Understanding the International Sustainability Standards Board's (ISSB) New Sustainability Disclosure Standards

?In recent times, sustainability has become a crucial consideration for businesses and investors alike. The impact of climate change and other environmental and social issues is becoming more apparent, and stakeholders demand greater transparency regarding corporate sustainability efforts. To address this need, the International Sustainability Standards Board (ISSB) has published its first set of sustainability disclosure standards. This article explores the key aspects of these standards and their potential implications for the alternative asset management industry.?

IFRS S1: A Comprehensive Disclosure Framework?

The ISSB's IFRS S1 standard sets the foundation for sustainability reporting. It mandates reporting entities to disclose information about all sustainability-related risks and opportunities that could reasonably affect the entity's cash flows, access to finance, or cost of capital over the short, medium, or long term. This expansive "financial materiality" test covers aspects beyond financial data, including the entity's value chain, ensuring a comprehensive approach to sustainability reporting.?

Themes for Disclosures: Governance, Strategy, Risk Management, Metrics, and Targets?

The general standard, IFRS S1, organizes sustainability disclosures into four key themes:

1. Governance: This theme addresses the governance structures and processes that ensure effective oversight and implementation of sustainability strategies within the organization.
2. Strategy: Here, companies outline their approach to sustainability, including their goals, targets, and plans to achieve them.
3. Risk Management: This theme focuses on identifying and managing sustainability-related risks that may impact the organization's performance and reputation.
4. Metrics and Targets: Companies are required to provide quantifiable metrics and specific targets that measure their sustainability performance and progress towards achieving their objectives.?

Collaborative Reporting and Metric Selection?

IFRS S1 encourages reporting entities to look beyond the standards themselves for reporting specific matters. Companies can utilize metrics developed by other organizations when specific IFRS standards do not yet exist, fostering a collaborative approach to sustainability reporting.?

IFRS S2: Climate-Specific Standard for Comprehensive Climate Reporting?

In addition to the general standard, the ISSB has introduced IFRS S2, which is specifically focused on climate-related reporting. These standard addresses both physical and transition risks associated with climate change, along with potential climate-related opportunities.?

Scope 1, 2, and 3 Greenhouse Gas Emissions Reporting?

IFRS S2 requires companies to disclose Scope 1, 2, and 3 greenhouse gas emissions, encompassing not only emissions from their direct operations (Scope 1) but also those from purchased electricity (Scope 2) and supply chains (Scope 3). Additionally, the standard mandates reporting of financed emissions for entities involved in asset management, commercial banking, or insurance.?

Global Adoption and Implications for the Industry?

The ISSB aims to provide useful and comparable data to aid investor decision-making, positioning these sustainability disclosure standards as the "global baseline" for reporting. The potential adoption by national regulators, including in the UK, could make these standards mandatory for a wide range of companies.?

Interoperability with the EU's Corporate Sustainability Reporting Directive (CSRD)?

For companies reporting under the EU's CSRD, the ISSB has collaborated with EU standard-setters to ensure "interoperability" with IFRS standards. However, differences exist, notably, the EU's "double materiality" threshold, which requires considering both financial materiality and impact materiality.?

Preparing for Sustainability Reporting

Many alternative asset managers, especially those regulated in the UK, are already gearing up to issue sustainability reports in line with TCFD recommendations. For large private companies, similar reporting requirements may also apply. Considering the potential future mandatory adoption of ISSB standards, it is prudent for companies to start integrating sustainability reporting into their processes.?

The ISSB's new sustainability disclosure standards mark a significant step forward in enhancing the rigour and comparability of sustainability reporting. As investors increasingly prioritize sustainability considerations, companies need to embrace these standards to demonstrate their commitment to responsible business practices and secure a competitive edge.

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