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Standard setters highlight concerns in letter to ISSB

Author: ICAEW Insights

Published: 12 Oct 2023

National standard setters flag connectivity with accounting standards, the ISSB’s strategic roadmap and implementation priority as areas in particular need of attention.

A heavyweight consortium of national standard setters from around the world has written to the International Sustainability Standards Board (ISSB) voicing a string of concerns about international sustainability standards and their alignment with international financial reporting standards.

A letter to ISSB Chairman Emmanuel Faber highlights connectivity with accounting standards, the ISSB’s strategic roadmap and implementation priority as areas in particular need of attention. 

The letter is signed by senior representatives of the UK Endorsement Board (UKEB), the Canadian Accounting Standards Board (AcSB), the Malaysian Accounting Standards Board (MASB), the Australian Accounting Standards Board (AASB) and the New Zealand External Reporting Board (XRB) and cites excerpts from individual comment letters from these bodies to the ISSB’s consultation on Agenda Priorities.

Connectivity with accounting standards

On connectivity with accounting standards, the letter warns that close alignment and connectivity between financial and sustainability reporting is paramount to ensure that the information produced for investors is both compatible and comparable. 

However, the UKEB says feedback from UK stakeholders together with its own research highlights that they “do not consider that this is yet complete.” Last month it published two reports highlighting the scale of connectivity challenges.

The Climate-Related Matters: Summary of Connectivity Research provides an overview of recent third-party research into connectivity challenges between TCFD disclosures (a proxy for the disclosures required by IFRS S2) and the financial statements. Meanwhile, A Study in Connectivity: Analysis of 2022 UK Company Annual Reports provides a deep-dive analysis from an investor’s perspective of potential connectivity challenges and includes stakeholder feedback on possible causes.

The AASB calls on the ISSB to develop additional guidance on connectivity to better support comparability. Meanwhile the XRB warns that “relying on generic aspirations for ‘connectivity’ or ‘interoperability’ may undermine the credibility of the work of the ISSB”.

Strategic roadmap

Having issued their inaugural sustainability standards in June – IFRS S1 and IFRS S2 – the ISSB’s consultation over the summer sought to gain feedback on priorities for its next two-year work plan. 

The signatories, however, call on the ISSB to do a better job of communicating its long-term objectives, suggesting that looking beyond the time horizon of the next work plan would be beneficial. The letter cites the MASB, which highlighted that “a two-year plan sends signals to the market when currently what the market requires is a period of stability as it transitions to IFRS S1 and IFRS S2.” 

The AASB recommends that “the ISSB prioritise the development of an appropriate conceptual framework to guide its future standard-setting activities and develop a roadmap which explains and specifies what the long-term objectives of the ISSB and how that relates to the IFRS Foundation and IASB’s strategy, mission and objectives.”

Implementation priority

All signatories agree that the highest priority of the ISSB should be the successful implementation of the inaugural standards, with potential existential implications for the ISSB. “Without this as their primary focus, ISSB Disclosure Standards risk not being accepted as mandatory, losing much of the impetus for the establishment of the ISSB, and potentially mean that preparers fail to adequately engage with and implement the standards,” the letter warns.

The need to prioritise implementation of IFRS S1 and IFRS S2 was also voiced by ICAEW in its own response to the ISSB Agenda Consultation in August. In its response, ICAEW said achieving widespread global adoption of the initial standards could form an excellent foundation for growth and expansion into new topic areas. 

“Working to embed the requirements of IFRS S1 and IFRS S2 into reporting frameworks worldwide will work in the ISSB’s favour when moving on to produce a full suite of sustainability disclosure standards.”

ICAEW also called for the ISSB to work closely with the IASB on the Management Commentary project, which was paused after the establishment of the ISSB because of the clear crossover and potential interaction with the ISSB’s work. “In our view, it would be a missed opportunity if the ISSB does not collaborate closely with the IASB to complete this important project,” ICAEW warns.

Pauline Wallace, Chair of UKEB, says: “Investors want both sustainability and financial information to be high-quality, comparable, and decision-useful, with clear connectivity between them. It is paramount to provide investors with a clear understanding of the impact of sustainability on companies’ financial statements. It is striking how much consistency there is in the stakeholder feedback received by each of the individual standard setters.”

Sally Baker, Head of Corporate Reporting Strategy at ICAEW, comments: “We recognise the difficulties for the ISSB in prioritising future activities and projects as they are all important and worthwhile. In line with the views expressed in the letter however, we strongly encourage the ISSB to prioritise activity that supports the implementation and uptake of IFRS S1 and IFRS S2 above all else. We also share the view that it would be beneficial for the ISSB to set out a clear statement of intent regarding the development of future standards.”

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