To ISSB or not to ISSB? That is the question

What are the ISSB standards?

The International Sustainability Standards Board (ISSB) standards are built on existing and established frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB).  They are a milestone in efforts towards a global ‘baseline’ of sustainability disclosures, focused on the needs of investors and the financial market.

Why are they important?

The financial materiality of climate and sustainability is well acknowledged throughout the investment chain. Just as we recognise the need for this information to support investment decision-making, so too do our clients, as asset owners in their allocation of capital, and regulators in their supervision of financial markets. The quality of reporting to clients and regulators is highly dependent on having globally consistent standards on our investee companies’ disclosures – something ISSB adoption helps provide.

When it comes to investee companies, the varying standards, frameworks, and expectations on reporting sustainability related information can often be challenging to navigate and resource-intensive to comply with.  Consolidation of the disparate reporting landscape should, in our view, benefit not only investors but also companies.

What approach do the ISSB standards take to disclosure?

The ISSB’s ‘building block’ approach starts with a ‘baseline’ level of reporting, while allowing more mature markets to move beyond this, from financial materiality towards double materiality.  

A well-functioning financial system requires identification of and response to systemic, market-wide risks, including those such as climate change and nature loss. The contribution of all individual and economic actors to the underlying causes of such risks cannot be ignored if we are to mitigate them. Double materiality broadens the traditional view of materiality by considering not only how environmental, social, and governance issues impact a company financially, referred to as financial materiality, but also how the company’s operations impact the environment and society, known as impact materiality. This is why we also seek information that goes beyond financial materiality’s ‘outside-in’ view, towards an ‘inside-out’ view of companies’ impact on climate and other dimensions of sustainability.

Importantly, ISSB standards improve the coherence between sustainability disclosures and financial reporting – where there often remains a disconnect. Bringing sustainability reporting under the banner of International Financial Reporting Standards (IFRS) supports the continued need for greater alignment between the two.

Building the ISSB standards on existing and established frameworks provides a pathway for companies that are already disclosing sustainability reports to transition to and align with ISSB requirements. Strategic partnerships, such as those with the Transition Plans Taskforce (TPT), Greenhouse Gas (GHG) Protocol, CDP[1], Taskforce for Nature-related Financial Disclosures (TNFD) and the Global Reporting Initiative (known as GRI[2]) and endorsement from the likes of the International Organisation of Securities Commissions (IOSCO)[3] will further support harmonisation across markets.  We believe that broad adoption of ISSB will help streamline and clarify reporting requirements for companies operating across different jurisdictions and needing to respond to a range of stakeholders.

But it’s not just at the level of operational efficiency where we see benefits.  Perhaps more importantly at the executive level, ISSB standards can support companies in the process of identifying and managing material sustainability-related risks and opportunities, helping to inform and integrate sustainability issues into strategic decision-making and ensuring financial resilience over the long term.  Furthermore, we believe it is in the interests of company boards to embrace the adoption of standards that ensure they and their shareholders have consistent and comparable disclosure of material risks and opportunities and how these are informing company strategy[4].

The rest is communication

Clear and unambiguous communication between companies and investors is key to improving access to global capital markets. While some may see ISSB adoption at the national level as unwanted red tape, we see it as an opportunity for streamlined and improved corporate communication, helping to reduce barriers to global investors when valuing securities and with potential benefits for long-term cross-boundary investment in capital markets for the future.

LGIM’s role

From an early stage, LGIM has been supportive of ISSB standards as a member of the ISSB Investor Advisory Group (IAG), through which we provide input and feedback on draft standards and research projects. We have since been calling on policymakers and regulators around the globe for full adoption, most recently in our responses to consultations in Japan and South Korea. We are encouraged by the take up so far, with more than 20 jurisdictions, accounting for nearly 55% of global GDP and more than 40% of global market capitalisation, taking steps to introduce ISSB standards in their legal or regulatory frameworks[5].

The next act

The global majority adoption of the ISSB standards should enable an enhanced and reliable reporting ecosystem that informs investors and benefits markets. To this end, we strongly encourage regulators to act with pace to adopt the ISSB standards to make this probable outcome a reality and we look forward to continued progress on the workplan for nature and human capital.

[1] Previously known as the Carbon Disclosure Project

[2] GRI - Home (globalreporting.org)

[3] The international body that brings together the world's securities regulators, recognized as the global standard setter for financial markets regulation

[4] It’s in companies’ own interests to adopt global sustainability standards (ft.com)

[5] IFRS - Jurisdictions representing over half the global economy by GDP take steps towards ISSB Standards