This article appears in the November issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
After publishing landmark climate disclosure standards this past summer that aim to end years of competing voluntary frameworks, the International Sustainability Standards Board (ISSB) is contemplating its future.
In June, the ISSB released two global reporting standards for public issuers. The aim is to ensure companies provide sustainability-related information alongside financial statements. The ISSB is targeting annual reporting periods after Jan. 1, 2024, for implementing the new standards.
With that initiative achieved, the ISSB consulted on its agenda for the next couple of years, attracting hundreds of submissions. Many of those responses recommended the ISSB focus first on facilitating the adoption and implementation of its initial standards before crafting standards for new areas or refining its initial standards.
“The highest and best use of ISSB resources is to support the implementation of [its first two standards] so that they can have a constructive impact on global capital markets,” said Scotia Global Asset Management’s submission to the consultation.
The International Organization of Securities Commissions (IOSCO) has endorsed the ISSB standards and many of the world’s securities regulators are likely to adopt them as a result. However, competing regulatory efforts and a growing backlash to ESG pose a risk to mandatory disclosures.
Toronto-based asset manager NEI Investments’ submission stated that despite global demand for mandatory ESG disclosure and growing consensus that these requirements should align with the ISSB standards, “it is not a given that this will actually happen, or that it will happen effectively.”
“The increasing resistance to sustainability-based investing, and more recently towards sustainability disclosure requirements, has led to broader concerns in the marketplace with respect to reporting presented by ISSB,” NEI said.
Alongside the ESG backlash, the ISSB standards must contend with competition from other global policy initiatives. The CFA Institute’s submission pointed to the European Sustainability Reporting Standards, which “have the effect of law for European companies, and for those companies doing business in Europe. The ISSB standards do not have the benefit of that legislative or regulatory mandate.”
Legally mandated reporting requirements will drive the data that firms collect and disclose, the CFA Institute said. In the meantime, “it’s not clear how the regulatory landscape will evolve,” even though IOSCO has endorsed the ISSB standards and regulators are consulting on their adoption.
The CFA Institute suggested the ISSB standards may have a tough time gaining traction, given they don’t yet represent a full set of sustainability standards.
At this point, the ISSB must define its mission, the CFA Institute said: “We believe the ISSB is more in need of a vision of what they want the ISSB to be in the future and a strategic roadmap on how they intend to get there rather than an agenda consultation on project priorities.”
This concern was echoed by the Chartered Professional Accountants of Canada (CPA Canada), which stated in its submission that, without a long-term vision, there may be reluctance to adopt the ISSB standards.
“The ISSB should communicate with as much specificity as possible what the ‘end game’ is for its work,” CPA Canada said, including insight into what the “full suite of ISSB topic-specific sustainability disclosure standards may encompass.”
The consultation also revealed a wide range of views on what the ISSB should prioritize beyond implementing its first two standards, although broadening its standards is a top priority for many.
For securities regulators worried about greenwashing, comprehensive standards are a key need.
The European Securities and Markets Authority said selective disclosure of material ESG impact is one of the causes of greenwashing. The regulator called on the ISSB to develop standards for ESG topics that aren’t covered in the initial standards “as soon as possible.”
The U.K.’s Financial Conduct Authority (FCA) recommended the ISSB work on standards governing nature-related risks — water and land use, pollution, resource consumption and the loss of biodiversity — before moving on to social risks, such as human rights and labour.
“Science and policy are aligned on the financial materiality of nature-related sustainability information. And a similar investor consensus to that which formed on climate change is crystallizing in the biodiversity space,” the FCA said.
To start, the regulator recommended building on the work of the U.K.-based Taskforce on Nature-related Financial Disclosures (TNFD), which published its final recommendations in September after two years of development.
The TNFD is an industry-led effort to develop recommendations for assessing and reporting the financial impact of risks to nature, modelled on a similar initiative that focused on climate risks (the Taskforce on Climate-Related Financial Disclosures, whose work formed the basis of the ISSB standards).
The FCA said the ISSB could quickly broaden its standards to capture nature-related risks as outlined by the TNFD, adding that beginning this process might push companies to voluntarily adopt the TNFD recommendations in the meantime.
However, other comments stated the ISSB should prioritize areas where less work has been done by others.
The submission from BMO Global Asset Management suggested the ISSB leave the topic of nature-related risks until the TNFD’s recommendations have been broadly adopted and allowed to mature. BMO GAM recommended the ISSB put social risks such as human rights and human capital issues first, including diversity, equity and inclusion, labour standards in the supply chain and worker well-being, which the asset manager linked to biodiversity and Indigenous rights.
Ontario pension giant OMERS also recommended prioritizing social risks, stressing the growing realization that workforce management can directly affect companies’ ability to generate value. While there have been some standards developed in this area, they are fragmented and generally limited to specific aspects of social risk or to certain regions.
OMERS recommended that the ISSB develop a standard that “serves to fill these gaps and provide investors with a global baseline for analyzing a company’s human capital management approach which would support investment decisions.”