1. General Overview
The International Sustainability Standards Board (ISSB) was created in 2021, during the 26th United Nations Climate Change Conference (COP26) held in Glasgow, by the International Financial Reporting Standards (IFRS) Foundation, which defines and manages the international accounting standards.
Currently led by Emmanuel Faber, the ISSB works closely with the European Financial Reporting Advisory Group (EFRAG (European Financial Reporting Advisory Group), which advises the European Commission on accounting issues and promotes the adoption of IFRS norms.
In 2023, the ISSB absorbed the Task Force on Climate-related Financial Disclosure (TCFD), which was created in 2015 after the G20 to enhance transparency in climate-related financial reporting. The TCFD publishes recommendations on disclosure, governance and actions to reduce the risks associated with climate change to improve market transparency and promote more informed financial decisions.
2. Typology of the framework
Date of creation: 2021
Framework type: Reporting & guidances on sustainability information disclosures
Targets: Entreprises, financial institutions
Number of users : not available
AUM: not available
3. Objectives of the framework
The primary objective of the ISSB is to define international disclosure norms for sustainable information, known as IFRS S, similar to how IFRS standards govern accounting practices.
In practice, investors and companies are called to align their sustainability and climate information disclosures with the ISSB standards, integrating them with their annual financial statements. To date, two norms have been published:
IFRS S1, which provides a comprehensive framework for companies to disclose sustainability-related risks and opportunities that could impact their financial performance. It aims to ensure consistent, comparable, and reliable sustainability disclosures across industries and regions;
IFRS S2, which focuses specifically on climate-related disclosures, requiring companies to report on how climate risks and opportunities might affect their financial statements. On that topic, the TCFD provided specific guidelines for financial institutions.
Together, these standards aim to integrate sustainability into financial reporting, improving transparency for investors and other stakeholders. Additional standards, such as IFRS S3 and S4, are currently in development and will be released in the coming months/years. .
It is important to highlight that ISSB standards support the financial materiality approach, which involves disclosing sustainability-related risks and opportunities that could have a direct impact on a company's financial performance. It is less stringent than the double materiality approach (used in the EU), which considers both the impact of sustainability issues on a company's financial performance as well as the company's impact on the environment and society not integrated in ISSB standard.
4. Implication for investors and their portfolios
For Limited Partners
As the ISSB defines internationally-recognized standards, it offers improved transparency and comparability in sustainability reporting, helping them assess climate risks and opportunities more accurately across their investments. They will be able to make enlightened investment decisions, identifying who are the best-in-class General Partners across the world.
For General Partners
GPs can leverage clearer guidelines for disclosing sustainability and climate-related risks to:
Answer more effectively LPs’ increasing requests on their climate and carbon performance. In particular, ISSB-2 suggests company publish:
Their carbon footprint on scope 1, 2 and 3, computed based on the GHG Protocol;
Decarbonization targets;
Information about climate risk governance and strategies to mitigate these risks.
Enhance their ability to attract capital from climate-conscious LPs, by demonstrating their commitment to sustainability;
Manage their portfolio’s risks more effectively, identifying the best assets and avoiding the stranded ones.
For portfolio companies
Compliance with the ISSB standards may involve additional reporting requirements (carbon footprint, decarbonization ambitions, climate risk assessment and mitigation strategies among other) and thus efforts to be implemented for data collection. However, it can also make companies more appealing to investors by demonstrating a commitment to responsible investments. This focus on sustainability could lead to better access to capital and potentially lower financing costs.
5. Carbometrix’s Opinion
Carbometrix likely views the ISSB standards as a positive step towards harmonising sustainability reporting. The integration of existing frameworks (e.g., SASB, TCFD) into a comprehensive global standard can streamline disclosures, reduce reporting burdens, and enhance transparency.
However, while the definition of these standards and their aim to become the internal norm are worthwhile, they suffer from their lack of ambition by using the financial materiality approach, which is certainly less restrictive but less complete than double materiality one.
Finally, to become the international standard for climate and sustainability reporting, the ISSB standards will need to face a major challenge: adoption. Indeed, to date, reporting using IFRS S Standards is made on a voluntary basis, and the initial effort required for data collection and reporting might pose challenges for companies (particularly for the small ones). Additionally, several regions in the world have already adopted climate reporting standards that they already use. It is the case in the EU, where climate reporting standards are more stringent, with the use of the double materiality approach. Should the ISSB promote double materiality, it would at the same time have much more impact on decarbonization and align with Europe who is undoubtedly a front runner on climate regulation.