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How will the new international sustainability standards take effect?

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While the International Sustainability Standards Board's (ISSB) new reporting standards may seem remote to some, Peter Ellington argues that businesses of all sizes should prepare for the incoming sustainability changes.

12th Jul 2023
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The new sustainability standards mark a significant milestone in how the world responds to sustainability issues that will eventually affect us all.

In a world grappling with complex sustainability challenges, from climate change to human rights, our collective institutional response mirrors the multi-layered construct of an onion. Each layer, from supranational entities to individual organisations, is critical in shaping global sustainability actions and standards.

Where the ISSB standards fit

In response to these challenges, the International Sustainability Standards Board (ISSB) has recently introduced new reporting standards within a layered framework.

These new standards are designed to integrate with the broader global response to sustainability and influence actions at various levels - from the broad strokes of supranational initiatives, down to the granular strategies of large businesses and SMEs.

Supranational

The outermost layer of our onion represents the supranational response to the sustainability crisis. This level includes initiatives like the United Nations Sustainable Development Goals (UNSDGs), the Task Force on Climate-related Financial Disclosures (TCFD), the Global Reporting Initiative (GRI) and the Task Force on Nature-related Disclosures (TNFD).

The UNSDGs consist of 17 Sustainable Development Goals addressing challenges like poverty, inequality, climate change, and environmental degradation; 

  • The TCFD develops voluntary, consistent climate-related financial risk disclosures for companies;
  •  The GRI assists businesses and governments in understanding and communicating sustainability impacts and issues and;
  •  The TNFD focuses on how businesses are responding loss of nature.

The ISSB Sustainability Standards operate at this supranational level. The IFRS S1 establishes a global baseline for finance, requiring companies to disclose significant sustainability-related risks and opportunities, thus providing investors with essential data for informed decision-making.

Material issues must now be classified into short, medium, and long-term financial outcomes. It binds financial statements (IFRS Accounting Standards) and sustainability reports, ensuring holistic reporting. Furthermore, it offers detailed implementation guidance on an industry-by-industry basis. It focuses on information requirements that are material, proportionate and decision-useful. By providing standards at an international level, it avoids duplicate reporting for companies subject to multiple jurisdictional conditions.

IFRS S2 complements S1 by mandating specific climate-related disclosures. Focusing on climate-related issues provides a starting point for companies that can then phase into broader sustainability issues as new sustainability standards are set. The requirement to report on scope 3 supply chain emissions is significant, as all companies within a supply chain are included in calculating emissions. Carbon reporting will filter down from larger to smaller companies as carbon accounting matures.

Government-level

The next layer of the onion symbolises the response from governments and sectors/regulators. The ISSB standards significantly influence this level, especially for governments yet to embed sustainability into their laws and institutions.

In the UK, the government has committed to net zero by 2050, implementing change through bodies such as the Financial Conduct Authority (FCA), The Pensions Regulator (TPR), the Prudential Regulation Authority (PRA) and the Financial Reporting Council (FRC) to ensure that risks and opportunities associated with climate change and sustainability matters are addressed.

The government and these regulatory bodies transpose supranational standards, such as the ISSB standards, into laws and regulations, binding them at the national and sector levels. The FRC, for example, oversees accounting, auditing, and reporting standards, embedding sustainability into these areas. The ISSB standards provide consistency in language and policy to these bodies and endorse their work, giving leverage, consistency of language, policy actions and deadlines that bring change at the national level.

Professional bodies

Professional bodies, including the International Federation of Accountants (IFAC), as well as the FCA and FRC, are putting climate change and sustainability issues at the forefront of their work. 

Educating and influencing their members to prioritise sustainability and climate action, these bodies pressure professional firms to put sustainability and climate change high on their agenda, and promote their members' responses to fulfil their potential for tackling these issues.

The ISSB standards assert that the position of the accountancy bodies is to ensure that financial reporting remains relevant to the opportunities and risks that businesses face. Ensuring their members keep up with the developing world of sustainability is a significant challenge, however, embedding rules for reporting sustainability issues into standards is a methodology that the membership respects.  

Organisations

The innermost layer of the onion represents individual organisations. Laws and regulations, sector-specific guidelines, and professional bodies directly influence them, so they must adapt their strategies and practices to comply with established sustainability standards.
 
At this level, businesses are already struggling with the day-to-day pressures of a challenging business environment, meaning that the ISSB’s work may seem disconnected from the issues they face. However, the standards trickle down into rules, incentives, consumer behaviours, and, more generally, how society reacts to the crisis. These issues will soon become tomorrow's challenges, and we can prepare for them by being aware of the ISSB standards.

The trickle-down effect

The sustainability and climate change issues are complex and the world's response has, so far, been slow and complicated. Yet, the onion-like structure of the ISSB’s new standards facilitates a coordinated, overarching approach to sustainability.
 
The standards that affect the highest echelons of business will eventually influence actions across all levels. For example, FRSC S2 requires large organisations to measure the scope 3 carbon emissions in their purchasing activity. This will lead to all businesses eventually having to report their carbon emissions to meet the purchasing requirements of their customers. 

While the standards may seem high-level and remote, they bring us closer to a future where sustainability is an integral part of our societies, economies and what we must account for.

Replies (2)

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By Hugo Fair
12th Jul 2023 22:12

Interesting ... can you tell us what exactly are the changes made (or even under consideration) at The Pensions Regulator?
Or, if you prefer, at the other UK bodies which you mention?

As always your intentions are clear (at the highest conceptual level) - but, whether it is written by you or the editors, I find it hard to take seriously the claim in the sub-title that:
"Peter Ellington argues that businesses of all sizes should prepare for the incoming sustainability changes."
All sizes? How and when for the typical SME, let alone sole trader?

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By listerramjet
13th Jul 2023 10:27

A lot of words in this. The summary is lots of cost for no reward.

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