Seen and Heard at GreenFin 22 - Spotlight on the ISSB

GreenFin 22: Can the ISSB Actually Fix ESG Standards?

From June 28-29 in New York City, GreenFin 22 convened leaders to discuss the world’s most pressing issues at the intersection of sustainability and finance. As one of the keynotes, I had the privilege of speaking with Aeisha Mastagni , a Portfolio Manager from CalSTRS, and Joel Makower , Chairman and Co-Founder of GreenBiz, to discuss the global standard setting landscape (click here to view the session).

What is the ISSB?

As the ESG investing marketplace has grown, so has the “alphabet soup” of sustainability standards that can be used for ESG reporting. To consolidate this fractured ecosystem, in 2021 the International Sustainability Standards Board (ISSB) was established to develop a global baseline for sustainability disclosures, provide investors with consistent and comparable ESG data, and enable companies to streamline their reporting efforts.

What’s notable about the ISSB is that it has not attempted to reinvent the ESG reporting wheel. Instead, it has integrated the standards developed by the industry-based Sustainability Accounting Standards Board (SASB) and the Taskforce on Climate-Related Financial Disclosures (TCFD), whose framework is focused on governance, strategy, risk management, as well as metrics and targets.

What are the implications of having a global standard setting body?

Against the backdrop of the consolidation of voluntary global standard setters under the ISSB, jurisdictions around the world are also shaping their own regulations for disclosures. In the US, the Securities and Exchange Commission (SEC) recently proposed rules to enhance and standardize climate-related disclosures for investors, with similar efforts underway in Europe and other parts of the world. Over the next several years, this will continue to be challenging and complex as voluntary standard setters are converging while local regulations multiply. Companies will have to navigate these two shifting layers of non-financial reporting, which will have different impacts depending on the location of their operations.?

“Over the next several years, standard setting will continue to be challenging and complex as voluntary standard setters are converging while local regulations multiply.” – Marc Siegel, EY’s ESG & Corporate Reporting Thought Leader?

How does the ISSB’s framework differ from the SEC’s proposal?

It’s important to recognize that the SEC’s proposal is solely focused on climate, while the ISSB’s mandate covers the broad ESG spectrum of issues. It’s S-1 proposal incorporates for consideration the industry-based disclosures that were created under SASB while the SEC proposal on climate disclosures do not have industry-based requirements. Another point of difference is the approach to Scope 3 emissions. The SEC’s proposal requires companies to disclose Scope 3 emissions only if material or part of a published corporate target or goal, whereas the ISSB’s exposure draft generally requires disclosure of Scope 1, 2, and 3 emissions. In addition to the ISSB and SEC proposals, the European Financial Reporting Advisory Group (EFRAG) has also issued a proposal that would require companies to provide certain climate-related disclosures. Learn more about the similarities and differences between all major proposals here .

What are investors looking for?

While not all investors approach their investment decisions similarly, the investor community has generally coalesced around requesting companies to report under both the SASB and the TCFD because these frameworks have been created to specifically target the investor audience, while frameworks such as the GRI are geared towards broader audiences.

According to Aeisha Mastagni , a Portfolio Manager at CalSTRS that manages a $300 billion California teachers’ pension fund, less than 60% of the portfolio companies they invest in disclose Scope 1 and Scope 2 emissions. As an investor in companies of all industries and sizes, this makes it difficult to navigate long-term risk.

What are companies doing to prepare?

Many companies are starting to prepare by asking finance teams to become more involved in managing the ESG data disclosed in non-financial reporting. Companies are also undergoing materiality or prioritization assessments, which allows them to hone in on the intersection between their business model and ESG, filtering out the ESG topics that aren’t relevant to their business.

What does the future of ESG reporting look like?

It’s likely that ESG reporting will take a similar path to financial reporting where there becomes a total of four dialects in the language of corporate reporting. In this scenario, companies disclose the financial metrics required under US GAAP, in addition to supplemental investor information on non-GAAP metrics and operational statistics, in order to provide context to the financial information. If ESG disclosures become mandatory, that might not mean that supplemental sustainability reporting will disappear. Companies will likely disclose the mandated ESG data in their regulatory filings while also providing context and a narrative through supplemental sustainability reporting. ?In short, the ESG reporting landscape is expected to continue to rapidly evolve in both the short and medium term.

Want to learn more? Watch the full discussion at GreenFin 22!

The views expressed above are not necessarily those of Ernst & Young LLP or other members of the global EY organization. The information is for educational purposes only and are not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.