Climate risk disclosure - direction of travel

As more and more countries, regions and companies step up efforts to curb CO2 emissions to avoid catastrophic consequences explained in the Intergovernmental Panel on Climate Change (IPCC)'s recent report, the IFRS Foundation is leading the charge in taking rapid action to consolidate the many existing sustainability-related disclosure initiatives to achieve global consistency, comparability and reliability to facilitate informed decision making.?

Twenty years ago, the IFRS Foundation was established to develop a single set of high-quality global accounting standards, known as IFRS Standards, to bring transparency, accountability and efficiency to financial markets around the world.?

Now it is working with existing standards-setters, supported by the International Organization of Securities Commissions ('IOSCO') and many others to establish an International Sustainability Standards Board ('ISSB') to develop a set of sustainability standards that are comparable and transparent. In particular, the G7 and G20 support the establishment of a global baseline of sustainability related financial disclosure that will form the basis of the ISSB’s work.??

The IFRS Foundation's 22 trustees (of whom I am one and one of two vice chairs) are working rapidly towards a deadline by COP26 to launch the ISSB.?

Here is a 'beginner's guide' to the project and what is to come.?

The IFRS Foundation has a three-tier structure, comprising an independent standard-setting Board of Experts ('IASB'), governed and overseen by the Trustees from around the world who in turn are accountable to a monitoring board of public authorities (IFRS Foundation Monitoring Board).

ISSB

Following IFRS Foundation's public consultation last September on sustainability reporting, the Foundation's trustees announced in March 2021 that there is broad support for the establishment of a single international standard-setting body for sustainability standards ('ISSB') under the existing governance structure of the IFRS Foundation.

Existing players

Amongst hundreds of reporting frameworks and voluntary standards in existence globally, the most influential and widely-used include:

• Carbon Disclosure Project (CDP) - a product of Davos, to integrate climate reporting into existing accounting practices.
• Climate Disclosure Standards Board (CDSB) - a principles-based framework that helps organisations to present environmental information in mainstream reports for investors. It's fully aligned with the TCFD (see below) and supports compliance with the EU's Non-financial Reporting Directive.
• Global Reporting Initiative (GRI) - focuses on how a company's actions affect society rather than how external factors affect the company, making it an effective framework for reporting to a much broader range of stakeholders than just investors.
• International Integrated Reporting Council (IIRC) - is entirely principles-based and provides a framework that connects sustainability disclosure with financial disclosure. It essentially sees itself as the convenor of the other frameworks.
• Sustainability Accounting Standards Board (SASB) - guides the disclosure of financially material sustainability information by companies to their investors.
• Value Reporting Foundation (VRF) - an integrated reporting-focused organisation formed through the merger of IIRC and SASB and it focuses on enterprise value creation.
• Task Force on Climate-related Financial Disclosures (TCFD) - established by the Financial Stability Board in 2015 to develop more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions, enabling stakeholders to better understand the financial system's exposure to climate-related risks.
• World Economic Forum (WEF) - developed together with Deloitte, EY, KPMG and PwC, it provides a set of universal ESG metrics and reporting standards.

Building blocks approach

The global sustainability reporting standards proposed to be issued by the ISSB will adopt a "building block" approach to avoid undue fragmentation, by providing a globally consistent and comparable sustainability-reporting baseline with the flexibility for "jurisdictions to go further and faster if they wish, while retaining cross border comparability."

Climate first, not climate only

Due to the urgent and pressing challenge of climate change, the ISSB will begin with climate-related disclosures, incorporating but also developing and enhancing the recommendations of the TCFD.?

Climate prototype

In December 2020, the alliance of the five international framework- and standard-setting institutions (namely, CDP, CDSB, GRI, IIRC, and SASB) published a paper on a prototype for what an eventual standard could look like. The investor focused standard setters are now working collaboratively through a Technical Readiness Working Group (TRWG) set up by the IFRS Foundation to provide a running start to the potential new board by providing technical observations and proposals to further enhance the Prototype. Other members of the TRWG include IASB, TCFD and WEF with IOSCO as an observer.?

Enterprise value

The new board would focus on enterprise value which refers to information that is material to the decisions of investors, lenders and other creditors. This includes information on how climate and other sustainability issues can erode a company's worth, or how sustainability issues present opportunities to create value which would pose material financial implications for a company.?

Assurance

External assurance of information reported by companies is essential to the credibility of any reporting standards. The plan is for the IFRS Foundation to work with IOSCO to develop an audit and assurance framework following the establishment of the ISSB, in consultation with the International Auditing and Assurance Standards Board (IAASB), auditing firms and data and index providers who are expected to play a major role in providing assurance.

COP26

COP stands for Conference of the Parties with the first COP held in Berlin in 1995. COP26 is the 26th United Nations Climate Change Conference scheduled to be held in Glasgow, Scotland, UK from 31 October to 12 November 2021. This summit will hopefully accelerate global actions towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change.?

The IFRS Foundation trustees are using COP26 as the target to launch the ISSB if the criteria for its establishment can be met, including funding. It is expected that once established the ISSB will work on the enhanced proposal by the TRWG and publicly consult on the common global baseline climate standards with a view to IOSCO endorsing it as early as possible in 2022.?

The direction of travel is clear. The pace of change is ambitious – but it needs to be.?

I hope that this project is the start of a global collective effort to bring greater comparability, consistency and efficiency to climate risk disclosure and other sustainability related topics. Our world needs to work on this together and fast!

Note: The views and opinions expressed in this article are those of the author.