Breaking Down International Sustainability Reporting Standards

Through the new International Sustainability Standards Board (ISSB) sustainability disclosures standards, there has been a promise of “a new global baseline” for ESG reporting for capital markets worldwide. ISSB has made the final decisions on the technical content of its inaugural corporate sustainability reporting standards, set to be released by June this year and become effective starting January 2024. But how can that be the case when the EU is developing their own regulatory standards? ISSB claims collaboration with the new standards and explicitly states that the new standards will refer to the EU standards, but there are fundamental differences in the purpose and intention of each set of frameworks. So, let’s break it down.

The EU’s approach toward sustainability reporting

While global sustainability reporting standards are under development to provide investors with more information about companies’ sustainability-related risks and opportunities, the EU is fueled by the ambition to become a front-runner in global sustainability reporting standards and adopted the Corporate Sustainability Reporting Directive (CSRD) in November 2022. These rules require ESG reporting at a level never seen before.

These new obligations will capture an increased number of companies in the marketplace. Compared to about 11,700 companies covered by the current rules, an estimated 50,000 companies–including all large companies, listed companies (except listed micro-enterprises) and large companies not domiciled in the EU–will now have to report detailed information on sustainability matters, such as climate change mitigation and adaptation, human rights, and governance factors. The draft disclosures are ambitious and would have a significant impact on the scope, volume, and granularity of sustainability-related information to be collected and disclosed by companies.

The new EU’s reporting rules will be set out in the European Sustainability Reporting Standards (ESRSs) and will become mandatory, replacing any other reporting framework used in Europe (e.g., TCFD/SASB/GRI) once adopted around June 2023. The standards are currently being developed by EFRAG–an advisory body to the European Commission–working closely with the ISSB toward a shared objective to set up a global baseline and maximize interoperability of their ESG standards. However, there are some fundamental differences between the two frameworks.

ISSB’s global baseline

As part of its work to harmonize a fragmented disclosure landscape and provide a clear and globally consistent pathway for businesses, the ISSB is building off existing and widely used standards and frameworks. ISSB encapsulates the merging of SASB, CDSB, and IR, and also takes into account TCFD and WEF frameworks, though those also remain separate. The purpose of ISSB will be to report on industry-specific and financially-material metrics primarily for an investor audience. This is an evolution of SASB to become more global, with a building blocks approach where companies can add on more specific line items, such as jurisdiction or, if their industry does not require it, climate. ISSB plans to continue to release draft standards for other topics, such as Human Capital Management, that companies can add to their base standards, though these have not been released and there is currently no information on when we can expect exposure drafts.

The fundamental difference between ISSB and ESRS, and the EU approach to reporting in general, is the approach of single materiality versus double materiality. Where ISSB is only recommending standards that are financially material, the EU approach is to look at disclosing items that are relevant to the world/society and financially. This aligns more with GRI’s approach of having all companies report to the same standards.

To argue for ISSB, what is most important to investors is that they have decision-useful data across firms of the same industry to accurately compare financially-material information. However, this brings up questions of proportionality–how are smaller companies compared to larger ones, particularly if they do not have the same data available? And geography–how do companies in vastly different operating markets get compared?

EU vs. The World?

The EU is finalizing its work on Corporate Sustainability Reporting Directive through the creation of the ESRS—expected to be adopted by the European Commission as delegated acts later this year during the same time as the issuance of ISSB’s standards. Given that the content of the ISSB standards is now finalized, this joint work will focus on detailed terminology within the standards to be completed with the finalization of both sets of standards.

As the ESRS is rolled out, companies will have to see how stringent the regulations are. For companies under the scope of EU rules, this has caused significant concern about potential divergence and the need to compile multiple sustainability reports in different jurisdictions. As more countries adopt ESG regulation, there will need to be coordination not just with the voluntary disclosures like ISSB, but across geographies. Companies should also watch for ISSB’s jurisdiction-specific recommendations within their building-blocks approach, as this is likely where the overlap between ISSB and ESRS, and other reporting regulations will come into play.

As the earliest reporting for both frameworks will begin on 1 January 2024, many companies will essentially only have a few months to adjust. Companies need to be prepared to collect robust, auditable data, not just for the ESRS, but for the looming SEC rule as well as regulation in other geographies.