Just about one year ago, I wrote in these pages that the sustainability standards introduced by the International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board (ISSB) were quietly emerging as the de facto global benchmark for corporate sustainability reporting specifically in relation to climate related risks. In the 12 months since that article was published, almost everything the world thought it knew about the timescales and content of the wider corporate sustainability reporting regulations has changed or is in the process of changing. That is, except for the IFRS sustainability standards.
At last count, 36 jurisdictions around the globe have adopted these standards. Meanwhile, other climate-related reporting initiatives have become or are in the process of being sidetracked, simplified, or in some cases, completely fallen by the wayside. By tracking how this set of sustainability standards and best practices has gained widespread adoption, we can start to see what the future of corporate sustainability reporting may look like.
IFRS Sustainability Standards Snapshot
First, it’s important to understand exactly what the IFRS Sustainability standards are, and how they are being addressed today by large corporations. The IFRS Foundation’s ISSB was launched in November 2021 at the COP26 climate conference with the following four goals:
- to develop standards for a global baseline of sustainability disclosures;
- to meet the information needs of investors;
- to enable companies to provide comprehensive sustainability information to global capital markets; and
- to facilitate interoperability with disclosures that are jurisdiction-specific and/or aimed at broader stakeholder groups.
In June of 2023, the Board introduced its first two reporting standards, and beginning in January of this year, some leading companies around the world started disclosing critical sustainability information in their financial statements using the principles set out in these standards.
Market Forces vs. Regulation
From a timeline perspective, various other regulatory mandates were also being introduced in parallel during the same period, such as the EU Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD), and the U.S. Securities and Exchange Commission’s (SEC) Climate Disclosure Rules. However, there are some very big differences. Most notably, the IFRS standards have already been or are in the process of being, adopted by 36 jurisdictions, representing the lion’s share of global GDP. Meanwhile the CSRD and CSDDD have been held up in administrative review and delays and the U.S. Climate Disclosure Rules relating to the disclosure of climate-related risks and greenhouse gas emissions, have been permanently shelved. It is important to note that those 36 jurisdictions have intentionally chosen to adopt the IFRS S1 and S2 standards and implement them into their own legislative frameworks. It is to be assumed that these decisions are driven by belief in the benefits associated with the standardization, consistency, and transparency of investor focused risk-based information.
The IFRS standards, of course, are a little different from the sweeping regulatory reforms being discussed in the EU and U.S. For one, they aren’t subject to the same political pressures, and they are not laws in of themselves until implemented by jurisdictions as they see fit. But that doesn’t stop them from already having a major impact on corporate sustainability reporting. By focusing specifically on the financial impacts of climate-related risks and creating a set of reporting standards rooted in the language of balance sheet reporting, the IFRS succeeded in taking the emotion out of sustainability reporting. As a result, its central tenants were absorbed and acknowledged by the marketplace not as “woke” or “anti-competitive,” but as practical financially driven common sense. If, for example, a large, global manufacturer is facing potentially serious service disruptions in response to catastrophic weather events, its finance team will most likely be evaluating that as a material business risk. That’s not political; it’s actuarial.
By focusing on these concrete business risks and deftly linking climate-related variables to the corporate balance sheet, the IFRS succeeded in creating a sustainability reporting playbook that has now been adopted by not only a significant number of jurisdictions, but also by many of the world’s largest corporations. While the U.S. has not formally adopted the IFRS sustainability standards, it is important to note that the IFRS Foundation has a longstanding engagement and cooperation program in place with the Financial Accounting Standards Board (FASB), which is the authority for maintaining the Generally Accepted Accounting Principles (GAAP) in the U.S. Accordingly, it is no surprise that the standards are already becoming a consideration in reporting obligations for many U.S.-based multinational companies.
What’s Next?
Where does it all go from here? With the major corporate sustainability regulatory reforms from the EU and U.S. currently ongoing and with all of the uncertainty and potential fragmentation of regulation which may ensue, the IFRS is plowing ahead with its efforts to provide a basis for harmonized global sustainability reporting requirements for companies, which is still very much founded on the Taskforce for Climate Related Disclosure (TCFD) principles. The organization is also looking to expand its core areas of focus with regard to sustainability topics, to include biodiversity, ecosystems and ecosystem services and human capital. As per its work plan for 2024-2026 and as a direct result of listening to the markets and to the stakeholders, they are also currently working on enhancing decision-useful information for investors and companies by proposing a review of some of the priority Sustainability Accounting Standards Board (SASB) Industry Standards.
Along the way, businesses are gradually moving to disclose more detail than ever on the composition of their climate-related risks and opportunities. It’s just happening with a lot less noise and fanfare. Instead of the green-washed marketing messages announcing how responsibly some companies are behaving or the resultant backlash against all things environmental, social and governance (ESG), the finance and accounting departments are quietly doing their things—treating material sustainability related risks as they would inflation, market volatility or any other unknowns that could affect the fortunes of their companies. Expect that trend to continue as the IFRS gradually normalizes the treatment of corporate sustainability as a quantifiable financial risk.