IFRS announce new ESG reporting standard

The IFRS Foundation formally announced the creation of the International Sustainability Standards Board ‘ISSB’ this morning, which will sit parallel to the International Accounting Standards Board under the IFRS Foundation. This is the most significant development in ESG Reporting for some time and is a major step towards convergence of the currently fragmented reporting landscape.

Whilst the ISSB’s creation was fully expected the IFRS Foundation also announced it will consolidate the Value Reporting Foundation (itself newly formed following the merger of the Sustainability Accounting Standards Board ‘SASB’ and Integrated Reporting Framework) and the Climate Disclosure Standards Board.

The merger of these existing standard setters to form the ISSB provides some idea of the direction of travel for future standards. The IFRS Foundation had already indicated that it would build on the work of the Task Force on Climate Related Disclosures ‘TCFD’ when developing it’s first climate standard. TCFD is very investor focused, seeking to provide investors with information on which to base decisions. SASB is one of the most popular ESG reporting standards, is much broader than just climate and has specific guidance for 77 sectors. This announcement implies that the ISSB standards (which will start with climate then broaden out to other ESG areas) will focus on disclosures that are material to investors.

This is in contrast to announcements already made by the European Financial Reporting Advisory Group ‘EFRAG’, who are developing their own sustainability standards expected to become mandatory for c.50,000 companies across the European Union. EFRAG have already stated they will take a double materiality approach which not only considers what is material to investors but the material impact a company has on the environment and society.

The Global Reporting Initiative ‘GRI’, which is the most popular ESG reporting standard globally, has publicly stated they will work with the ISSB and EFRAG in the development of their respective standards. Though notably GRI’s approach to materiality goes beyond what is financially material to investors so perhaps better aligns with EFRAG’s approach.

On Thursday 4 November at 17:30 GMT a key EU side event to watch out for is “EU Sustainability Reporting Standards and the future of sustainability reporting”. This event hosts EFRAG, IFRS and the GRI so will be very revealing on convergence. Will the ISSB and EFRAG move in different directions, will there be convergence between the two or are we looking at reducing several ESG reporting standards down to just two?