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The deadline to comment on the ISSB’s initial proposed sustainability disclosure standards has now passed. ICAEW has submitted its detailed assessments of the two Exposure Drafts and has set out what it believes to be the mission critical matters the ISSB should focus on in the coming months.

The IFRS Foundation has received wide support in assuming an international standard setting role for sustainability-related information through the new International Sustainability Standards Board (ISSB). This broad support extends to the publication of the two recent exposure drafts, on general sustainability-related disclosures and climate-related disclosures. ICAEW, along with many other organisations and individuals, want these standards to be successful – and to that end ICAEW has analysed the proposals in detail and set out below the matters which it believes to be “mission critical”.

Substantial improvements to clarity

Clarity is a prerequisite for the effective implementation of reporting standards and for the information produced to be audited and enforced effectively. The proposals require disclosure of information about “significant sustainability-related risks and opportunities that is useful… when assessing enterprise value” but do not define “significant” or “sustainability-related”. In other cases, with key terms such as “enterprise value” and “value chain”, the definitions provided raise more questions than answers.

ICAEW believe that it is crucial that these and other key terms are very clearly and consistently defined to avoid any confusion and to ensure consistent application around the world. In ICAEW’s view, the lack of clarity over the meaning of these critical terms will be an issue for reporting entities as well as assurance providers and regulators.

Clarity is not only an issue when it comes to specific definitions but also regarding the way in which the standards are intended to be applied. ICAEW understands that topic-based standards will only be applicable to entities that have identified a significant risk or opportunity within that topic, however this is not explicit within the current drafts. This leaves lingering uncertainty for users of the standards as to what is required if they have not identified any specific risks or opportunities that fall under a given topic-based standard.

When it comes to specific requirements within the proposals, it is often unclear which requirements are subject to management’s judgement regarding their significance (ie, likely to affect assessments of enterprise value), which are subject to materiality assessments, and which are mandatory regardless. Removing this ambiguity must be a high priority for the ISSB when finalising the standards.

Re-think the industry-based requirements

ICAEW are of the firm view that the extensive, mandatory industry-based requirements (Appendix B) are not of sufficient quality to form an integral part of the Climate-related Disclosures Standard.

There is no doubt that industry-based metrics are highly valued by investors, and the proposed appendix – or rather the Sustainability Accounting Standards Board (SASB) Standards it encompasses

has been subject to a rigorous due process prior to being included in the exposure draft. But the material has not previously been subject to IFRS Foundation due process in the context of a global standard. The appendix is some 640+ pages long! ICAEW believe that the 120-day consultation period is simply not enough time for respondents to properly review the material it encompasses.

Putting the issue of inadequate due process to one side, there are other fundamental concerns regarding the industry-based requirements, as drafted:

  • Inappropriate for legislation: there are extensive links throughout Appendix B to external sources, which mean the document is not remotely self-contained.
  • US focused: further work is needed to improve the international applicability and relevance of the appendix.
  • Poor structure: it is currently difficult to understand how these requirements fit with the main body of the standard and/or where there may be duplication.
  • Not just climate: although the standard is intended to be climate-related, the appendix contains requirements that relate to topics other than climate.

ICAEW recommend addressing the issues above as a matter of priority and reassigning Appendix B as non-mandatory guidance. ICAEW understand and appreciate the importance of industry-based metrics to investors and other primary users and are supportive of an ambition to mandate appropriate industry-based requirements at an early future date.

Allowing for a compliance “journey”

Implementing the ISSB’s proposals will no doubt be a big challenge for many businesses, assurance providers and regulators. But just because it is a challenge, it does not mean that we shouldn’t rise to it!

To that end, ICAEW hopes that the ISSB and local regulators accept that reporting under its framework should be seen as a journey – a journey on which larger corporates in more advanced jurisdictions are well on their way, but smaller entities may not have even started.

As part of ICAEW’s comment letters, a suggestion is put forward for an approach that the ISSB could consider when finalising the standards. This categorises the disclosure requirements into three “buckets”:

  • Core disclosures: disclosures that are considered urgent and should be made by all companies in scope when the standards first become effective;
  • Additional disclosures: disclosures that should be added over time, with all companies in scope required to disclose them at a later date; and
  • Supplementary disclosures: any disclosures that are considered desirable but not mandatory.

This approach would enable some jurisdictions to adopt the ISSB’s Standards and allow reporting entities to begin their journey towards full compliance at an earlier date than might otherwise be possible. This, in turn, should help to facilitate the widespread global adoption that is critical to the success of this project.

Responses from others - such as the UK Financial Reporting Council - propose similar approaches, with “phasing” of some kind a common suggestion.

Undoubtedly, there will be jurisdictional solutions to the issue of company preparedness, but ICAEW believe that the ISSB have an important role to play in supporting entities, assurance providers and regulators with the steep learning curve ahead.

Further information

ICAEW's full response