Investment community embraces UK move to duplicate ISSB standards: ‘right direction’

Key players in the world of sustainability reporting standards and the wider investment community have responded overwhelmingly positive to the announcement by the UK government to largely duplicate the framework of the  International Sustainability Standards Board (ISSB).

Britain's upcoming corporate disclosure scheme - the Sustainability Disclosure Standards (SDS) - will be underpinned by the reporting principles of the ISSB, the UK Department for Business and Trade confirmed this week.

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.

Ian Hagg, director of responsible business at City law firm DLA Piper, called the endorsement of the ISSB by the UK "extremely encouraging".

He told Net Zero Investor that it "has the potential to align major securities exchanges and therefore capital markets, internationally."

Hagg stressed that "this is especially timely, forming a component of the developing package of measures being implemented by the UK to restore its competitive position as an internationally desirable venue for businesses of all sizes and flavours." 

The SDS will be a disclosure scheme covering sustainability-related risks and opportunities that companies face.

The British government stressed any “UK endorsed standards will only divert from the global (ISSB) baseline if absolutely necessary for UK specific matters.”

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The UK's move to follow the ISSB's approach has also been welcomed by Mark Babington, the executive director of regulatory standards at the Financial Reporting Council, the watchdog responsible for regulating auditors, accountants and actuaries, and setting the UK's Corporate Governance and Stewardship Codes.

However, Babington did warn: "There is a process which needs to be followed."

"We're working with the government and other regulators to basically develop a mechanism to endorse the use of the ISSB in the UK," he told Net Zero Investor.

Babington pointed out that the government will still need to consider which companies they want to report using the standards.

Global approach

Using the ISSB norms will make UK company disclosures comparable for investors globally, the UK government clarified.

"The disclosures required by these standards will help investors to compare information between companies, thereby aiding decision-making; supporting the efficient allocation of capital, and smooth running of the UK’s capital markets," it added.

Hagg said in agreement that that "climate disclosures which are authentic, respected, and comparable will be a key facilitator of capital flows which are a necessary element of any sustainable and resilient economic recovery."

"Such disclosures, specific to individual companies, based upon investment-grade sustainability data and KPIs, should eventually align them with rigour of financial returns, making sustainability disclosures a core business requirement."

To assist with implementing the ISSB’s first two standards, IFRS S1 and IFRS S2, within the upcoming SDS, the UK government has established two committees, the Sustainability Disclosure Technical Advisory Committee, and the Sustainability Disclosure Policy and Implementation Committee (PIC).

PIC’s membership consists of UK government departments and regulators, including the Bank of England, the Department for Energy Security and Net Zero, the Department for Environment, Food and Rural Affairs, and the Financial Conduct Authority (FCA).

Any decisions to make the ISSB-based disclosures mandatory for companies would be taken separately by the government and the FCA.

'Right direction'

Using ISSB norms will make UK company disclosures comparable for investors globally, the UK government clarified.

"The disclosures required by these standards will help investors to compare information between companies, thereby aiding decision-making; supporting the efficient allocation of capital, and smooth running of the UK’s capital markets," it added.

Alexis Normand, chief executive of carbon accounting firm Greenly, said that “UK adoption of these standards is a significant step in the right direction when it comes to consolidating the fragmented landscape of disclosure frameworks globally."

He added: “Whilst decisions over whether or how to enforce the rules will become clear in time, widespread adoption of these standards improves the quality of information that market participants have access to and would provide investors with valuable information that will help them decide where to allocate capital."

"Just like financial reporting, reporting on sustainability issues will be taken into consideration when making resource-allocation decisions.”

ISSB

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.

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Also responding to this week's UK announcement, City insider and sustainability lawyer Alex Tamlyn told Net Zero Investor "at least there will now be a clearly defined set of rules which define the investor game."

He added "currently, the pursuit of decision-useful climate disclosures is greatly hampered by the lack of a common global standard for the disclosures themselves."

"Consequently, it is hard to make like-for like comparisons between bona fide disclosures of companies which might regard each other as members of a peer group, because of similar size, industry sector and geography,"

Tamlyn concluded that "the impact of those rules on the governance of climate risk and the obligation to map climate impact over short-, medium- and long-term timescales will enable business leaders to understand the impact of climate risk and opportunity in relation to their business and to formulate the strategy of their climate response in a more relevant and authoritative manner."

Priorities

Meanwhile, regarding the ISSB standards gaining momentum, vice chair Sue Lloyd told Net Zero Investor recently that there are "four priority areas" for the ISSB this year: biodiversity, ecosystems and ecosystem services, human capital, human rights and "a project to move forward integrated reporting, bringing together the financial statements and the sustainability reporting more closely."

She said that "we will be working directly in collaboration with others on capacity building around the world."

Lloyed stressed that there is a lot of education and training required for companies, for regulators, audit firms and investors to prepare and use the information that will be required by the ISSB.

"So, there's a lot of need for learning and training across markets to get us all on the journey we're about to embark on!"

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