Although not mandatory in the Unites States, adoption of the International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board (ISSB) is progressing among key US trading partners. For example, EU regulators are proposing to integrate ISSB standards within CSRD as a key component of that law. The UK is also leaning towards adoption driven by the UK’s Financial Reporting Council. With a Labor government in place, the likelihood for adoption is high. This is also the case of Canada, while Australia is already setting the stage for its adoption.
The ISSB traces its origins to the 26th United Nations Climate Change Conference (COP26) held in November 2021, essentially put forward by the International Accounting Standards Board (IASB), owned by the IFRS Foundation. The focus on ISSB is to provide greater visibility on corporate sustainability specifically to investors. This is unlike CSRD, which is concerned by a broader set of stakeholders. Because of its narrow scope on who will benefit from ISSB, it is more stringent and more specialized than CSRD, linking corporate value to its sustainability position. ISSD draws from various other existing standards to form its own, and its work is still progressing.
While there may be overlaps and possible redundancies between CSRD and ISSD, the latter is more focused on serving the needs of providers of capital and investors. Many of the reporting requirements are the same, including, but not limited to what environmental policies companies are adopting, including disclosing metrics on energy and water consumption, waste management, and carbon emission reduction, for instance. Companies will also have to report on other areas of ESG, including labor and social issues, impact on communities, etc. While other areas of interest such as governance will also be required, more importantly, perhaps, is that ISSD asks companies to articular how the ESG components and factor would have a material impact on the business. Companies affected by this law would have to release reports that are many times more transparent than what they are accustomed to during their quarterly regulatory filings.
This situation is expected to create a backlash for three reasons:
- The first is that companies will resist the requirement of disclosing what their legal departments may consider privileged information which could undermine competitiveness.
- The second is that opponents say this would be a redundant exercise as CSRD is already doing many of the same.
- Finally, even US-based companies will not be immune to ISSD, even if adoption is abroad. In particular, global corporations doing business in Europe will have to adjust and that means significant cost and unusual amount of disclosure.
The general aim of ISSB is to ensure that investors and those providing capital to companies have a way to assess risk for the investment above and beyond the usual financial metrics. In the minds of ISSB authors, having ESG disclosure and requiring companies to assess risk would provide great risk control for investors.
In the United States, two laws could play a significant role in ESG reporting and on what ITAD firms should expect. California’s new climate reporting laws and the SEC’s climate disclosure rule are likely to be the biggest driver of ITAD transformation, with transparency and disclosure leading the way of such a transformation.
