A4S response to ISSB consultation on agenda priorities

A4S response to ISSB consultation on agenda priorities

1st September 2023

Dear International Sustainability Standards Board,

We welcome the ISSB’s request for information on ISSB’s agenda priorities. We believe that the disclosure of robust, comparable and decision-useful information is essential to address with urgency the environmental and social challenges facing the global economy.

We are pleased to share the following recommendations in response to your consultation:

1. The ISSB should consider the urgent nature of many environmental and social issues as it works towards the adoption of a global baseline. In this regard, the ISSB should prioritize interoperability and collaboration with other existing and emerging standards and frameworks, both regulatory and voluntary, to enable rapid development of a full set of global standards in an efficient way. In addition, supporting the implementation of IFRS S1 and IFRS S2 in all regions is key for achieving a real global baseline.
2. The importance of the topics of biodiversity and ecosystems, human rights and human capital to investors and other stakeholders varies based on the organization, sector and geography. These are all critically important issues and we do not feel it is possible to rank them. The ISSB’s criteria could put greater emphasis on an assessment of the pervasiveness of an issue across all sectors and regions, something which would apply to human capital matters which will be material for almost all organizations globally. The ISSB might also consider the extent to which other groups, including standard setters, are tackling topics under consideration. For all topics, the ISSB should leverage and build on the existing material and significant work done by other bodies to ensure progress is achieved at pace. This is particularly the case in relation to biodiversity and ecosystems, where there is an opportunity for the ISSB to work jointly on standard setting with other organizations such as the Global Reporting Initiative (GRI) and the Taskforce on Nature-related Financial Disclosures (TNFD). This would enable the ISSB to achieve more with its limited resources and address interoperability concerns.
3. Integration in reporting should be a priority item for the IFRS Foundation as a whole and should be addressed in conjunction with the International Accounting Standards Board (IASB) as a strategic activity, not treated as a standalone ISSB project or only dealt through concepts embedded in individual standards. The Integrated Reporting Framework provides a starting point for the development of an overarching conceptual framework which might guide this work.
4. It is critical to capture how risks and opportunities related to biodiversity, ecosystems and ecosystem services, human rights and human capital affect value creation in different sectors and geographies, recognizing their interconnectedness, including with climate.

We commend the work to date by the ISSB and the intention to move quickly towards the global adoption of a set of sustainability disclosure standards beyond climate.

We note that greater clarity around the ISSB’s longer-term vision, including the potential scope of a full set of sustainability disclosure standards to meet investor needs in relation to the broad range of sustainability-related risks and opportunities would be helpful to preparers, investors and regulators in their consideration of adoption of the ISSB’s standards.

Accounting for Sustainability (A4S)

As background, Accounting for Sustainability (A4S) was established in 2004 to mobilize action and leadership by the finance and accounting community to make sustainable business, business as usual.

We work with the finance and accounting community to:

• Inspire finance leaders to adopt sustainable and resilient business models.
• Transform financial decision making to enable an integrated approach, reflective of the opportunities and risks posed by environmental and social issues.
• Scale up action across the global finance and accounting community.

A4S has worked with CFOs and finance teams, investors, accounting bodies, regulators and other representatives from across the finance and accounting community on reporting for many years, including setting up the International Integrated Reporting Council in 2010 and helping establish the Task Force on Climate-related Financial Disclosures (TCFD). As part of this activity, we work closely with organizations and institutional investors to understand the practicalities of the preparation and use of sustainability disclosures to enable better informed decisions.

Our consultation response to the ISSB is informed by this work with the finance and accounting community globally. We welcome the possibility to respond to ISSB’s consultation on its agenda priorities for the next two years as an important step to meeting the needs of the finance community, in particular where there are clear links to financial reporting.

Observations

In response to the ISSB’s request for information on agenda priorities, we offer the following observations and perspectives. We encourage the ISSB to consider these perspectives as it progresses in setting its agenda for the next two years and beyond.

1. The ISSB should consider the urgent nature of many environmental and social issues as it works towards the adoption of a global baseline. In this regard, the ISSB should prioritize interoperability and collaboration with other existing and emerging standards and frameworks, both regulatory and voluntary, to enable rapid development of a full set of global standards in an efficient way. In addition, supporting the implementation of IFRS S1 and IFRS S2 in all regions is key for achieving a real global baseline. (Questions 1 and 2)

All seven ISSB activities included in paragraphs 18 to 22 and Table 1 of the consultation are important to achieve progress towards the adoption of a global baseline set of standards as part of a reporting system for sustainability-related information. Of these activities, the ISSB’s top priority should be ensuring interoperability with other sustainability standards (as per point (f) in paragraph 19).

