Investors digest new reporting standards as ISSB principles rapidly gain momentum
The sustainability reporting landscape is consolidating, with the ISSB's green principles rapidly gaining momentum. What can investors expect?
The net zero investment landscape has evolved rapidly over recent years, with regulation and reporting standards striving to keep pace.
Aligning with a recognised reporting framework is crucial to increase transparency and provide a more detailed focus on relevant data and KPIs. That is why investors worldwide are generally enthusiastic about the International Sustainability Standards Board's (ISSB) inaugural ESG standards, as they are gradually gaining momentum with more and more countries confirming they plan to adopt or implement the principles.
For example, key players in the world of sustainability reporting standards and the wider investment community responded overwhelmingly positive to the announcement by the UK government to largely duplicate the ISSB framework.
Britain's upcoming corporate disclosure scheme - the Sustainability Disclosure Standards (SDS) - will be underpinned by the reporting principles of the ISSB. The announcement meant a major boost for the ISSB.
The SDS will use the ISSB framework as a baseline, with plans for the new regulation to be rolled out by July of next year.
The general consensus within the community is that ISSB's ESG standards offer several advantages. They establish a global set of sustainability disclosures, creating a common baseline for issuers of all sizes, sectors, or locations.
This uniformity in communication drives convergence with other reporting requirements and efficiencies in data capture across geographies.
It enables companies to deliver robust reporting efficiently and cost-effectively, particularly beneficial for businesses operating in multiple jurisdictions.
The ISSB standards also facilitate companies to "communicate their sustainability disclosures in a common language with their global investor base, enhancing transparency and enabling informed decision-making," according to Paul Woods, director of sustainability & ESG at UK-based Arrow Global, a European-focused alternative asset manager specialising in private credit and real estate.
"They also promote greater comparability between asset managers, encouraging them to improve their ESG strategy," Woods explained to Net Zero Investor.
"From a risk management perspective, the ISSB standards mandate companies to identify and report on sustainability-related and climate-related risks affecting their assets."
This ensures comprehensive risk management and, coupled with the increased transparency and comparability of ISSB disclosures, guides asset managers and investors on capital allocation, Woods continued, thereby reducing portfolio risk and boosting sustainable investment.
"This is pivotal in driving the change needed to meet the Paris Agreement's objectives."
Initially launched following the COP26 climate conference in Glasgow in 2021, the ISSB aims to develop standards for a global baseline of sustainability disclosures.
The framework enables companies to provide comprehensive sustainability information to global capital markets.
Last month, it was confirmed that the ISSB is to merge with the Task Force on Climate-Related Financial Disclosures (TCFD), considered a critical step forward in unifying the current climate disclosure maze, even though the decision was met with scepticism by some industry insiders.
Challenges and risks loom
However, the adoption of the ISSB's standards could still present potential challenges.
The global applicability of the ISSB's standards depends on individual countries and companies' willingness to implement them, which could be challenging due to varying regulatory landscapes and enforcement mechanisms.
The standards demand high transparency and detailed reporting, posing a challenge for companies lacking the necessary systems or processes.
"Meeting these requirements may necessitate investment in new technologies or processes, which could be costly and time-consuming," Woods pointed out.
"The introduction of the ISSB's standards could also lead to a polarisation of reporting frameworks, causing inconsistencies and complicating comparisons."
Despite these potential challenges, the ISSB's standards offer a streamlined, universal approach built upon existing standards via SASB and the International Financial Reporting Standards (IFRS) Foundation.
This increases credibility and complements other reporting frameworks, including those aimed at broader stakeholder groups or jurisdiction-specific ones.
"As a vertically integrated asset manager operating in five jurisdictions with 19 asset management platforms, I support calls from the likes of the PRI for global policymakers to make ISSB mandatory by 2025," Woods said.
"This will drive convergence with other reporting requirements and enhance efficiency for businesses operating in multiple jurisdictions."
The ISSB standards will enable the communication of sustainability disclosures in a common language with across a wide range of global investors, driving transparency and enabling informed decisions, he noted.
They will also promote greater comparability between asset managers, encouraging them to improve their ESG strategy and performance.
"The transparency requirements of ISSB mean there will be nowhere to hide – you will have to identify and report on sustainability-related and climate-related risks affecting assets," Woods stressed.
Many agree that reporting on sustainability and climate-related opportunities is equally important.
The increased transparency and comparability of ISSB disclosures will guide asset managers and investors on capital allocation, reducing risk and increasing sustainable investment.
"This will help drive the change needed to meet the Paris Agreement's goals. Despite the potential challenges, the ISSB's standards is another significant step forward in our sustainability journey," Woods concluded.