements, with the option for companies to comply with any existing accounting requirements.
It is at each individual country’s discretion to require companies operating within its borders to comply with ISSB standards. So far, numerous countries including Canada, Britain, Japan, Singapore, Nigeria, Chile, Malaysia, Brazil, Egypt, Kenya, and South Africa are considering adoption, according to ISSB Chair Emmanuel Faber.
At present, it seems unlikely that the United States will adopt these standards any time soon, as the Securities and Exchange Commission is working on its own rules for climate disclosure. Corporate giants have opposed these disclosures, while many Republican politicians in the U.S. resent ESG as a form of “wokeism.”
Despite such opposition, ISSB’s emphasis on transparency in sustainability reporting is key to shaping a more sustainable global economy in which investors can make informed decisions.