ISSB Standards: The New Language for Climate Risk Reporting and the Promise of IRM
The International Sustainability Standards Board (ISSB) has recently announced its first set of global sustainability-related disclosure standards, marking a significant development in sustainable investing. Established at the COP26 UN Climate Summit in Glasgow, the ISSB has introduced the IFRS S1 and S2 standards as a common language for disclosing the impact of climate-related risks and opportunities on a company's prospects.
Integrating Climate Risk Data into Corporate Financial Reports
These new standards are considered a "frontier-crossing" release to facilitate better-informed green investment decisions. Emmanuel Faber, chair of the ISSB and former CEO of French food brand giant Danone, noted that these standards are not just a suite of ESG metrics or disclosures. They provide "a comprehensive language, which is deemed consistent, verifiable, and therefore, decision-useful".
According to John A. Wheeler, a leading expert in Integrated Risk Management and founder and CEO of Wheelhouse Advisors, this development has profound implications for sustainable investing.
"Today's announcement by the ISSB marks a turning point in how organizations report and manage climate-related risks. With a global baseline for sustainability disclosures, investors and other stakeholders now understand how companies manage their climate impact. At Wheelhouse Advisors, we recognize the value of these new standards in providing a structured, comprehensive, and integrated approach to risk management. We are committed to helping our clients navigate this new landscape, align their risk management strategies with these global standards, and turn these climate risks into opportunities," Wheeler said.
The New Standards: Bridging the Gap between Financial Statements and Sustainability Reporting
The newly released ISSB standards – IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures – go beyond traditional ESG metrics. IFRS S1 provides a set of requirements for companies to use alongside their financial statements to share forward-looking, sustainability-related risks and opportunities over the short, medium, and long term. IFRS S2, on the other hand, guides reporting on corporate risks associated with climate change impacts and the net zero transition.
“The ISSB standards introduce a fresh approach to sustainability reporting that recognizes the interdependencies between financial and non-financial risks. ”
These standards aim to "connect the dots with financial statements” and encourage companies to express the risks and opportunities relating to their entire value chain. Furthermore, they emphasize the forward-looking nature of these standards due to the requirement that firms disclose "the current and anticipated effects of sustainability risks and opportunities on financial statements and the company's prospects".
A Global Baseline Standard: Responses and Next Steps
The unveiling of the ISSB's new sustainability standards has been widely welcomed by governments, financial regulators, and businesses. The UK government, for instance, indicated that it could integrate the ISSB's recommendations into UK policy and regulations.
Baroness Penn, a Treasury Minister responsible for ESG, reiterated the importance of global standards and interoperability. She emphasized their role in "minimizing the costs to firms operating across multiple jurisdictions, and crucially providing investors with comparable and consistent information to inform capital allocation".
With the aim of supporting adoption, the ISSB announced it would create a Transition Implementation Group to assist companies that apply the Standards and initiate capacity-building initiatives to support effective implementation.
Steve Varley, global vice chair for sustainability at consulting giant EY, highlighted the freedom these standards offer from ambiguity and how they enable businesses and investors to go further, faster.
The Role of Integrated Risk Management in Navigating the New Standards
As the ISSB standards begin to shape the corporate reporting landscape, companies must harness the power of Integrated Risk Management (IRM) to navigate this new terrain successfully.
John A. Wheeler of Wheelhouse Advisors emphasized IRM's key role in this evolving landscape.
"The ISSB standards introduce a fresh approach to sustainability reporting that recognizes the interdependencies between financial and non-financial risks. Companies must realize that managing these risks in silos is no longer an option. A comprehensive IRM strategy ensures a holistic understanding of risk across the organization. It helps make strategic decisions that align with sustainability goals and the expectations of a wide range of stakeholders."
The introduction of the ISSB standards represents a significant leap forward in standardized, global sustainability disclosures. However, this new language also brings new challenges, making the role of an integrated risk management approach even more vital.
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