Environmental, social and governance (ESG) accounting has been fragmented for years as reporting initiatives sought to converge on a harmonised landscape for sustainability disclosures.

After a number of major announcements on new establishments, collaborations and mergers in the sustainability reporting arena in 2021, the momentum has continued as plans are turning into action.

The most notable signs of breakthrough came with open consultations on sustainability disclosure standards by the International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board (ISSB), the European Financial Reporting Advisory Group (EFRAG), and the US Securities Exchange Commission (SEC) in recent months.

While the three proposals all base their rules in part under the Task Force on Climate-related Financial Disclosures (TCFD) framework, there are areas in which the  proposals diverge, creating challenges for businesses to structure disclosures to meet the demands of both global investors and jurisdictional requirements.

In this article, we take a look at the three proposals and the prospects for consensus as worldwide discussions continue.

1: ISSB’s Proposed Standards

Established at the 26^th United Nations Climate Change Conference (COP26) in November 2021, the ISSB published two draft standards in March 2022 that focus on climate-related and general sustainability disclosures.

One of the main distinctions between the ISSB standards and the proposals issued by the SEC and EFRAG is that it draws on sector-specific guidance for disclosures. 

CLP Holdings submitted a response to the consultation after consulting various chambers of commerce, industry organisations and professional bodies. In response to the ISSB’s approach on materiality, CLP recommended that the ISSB require entities to take a “comply or explain” approach to the disclosures for key cross-industry sustainability topics. CLP also proposed the ISSB provide practical guidance to facilitate companies in assessing and valuating the financial implications of their significant sustainability and climate-related risks and opportunities.

Following analysis of feedback from the consultation, the ISSB announced at the end of 2022 that they will be making the disclosure of Scope 1, Scope 2 and Scope 3 greenhouse gas emissions and the use of climate-related scenario analysis mandatory for companies reporting under the ISSB standards. 

To support implementation, the ISSB will develop relief provisions, including additional time for Scope 3 disclosures and TCFD-based guidance to support companies in undertaking scenario analysis. 

Furthermore, the ISSB will also be developing a digital taxonomy to enable digital reporting and enhancing the Sustainability Accounting Standards Board (SASB) standards to make them more internationally applicable.

Meanwhile, the Global Reporting Initiative (GRI) has also established a collaboration agreement with the ISSB. The collaboration would include initiatives such as mapping and comparison exercises for the GRI and the ISSB to identify and establish a scope for disclosure alignment, as well as an examination of future priorities to maximise joint standard-setting and guidance development activities.

Combined with its previous work in consolidating the technical expertise, content, and resources of key standard setters in the reporting arena, the ISSB is gaining traction globally.

The UK government has signaled its intent to adopt the ISSB’s standards as part of future sustainability reporting requirements. In Hong Kong, meanwhile, the Securities and Futures Commission and the Hong Kong Exchanges and Clearing Limited are evaluating a climate-first approach to implement the ISSB standards for Hong Kong-listed companies. 

2: EFRAG’s Draft European Sustainability Reporting Standards

The EFRAG held a public consultation on its first set of draft European Sustainability Reporting Standards (ESRS) in 2022 and found most respondents stressed the importance of interoperability between the ESRS and the ISSB standards to avoid double reporting, particularly in relation to the definition of greenhouse gas emission reduction targets, transition plans, and the use of offsets. 

A number of respondents also called on the EFRAG to provide clearer definition and guidance on double materiality, specifically on how impact materiality should be assessed and how financial materiality should be aligned with the ISSB definition.

In November, the EFRAG submitted its final draft ESRS to the European Commission, which will consult EU bodies and Member States. The final standards are planned to be adopted as delegated acts in June 2023, followed by scrutiny by the European Parliament and Council. The reporting requirements will then be phased in over time for different kinds of companies, starting from financial year 2024 for reports published in 2025. 

3: SEC’s proposed climate change disclosure rules

The SEC proposed new rules in March that would mandate domestic registrants and foreign private issuers to disclose extensive climate-related information in their registration statements and periodic reports.

The SEC’s consultation closed in June with most respondents saying the proposal lacked specificity on what is considered as climate-related and critical for disclosure, and that it appeared to be too divergent from current, materiality-based disclosure initiatives.

Some respondents also raised concerns about the insufficient science and methodologies behind quantitative climate-related disclosures, including Scope 3 emissions, and expressed their endorsement of phased-in disclosures and the creation of safe harbors to reduce liability risks. 

The art of compromise

Effective coordination and alignment of the work of the ISSB and parallel initiatives in major jurisdictions is crucial for the journey to achieve consistent, comparable and high-quality sustainability disclosures. For this reason, a number of prominent global financial regulators, including the SEC and EFRAG, have agreed to join a working group focused on compatibility between the ISSB’s standards and jurisdictional initiatives.

At the recent COP27 climate change conference in Egypt, the ISSB also announced its new Partnership Framework with more than 20 global public and private organisations, including climate-disclosure non-profit charity CDP, GRI, the UN Department of Economic and Social Affairs, and the UN Development Programme. The framework is designed for capacity building in developing and emerging economies for the adoption of ISSB standards.

CDP also announced at the conference that it will incorporate the ISSB’s climate-related disclosure standard, currently being finalised, into its global environmental disclosure platform. This aims to help provide investors with consistent climate-related information and reduce the reporting burden on entities through an alignment of requirements.

For businesses, it is understandable that the maturity in the adoption of sustainability strategies and disclosures differ between companies, making it more challenging for some than others.

However, considering the rapid evolution of the sustainability reporting landscape, early involvement in and preparation for standards like the ISSB and EFRAG, where applicable, would help companies develop reporting readiness when such standards are widely recognised and adopted.