Dr Janice Denoncourt, Associate Professor at NLS https://www.ntu.ac.uk/staff-profiles/law/janice-denoncourt
With COP29 coming to a close, it is timely to reflect on the role of the International Sustainability Standards Board (ISSB) since its creation in November 2021 by the International Financial Reporting Standards (IFRS) Foundation at the United Nations Climate Change Conference (COP 26) in Glasgow.
The establishment of the ISSB was driven by society’s demand for greater transparency of entities’ carbon footprint. This ‘explainer’ will help to demystify the ISSB’s ambition to create a global baseline standard for sustainability reporting and cover certain progress made over the past 3 years.
Sustainability reporting is the practice of publishing information on an organisation’s environmental, social, and governance performance (ESG) in annual corporate reports. The information goes beyond financial metrics such as the balance sheet and profit and loss account, to reflect how the firm contributes toward sustainable development, environmental stewardship, and ethical governance practices. This type of information is sought by shareholders, investors, regulators, and other stakeholders who wish to learn more about the company’s approaches to addressing climate change, resource depletion, and social equity. In the UK, the new sustainability reporting rules apply to all companies that are required to provide an overview of their business in a strategic report, which will include an account of the principal risks and uncertainties facing the company. For these reasons, sustainability reporting has gained international prominence as it provides a legal framework to gain insights into a company’s ‘green’ credentials, sustainability risks and opportunities (non-financial information), and accountability.
However, it is important that such information is published in a consistent and comparable way by companies and avoids ‘greenwashing’. The rules and guidance promulgated by the ISSB assists companies as to how to do this effectively. In other words, the ISSB’s mission is to create a comprehensive global baseline of sustainability-related reporting standards, aimed at meeting the information needs of private and public stakeholders. This is a monumental change in the world of corporate annual reporting. The ISSB’s role is to provide clear and comparable metrics across industries and regions so as to bridge the gap between traditional financial reporting and sustainability narratives. Ultimately, our global community seeks to ensure companies align their financial objectives with their sustainability performance.
The first corporate sustainability reports have now been studied. The International Financial Reporting Standards (IFRS) Foundation report has found that a mere 2-3% of companies reported in line with all 11 recommended sustainability financial-related disclosures in the 2023 financial year. The evidence base was a survey of 3,814 public firms, with 82% disclosing on at least one ISSB sustainability metric, while 44% reported against at least five sustainability metrics. However, between October 2023 and March 2024 more than 1,000 public companies acknowledge the ISSB in their annual reporting, which shows a level of awareness of the scheme.
The underlying problem relating to finance
Companies of all sizes typically need of financing, which requires providing relevant information to the capital providers. Listing on stock markets is the most efficient form of financing, as the liquidity and high number of potential investors decreases the firms’ cost of capital. The problem with stock markets is that there are now high requirements for public disclosure of sustainability information which requires additional resources.
Emmanuel Faber, Chair of the ISSB stated, “Investors are still not receiving the information they need to assess and price appropriately climate and other sustainability-related risks and opportunities”. Further, he urges, “The introduction of sustainability-related disclosure requirements into regulatory frameworks through the adoption or other use of ISSB Standards…is of vital importance for the healthy functioning of capital markets around the world”.
In the UK the corporate sustainability reporting picture is less clear. The Financial Reporting Council’s (FRC) Executive Director of Regulatory Standards, Mark Babington, said:
“For many investors, sustainability related reporting is becoming an increasingly prevalent factor in their decisions to allocate capital and invest in UK companies. Independent assurance of this reporting is vital in ensuring trust and transparency in companies non-financial reporting”.
However, earlier in July the FRC’s revised corporate Stewardship Code has recently eased reporting demands.
In conclusion, according to the ISSB, significant and encouraging progress is being made, but it is slow. The ISSB urges countries to introduce jurisdictional initiatives and study the voluntary corporate reporting choices companies are making, often in response to investor demand. My legal research builds a shared understanding to address rising policy concerns regarding verification and reliability of green tech investment information. The path forward for sustainability reporting involves collaboration between the IFRS, the ISSB (standard-setters), regulators, businesses, their shareholders and prospective investors to refine the new legal requirements as more data emerges. This will help to ensure sustainability is further integrated in mainstream decision-making by corporate boards regarding their business activities and impacts locally, regionally, nationally, and internationally. The ISSB therefore plays a crucial role in how companies should measure, manage, and report, thereby promoting transparency, accountability, and corporate responsibility.
Further Reading
Denoncourt, J. ‘Corporate governance, ESG and sustainability: the underexplored role of ‘green’ trade marks’ (2024) In: Intangibles Accounting, Reporting and Valuation, Edward Elgar
Denoncourt, J. "Seeking and hiding: corporate disclosure norms, enhancing non-financial information transparency using the technology readiness level (TRL) system." (2023) Intellectual Property Rights in the Post Pandemic World. Edward Elgar Publishing, pp319-347.
FRC publishes emerging findings from sustainability assurance market study (15 October 2024) UK Financial Reporting Council, available at: https://www.frc.org.uk/news-and-events/news/2024/10/frc-publishes-emerging-findings-from-sustainability-assurance-market-study/
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