Interoperability

Our engagement with reporting organizations and investors has highlighted the continuing need for enhanced interoperability with other standards, both existing and new. Reducing the complexity and inconsistency of reporting practices globally remains critically important for both reporters and users. Enhanced interoperability will help mitigate the risk of lack of adoption, duplicative disclosures or a failing reporting system.

Working hard to achieve interoperability in relation to the existing S1 and S2 standards, while also building this more concretely into the process for future standards, is essential. This includes enabling a much closer alignment, consistency and interoperability with impact-focused standards if the ISSB is to meet investor needs.

For a significant group of investors and primary users of financial data, information on the impacts that a company has on environmental and social outcomes is key to an understanding of, and in response to, sustainability-related risks and opportunities associated with their investments, including their ability to adopt macro stewardship approaches to engagement.^[1] This is particularly the case where these issues are difficult to predict, tend to materialize in the long term and are systemic, with biodiversity being one such risk.

With new standards being considered in relation to biodiversity and ecosystems, human capital and human rights, there is an opportunity to hardwire interoperability into the process from the outset, taking existing impact-focused standards, including the TNFD and GRI, as the starting point, identifying the subset of information – as well as any additional disclosures – that are material for investors and other primary users of financial information.[²]

As such, when assessing the relative importance of potential projects, we recommend that ISSB first considers the pre-existing reporting requirements relevant to the topic as well as to what extent does IFRS S1 not already address the issue. Prioritizing interoperability is a means for the ISSB to promote efficiency, meet the needs of investors and make vital, rapid progress in comparability and reliability of a global sustainability reporting system.

Other priorities

Both ensuring connectivity with financial reporting standards and engaging with stakeholders are also key strategic priorities for the ISSB – points (e) and (g) of paragraph 19, respectively. Alongside interoperability, these remain core to the ISSB’s activities.

Of the remaining four areas – points (a)–(d) of paragraph 19 – on which the ISSB is consulting regarding prioritization, we suggest the ranking provided below:

1. Supporting the implementation of ISSB standards IFRS S1 and IFRS S2 (19b)

The implementation of IFRS S1 and IFRS S2 in all regions is important for achieving a real global baseline, but support is needed for this to happen. In particular, organizations are likely to face challenges in responding to the standards’ requirements for information along the value chain, including from developing economies and smaller entities, and to create a credible and reliable set of disclosures.

Here, the ISSB should focus its efforts on:

1. Working with individual jurisdictions to promote consistent adoption of the standards.
2. Working with relevant partners and organizations on implementation, who can then amplify the message and help to upskill professionals around the world.

Upskilling and capacity building are key to successful adoption, for both reporters and users. Given the scale of this work and the limited resources available, the ISSB should draw upon the support of many other organizations, including A4S, through its Partnership Framework established for this purpose, alongside other methods. In this way, the ISSB can focus more of its efforts on regulatory adoption and alignment alongside rapid development of additional standards and interoperability, areas where the ISSB must take the lead.

2. Beginning new research and standard-setting projects (19a)

As underlined above, investors depend upon the disclosure of robust, comparable and decision-useful information across a wide spectrum of social and environmental risks and opportunities. To meet the ISSB’s aspiration to provide a global baseline for sustainability-related reporting, it is critical that the ISSB moves rapidly beyond climate to cover the full set of issues that materially impact investor decision making.

While climate change is a key concern, other pressing environmental and social risks are closely interrelated with climate. Having launched IFRS S2 on climate, the ISSB should quickly move forward with other sustainability disclosure standards to capture the full range of sustainability topics and their interconnectedness. In doing so, we encourage the ISSB to leverage the significant body of frameworks and standards that today are being applied on a voluntary basis (eg GRI) or being adopted in other jurisdictions (eg ESRS).

3. Researching targeted enhancements to the ISSB standards (19c)

The scientific and political consensus around issues such as climate change is evolving at a rapid pace. In addition, as more organizations start reporting in line with the ISSB standards, the availability of data and the ability for preparers to disclose accurate information will increase. These developments will have implications for the relevance and scope of the standards themselves.

As a result, the standards will need regular reviews and updates to maintain relevance and deliver on user needs. The ISSB will have to respond to implementation challenges and real-world feedback on the practical application of its standards, and incorporate evolving risks and opportunities associated with social and environmental factors. Establishing an agile due process to inform reviews and updates is essential.

4.  Enhancing the Sustainability Accounting Standards Board (SASB) standards (19d)

In our response to the 2022 ISSB consultation, we welcomed the industry-specific reporting requirements, although they were largely unchanged from the existing SASB standards, which were developed initially for the US market. As a result, a detailed review of SASB standards is required. Based on the review, the SASB standards should be updated to make them appropriate for international adoption and to maintain their relevance and applicability, in alignment with the ambitious timelines of the ISSB.

