What is critical to effectively meeting the ISSB standards?

Cyrus Cheung, Hendrik Rosenthal and David Madon

Experts chime in on the latest topics in accountancy and business

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Cyrus Cheung, Hendrik Rosenthal and David Madon


Cyrus Cheung, Partner, ESG Disclosure and Consulting at PwC, Deputy Chairman of the Institute’s Sustainability Committee, and an Institute member

With the final International Sustainability Standards Board (ISSB) standards under discussion and the Hong Kong Stock Exchange’s (HKEX) affirmation that the ISSB is the way forward, it is prime time for companies to take action to prepare for effectively meeting the ISSB standards.

Early preparation is critical. With the ISSB standards expected to be issued in the near future, companies will benefit from getting ready now – taking the time to understand the standards’ expectations, onboard and upskill relevant internal stakeholders, as well as implement action steps so that the company is in a state of readiness when there is a time-bound deadline and it becomes mandatory to report in line with the ISSB.

A practical way of getting prepared is performing a gap analysis to understand your gaps and biggest “win areas.” A gap analysis against the ISSB standards can be a worthwhile exercise, as they already encompass several globally used standards, such as Sustainability Accounting Standards Board standards and the Task Force on Climate-related Financial Disclosures recommendations. You can consider taking into account commonalities across additional environmental, social and governance (ESG) standards and frameworks, such as the United Nations Sustainable Development Goals, and industry-specific focus areas from ESG rating bodies, to maximize the benefits of this exercise. Use these findings to inform where you are leading and lagging to effectively meet the ISSB standards, as well as prioritize actions for your short, mid and long-term ESG strategy.

“A gap analysis against the ISSB standards can be a worthwhile exercise, as they already encompass several globally used standards.”

This exercise will also yield insights into your company’s key challenges relating to ESG. Common challenges we have heard from companies across industries include scenario analysis and gathering data for Scope 3 emissions – both required by the ISSB. Scope 3 emissions pose a set of unique challenges, from difficulties in obtaining quality data to a wide scope and lack of clear accountability. Before gathering data, it is important to define your scope and identify relevant Scope 3 categories – consider criteria including to what extent they contribute to your total anticipated Scope 3 emissions and your risk exposure.

With scenario analysis, in the lead up time before the standards are finalized, consider preparing your company by starting with qualitative scenario analysis to evaluate resilience, before maturing to partially qualitative and quantitative, and ultimately more quantitative for increased rigor. With no overnight solution to these challenges, start now to upskill your internal staff and engage external support where needed to prepare well.

I encourage you to take this opportunity to revisit your ESG strategy, enhance your governance structure, and ultimately increase your company’s long-term value. (Natalyn Pow, Senior Associate, ESG Disclosure and Consulting at PwC, contributed to this response.)

Hendrik Rosenthal, Director, Group Sustainability at CLP Holdings Limited, and a member of the Institute’s Sustainability Committee

Companies will need to first research and prepare the data required to meet the ISSB standards. For instance, following last year’s consultation, the ISSB announced that they would make the disclosure of Scope 1, Scope 2 and Scope 3 greenhouse gas (GHG) emissions and the use of climate-related scenario analysis mandatory. This requires companies to move GHG accounting to the next level of sophistication, but luckily data management tools have become more widely available to streamline this process.

Moreover, the Global Reporting Initiative Standards and the European Sustainability Reporting Standards have been included by the ISSB as sources of guidance that companies may consider. This important step of alignment should address any lingering confusion about reporting standards.

“Reporting is not just for the sakeof disclosure, but also a means to assess... alignment of corporate efforts to adopt sustainability.”

The earlier companies familiarize themselves with ESG data management and reporting trends, the more value they will be able to derive from adopting the ISSB standards. After all, reporting is not just for the sake of disclosure, but also a means to assess business strategy and overall alignment of corporate efforts to adopt sustainability. As part of ESG data management, a credible, independent assurance framework will also be crucial to the implementation of the forthcoming standards. As the valuation and assurance of the financial implications of an entity’s significant sustainability and climate-related risks and opportunities would be an integral part of the new disclosures, the market will need further guidance on how to make financial estimates over a long-time horizon, and have them assured to ensure data quality.

Looking ahead, preparers are encouraged to keep their eyes on some major developments with the International Organization of Securities Commissions (IOSCO). This includes their collaboration with the International Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants to develop profession-agnostic standards that support the assurance of sustainability information. For the IFRS sustainability disclosure standards to be embraced globally, they are set to undergo IOSCO’s assessment. If endorsed, IOSCO members will be able to use the standards to establish sustainability disclosure requirements in their respective jurisdictions.

In Hong Kong, companies may anticipate the localization of the standards through the concerted efforts of the Securities and Futures Commission, HKEX and the Hong Kong Institute of CPAs. This is expected to provide clarity on how to ensure disclosures are in line with mandatory reporting requirements.

David Madon, Director, Sustainability, Policy and Regulatory Affairs, at International Federation of Accountants

At International Federation of Accountants (IFAC), we believe that the ISSB’s global baseline of sustainability reporting requirements will finally allow sustainability-related information to take its place alongside traditional financial reporting.

Sustainability or ESG risks and opportunities need to be integrated into the way companies think – in the board room, among senior management, and in the way strategies, business models, and decisions are made. In other words, from an IFAC point of view, sustainability starts inside of companies – so this is where the success of ISSB standards also starts.

The ISSB’s Partnership Framework focuses on “capacity building.” This applies to companies, and the professionals who work within them, who must apply the S1 and S2 standards as reporting shifts from voluntary disclosures to mandatory requirements. Accounting and finance teams are key in making this transition. Information silos that may exist within companies – between chief financial officers and sustainability officers, for example – are barriers to decision-making for long-term value creation and must be bridged or broken down. This will enhance the way companies communicate with investors and other stakeholders.

“For ISSB standards to achieve this potential, we need jurisdictions to require high-quality ISSB disclosures.”

Sustainability disclosures under ISSB standards must be trusted if they are going to influence capital allocation decisions. ESG information must be “on par” with financial information and, where material, disclosed at the same time. Therefore, the expertise of accounting and finance professionals working inside of companies is needed to enhance the reliability and usefulness of information, and assurance by independent assurance practitioners is required to provide additional confidence.

We refer to all of this as adopting an “integrated mindset” inside of companies that will drive financial and sustainability reporting – not as a compliance exercise – but as a reporting transformation that helps deliver more sustainable businesses. But, for ISSB standards to achieve this potential, we need jurisdictions to require high-quality ISSB disclosures. In other words, the global baseline of ISSB requirements must become local reporting requirements.

IFAC has issued helpful guidance on the issues and processes that IFAC member organizations should discuss with their local authorities – examining the existing mechanisms already in place for using the International Accounting Standards Board financial reporting standards and determining if the same, or a different approach, is needed to implement ISSB disclosures for ESG. This process will take time, so now is the time to start the conversation.

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