The International Sustainability Standards Board (ISSB) has introduced two primary standards, S1 and S2, aimed at guiding sustainability and climate-related disclosures for organizations. These standards are part of a broader effort to create a global baseline for sustainability reporting, making it easier for investors and other stakeholders to compare and assess companies' sustainability performances. Let's delve into what each standard entails:
ISSB S1: General Sustainability-Related Disclosures
The ISSB S1 standard focuses on general sustainability-related disclosures. It sets out the overall framework for how organizations should report on sustainability matters that affect their value creation. The key aspects of S1 include:
- Disclosure Requirements: Organizations are required to disclose sustainability-related risks and opportunities that affect their strategy, business model, and cash flows. This encompasses a wide range of ESG topics, from environmental concerns to social issues and governance practices.
- Materiality Assessment: S1 emphasizes the importance of materiality, requiring organizations to identify and report on sustainability issues that are significant to investors' decision-making processes.
- Management Approach: Organizations must disclose how they manage significant sustainability-related issues, including their governance processes, strategies, and risk management practices related to sustainability.
- Metrics and Targets: S1 requires the disclosure of specific metrics and targets used to assess and manage relevant sustainability issues, providing a clear view of an organization's performance and progress in these areas.
ISSB S2: Climate-Related Disclosures
The ISSB S2 standard is specifically focused on climate-related disclosures. It builds on the framework established by the Task Force on Climate-related Financial Disclosures (TCFD) and provides detailed guidance on how organizations should report on climate-related risks and opportunities. Key elements of S2 include:
- Climate-Related Risks and Opportunities: Organizations are required to disclose how climate change impacts their business model, strategy, and financial planning. This includes both physical risks, such as extreme weather events, and transition risks associated with the shift to a lower-carbon economy.
- Scenario Analysis: S2 encourages organizations to conduct scenario analysis to assess their resilience under different climate-related scenarios, including a 1.5°C or lower scenario. This helps stakeholders understand the potential financial implications of climate change on the organization.
- GHG Emissions: A crucial part of S2 is the requirement for organizations to disclose their greenhouse gas (GHG) emissions, including Scope 1 (direct emissions), Scope 2 (indirect emissions from purchased energy), and, if material, Scope 3 (other indirect emissions in the value chain).
- Targets and Transition Plans: Organizations are also required to disclose their climate-related targets, such as emissions reduction targets, and their plans for achieving these targets, providing transparency on their commitment to addressing climate change.
Both ISSB S1 and S2 standards aim to enhance the consistency, comparability, and reliability of sustainability reporting globally. By adhering to these standards, organizations can provide investors and other stakeholders with the information they need to make informed decisions related to sustainability and climate risks.
The SASB (Sustainability Accounting Standards Board) industry frameworks, now part of the Value Reporting Foundation which has merged with the International Financial Reporting Standards (IFRS) Foundation, play a complementary role to the ISSB's S1 and S2 standards by providing industry-specific guidance for sustainability reporting. While ISSB standards set the global baseline for sustainability and climate-related disclosures, SASB frameworks drill down into the specific, material sustainability issues relevant to different industries. Here's how SASB industry frameworks fit within the broader context of sustainability reporting and their relationship with ISSB standards:
Industry-Specific Materiality
- Targeted Disclosure: SASB standards are designed around the concept of materiality specific to different industries, identifying sustainability issues that are likely to impact the financial condition or operating performance of companies within those industries. This approach helps companies focus their reporting on the most relevant ESG issues.
- Complementing ISSB Standards: SASB industry frameworks can be seen as a complement to the ISSB's more general sustainability disclosure standards (S1) and climate-specific disclosures (S2). While ISSB standards provide the overarching principles and requirements for sustainability reporting, SASB frameworks offer detailed, industry-specific metrics and guidance for reporting on material sustainability topics.
Enhancing Comparability and Relevance
- Consistency Across Industries: By using SASB frameworks, companies can report sustainability information in a manner that's consistent with others in their industry, enhancing the comparability for investors and other stakeholders. This is particularly valuable in sectors where certain sustainability issues are more prevalent or critical than in others.
- Integration with Global Standards: The integration of SASB with the IFRS Foundation, under which the ISSB operates, is aimed at creating a comprehensive global sustainability reporting system. This integration ensures that SASB's industry-specific standards work seamlessly with the ISSB's global sustainability reporting standards, providing a unified approach to ESG reporting.
Practical Application for Companies
- Identifying Material Issues: Companies can use SASB frameworks to identify which sustainability issues are material to their industry and therefore should be disclosed in accordance with ISSB standards. This helps organizations ensure their reporting is both comprehensive and focused on what matters most to their stakeholders.
- Detailed Metrics and Targets: SASB provides specific metrics for each material sustainability issue identified, offering companies a clear set of indicators to measure, manage, and report their performance. These metrics can support the requirements under ISSB S1 for disclosing metrics and targets related to sustainability issues.
Future of Sustainability Reporting
- Harmonization Efforts: The merger of SASB with the IFRS Foundation and the establishment of ISSB mark significant steps toward harmonizing global sustainability reporting standards. The goal is to streamline the sustainability reporting landscape, making it easier for companies to report relevant ESG information in a standardized manner.
- Guidance for Companies: As sustainability reporting continues to evolve, companies are encouraged to stay informed about the developments in global standards like ISSB and industry-specific frameworks like SASB. This ensures their disclosures remain relevant, informative, and aligned with best practices and regulatory expectations.
In summary, SASB industry frameworks fit within the broader sustainability reporting ecosystem by providing detailed, industry-specific guidance that complements the global standards set by ISSB. Together, they aim to enhance the quality, comparability, and relevance of sustainability disclosures across industries, supporting informed decision-making by investors and other stakeholders.