The ISSB has already been taking steps in this direction by issuing a consultation on the proposed methodology for enhancing the international applicability of the SASB standards. We commend this initiative as a necessary step forward. However, recognizing that this project would require significant efforts and highly technical knowledge, this work should not come to the detriment of the more urgent activities mentioned above and should not come ahead of the development of much needed cross-sectoral standards.

In making the SASB sector-specific standards globally applicable, there is an opportunity for the ISSB to collaborate closely with other sustainability standard setters, in particular, GRI and the upcoming sector-specific European Sustainability Reporting Standards (ESRS), as they develop impact materiality sector-specific standards, helping to achieve interoperability.

We also recommend that the ISSB continues to monitor closely developing issues that may have sustainability-related implications, such as cyber risk and artificial intelligence, to capture relevant topics that may require disclosure standards to be developed or evolved in the future.

With this in mind, we welcome the establishment of criteria by the ISSB in assessing future projects as laid out in Table 2, and we recommend the consideration of existing and developing reporting frameworks be included. We believe the applicability of criteria will help define the scope of sustainability-related reporting matters that the ISSB is called on to address as part of its mandate by the IFRS Foundation.    

2. The importance of the topics of biodiversity and ecosystems, human rights and human capital to investors and other stakeholders varies based on the organization, sector and geography. These are all critically important issues and we do not feel it is possible to rank them. The ISSB’s criteria could put greater emphasis on an assessment of the pervasiveness of an issue across all sectors and regions, something which would apply to human capital matters which will be material for almost all organizations globally. The ISSB might also consider the extent to which other groups, including standard setters, are tackling topics under consideration. For all topics, the ISSB should leverage and build on the existing material and significant work done by other bodies to ensure progress is achieved at pace. This is particularly the case in relation to biodiversity and ecosystems, where there is an opportunity for the ISSB to work jointly on standard setting with other organizations such as the Global Reporting Initiative (GRI) and the Taskforce on Nature-related Financial Disclosures (TNFD). This would enable the ISSB to achieve more with its limited resources and address interoperability concerns. (Question 3)

Prioritizing among the topics of biodiversity and ecosystems, human capital and human rights would be very difficult. Additionally, these topics are not standalone, with a degree of interconnectedness across the three topic areas and with a number of other social and environmental risks, including climate change. If not approached holistically, action in one area could result in harm to another area. As an example, investors need to be able to understand potential positive and negative social impacts of actions to address biodiversity loss through changing land use, and how these changes might impact the rights of local communities and hence license to operate.[³]

The relative importance of these topics will also vary depending on the organization, industry and geography being considered. As such, even if these areas could be usefully prioritized, that prioritization would not hold true in all contexts.

However, in light of ISSB’s resource constraints highlighted in the request for information, we note that human capital matters will be material for almost all organizations globally and therefore may be adopted more quickly if prioritized, with a consequent benefit for users. Further, there is no current body which is standardizing reporting in this area on a global basis, a gap which the ISSB could fill.

In the areas of biodiversity and human rights, there are clear opportunities for the ISSB to work in close collaboration with other global standard setters. The ISSB should work jointly on standard setting with other organizations such as GRI and the TNFD on biodiversity and ecosystems, and with GRI and Shift on human rights. This would enable the ISSB to achieve more with its limited resources and address interoperability concerns.

In addition, the ISSB should build upon the range of materials already produced to inform its work. Many of these are identified in the consultation document – paragraphs A13, A25 and A36 – and we agree that these are important sources of information.

While each of the different frameworks referenced in the consultation have useful elements, we would highlight that several of these resources are not developed for reporting purposes (eg the World Benchmarking Alliance). Also, in most cases the resources identified do not specifically address the concerns of investors. We suggest that where significant work has been done by other bodies, taskforces, standard setters and researchers, this can be leveraged by the ISSB. The Board should assure itself that the team are thoroughly exploring all the work that has gone before and to use its resources wisely.

3. Integration in reporting should be a priority item for the IFRS Foundation as a whole and should be addressed in conjunction with the International Accounting Standards Board (IASB) as a strategic activity, not treated as a standalone ISSB project or only dealt through concepts embedded in individual standards. The Integrated Reporting Framework provides a starting point for the development of an overarching conceptual framework which might guide this work. (Questions 3 and 7)

Sustainability-related issues may have a material impact on the financial performance of an organization and only an integrated approach can serve the purpose of effective reporting that is useful for internal and external decision making. In fact, many users and reporters are quite clear that an integrated, coherent and comprehensive system of corporate reporting is necessary to provide a clear view of an entity’s performance, risk management and how it creates values for shareholders and beyond.[⁴]

As a founding organization of the International Integrated Reporting Council (IIRC), we believe that concepts from the Integrated Reporting (<IR>) Framework are key to enable organizations to demonstrate clearly how they create value and support better decision making within the business and for shareholders. Currently, around 2,500 organizations globally in over 70 countries have adopted <IR> Framework, with some jurisdictions also making it mandatory. For organizations this has enhanced their reporting process, improved their business models and decision making, and enabled them to reduce costs.[⁵] Investors, in particular institutional investors with longer-term time horizons, find the approach of the <IR> Framework especially helpful in guiding their investment decisions.

