Pro Take : Forget the SEC, International Climate Reporting Standards Could Become the Global Baseline

Investor demand for a single standard increases the benefits to companies and countries of aligning with the new ISSB guidelines, even if they are more demanding

New international sustainability reporting standards could fulfill their ambition in becoming the global baseline as the advantages of using a single standard worldwide may, for many companies, outweigh the disadvantages of being more demanding than the SEC’s coming climate reporting rules.

On Monday, the International Sustainability Standards Board released its initial two reporting standards. The first is a general standard requiring a company to disclose material information about sustainability-related risks and opportunities including their governance, strategy, risk management and performance along with industry-specific information. The second standard establishes the specific requirements for climate-related physical risks, transition risks and opportunities. The ISSB consulted widely before it built its guidance on a number of established voluntary standards including from the Task Force on Climate-Related Financial Disclosures and the Sustainability Accounting Standards Board. It was created to respond to widespread stakeholder demands for more consistent and reliable information about companies’ sustainability plans and performance amid mounting decarbonization promises, regulation and climate change impacts. Despite the strong demand for one standard, U.S. and European Union officials are each developing their own climate reporting regimes. The

ISSB has worked closely with American, European, Japanese and Chinese officials, together with the International Organization of Securities Commissions, or Iosco, to develop its rules as a global baseline and work on interoperability between jurisdictions, but some gaps are expected to remain. The still-to-be-finalized Securities and Exchange Commission rules are expected to take a lighter touch than the ISSB. EU rules require more disclosure, particularly for stakeholders beyond investors. Even so, there has been real interest from the U.S. corporate and investor communities for the ISSB standards as a choice that might be voluntarily made, separate from what might be required from a regulatory perspective, said Sue Lloyd, vice chair of the ISSB, in an interview with The Wall Street Journal.

The ISSB is “helping drive the convergence of voluntary and regulated disclosure toward greater coherence so that capitalism and markets can continue to focus on long-term, sustainable development and deliver the progress we all want,” said Brian Moynihan, chair and chief executive of Bank of America.

It is now up to individual countries and jurisdictions to decide if and when they will adopt the ISSB standards. Reporting could start as early as 2025. So far, major countries that have indicated they are setting up mechanisms to consider using the ISSB standards are Australia, Canada, Japan, Hong Kong, Malaysia, New Zealand, Nigeria, Singapore and the U.K. Many others are expected to adopt the new guidelines given the strong backing for the ISSB. The standards board was created at the COP26 climate summit in Glasgow in response to calls from the Group of 20 advanced and developing economies, the Financial Stability Board—which oversees the G20 global financial system— and Iosco, as well as business leaders and investors.

“It was market demand that led the ISSB to be established to bring to an end the alphabet soup in the market and make sure that we had a system of reporting that really provided the information investors need to be confident to understand sustainability risks and opportunities,” said Lloyd at Monday’s launch.

To be sure, additional disclosure can increase a company’s workload and some have raised concerns about publishing competitive information, but working to one global baseline, even a more rigorous one, also brings advantages. Most investors allocate capital internationally so consistent global data would enable investors to more easily compare their options and companies to clearly communicate their performance. Alignment could also help developing countries, many of which are struggling to attract climate investment.

African finance ministers said ahead of last year’s climate summit in Egypt that “early adoption (of ISSB) by African jurisdictions and companies has the potential to attract more investment and to boost private sector development in Africa.” Likewise, Woochong Um, managing director general of the Asian Development Bank, said the ISSB disclosure standards have the potential to enhance Asian capital markets through attracting more investment and boosting private-sector development in Asia. A consistent global baseline would also make it easier for companies to estimate and report so-called Scope 3 emissions, defined as those in their value chain. Even most domestic companies work across the globe through their supplier network, and you need your suppliers to be thinking about their emissions in the same way as you are thinking about your emissions if you are going to aggregate those numbers, said Lysanne Gray, executive vice president of sustainable business performance and reporting at consumer-goods company Unilever.

Alignment would also reduce the costs of producing the information. A common language and a common set of definitions are needed to build a good taxonomy that can be translated into a digital taxonomy, lowering compliance cost and making it easier, said Eelco van der Enden, chief executive of nonprofit Global Reporting Initiative.

Iosco’s board is composed of 35 securities regulators, including the U.S., and it counts more than 130 jurisdictions as members. Its coming assessment of the ISSB’s standards is expected to be an important consideration in their adoption around the globe. Jean-Paul Servais, chair of Iosco, commended the quality of the ISSB’s work and spoke at Monday’s launch event.

The ISSB’s sister organization has developed international financial reporting standards and the adoption of its standards also hints at widespread uptake: More than 140 jurisdictions now apply its guidelines, although it took a long time to harmonize and the U.S. continues to have its own accounting rules.

It took a long time to go from jurisdictional accounting standards to International Accounting Standards, said Unilever’s Gray, so she wants companies to take the lesson from that and unite behind a set of consistent international standards for sustainability reporting.

And right now it looks as though the ISSB’s approach is the one most likely to provide that global baseline.