We recommend that the ISSB should work closely with the IASB and use the <IR> Framework as a starting point in considering its strategic priorities, where relevant parts of the IASB’s Management Commentary exposure draft and ISSB standards can be incorporated.[⁶] We recognize that this work could involve establishing a corporate reporting conceptual framework that integrates disclosure across one or more elements of corporate reporting and as a result, it is necessary to approach the work as a joint project with the IASB. As the Management Commentary is well advanced, the resources required are not expected to be as resource intensive as the other three projects described in this agenda consultation.

4. It is critical to capture how risks and opportunities related to biodiversity, ecosystems and ecosystem services, human rights and human capital affect value creation in different sectors and geographies, recognizing their interconnectedness, including with climate. (Questions 4, 5 and 6)

The importance of human rights and human capital, and biodiversity, ecosystems and ecosystem services (BEES), differ depending on sectors and geographies, while still being interconnected with each other and with climate. These connections need to be reflected in corporate reporting for users to get an accurate picture of an organization’s risks, opportunities and impacts and how it creates value.

Biodiversity, ecosystems and ecosystem services (BEES)

Various research has demonstrated how the crisis of BEES is unequivocally linked with climate change.[⁷] BEES also affect and are affected by human and social aspects of sustainability. For example, deforestation and water pollution have a negative impact on local communities. These important interdependencies should be acknowledged explicitly in organizational reporting to convey better the importance and urgency of addressing BEES-related risks to users of reports and enhance the readability of disclosures.

Risks and opportunities associated with BEES do, however, differ from climate as the effects and impacts are location specific. Also, negative and positive impacts in different areas cannot be offset against each other, so different locations will need to be considered separately by entities and users when disclosing or evaluating reported information, even before looking at subtopics. The nature of risks and opportunities connected with BEES are also likely to vary by sector. This is why several organizations – such as the TNFD, the Capitals Coalition and the Science Based Targets Network – have released sector-based guidance. 

With regards to the frameworks referenced in paragraph A13 for the ISSB’s work on BEES, we highlight TNFD as key. Being market-led and building on the same pillars of TCFD, it provides an important starting point for the ISSB’s work in this area, alongside the GRI’s recent biodiversity standard.

As well as the frameworks identified in the consultation, we recommend that the ISSB also considers key emerging regulation that contains disclosure requirements relating to biodiversity targets and transition plans. Regulation in this area is particularly mature in the European Union (for example, the Nature Restoration Law and the EU taxonomy – objectives 4 to 6).

Organizations’ BEES-related reporting would need to be integrated with other elements of corporate reporting. Connections between a BEES-related standard and other standards will therefore be key for guiding report preparation. In developing a BEES-related standard, we recommend that the ISSB consider the work of other organizations as they develop reporting frameworks that draw on management accounting frameworks. For example, in June 2023 the Capitals Coalition’s Transparent Project released a framework to quantify and evaluate the impact of an organization’s activities on natural capital based on management accounting principles. Having a view to management reporting on sustainability will help organizations to ease the process of integrating sustainability reporting and financial reporting, thereby helping to present a coherent message to investors. 

Human capital and human rights

Human rights and human capital are inherently linked – not only in that there are many points of overlap but that each also influences the other. Dealing with both aspects in one single project or at the same time could be more appropriate and more effective for identifying boundaries and elaborating connections than approaching them separately. In developing the standards, it will also be important to capture the connection of human capital and human rights with climate and biodiversity issues. For example, considering the just transition and how biodiversity loss affects local communities.

Regardless, clear definitions of each will be necessary (such as whether contractors will be considered as part of the workforce), and clarity will also be needed on the scope of the subtopics. Within the consultation document, in paragraph A22, it was unclear whether the following areas of interest to investors would be covered in the subtopics highlighted:

• Health and safety (eg, lost time injuries, fatalities) as part of worker wellbeing
• Training and development as part of workforce investment
• Information on turnover, redundancies, duration of service with the organization and litigation costs as part of workforce composition
• With regards to the available material which the ISSB could consider or leverage, in addition to sources already noted in paragraphs A25 and A36, we highlight the following:
  • The A4S Essential Guide to Social and Human Capital Accounting
  • OECD Due Diligence Guidance for Responsible Business Conduct
  • WBA Just Transition methodology
  • UNICEF’s Sustainability Reporting on Children’s Rights and their current work in this area

****************

This agenda priorities consultation represents a key point in the next steps of the important work of the ISSB.

Until the release of new global baseline standards, regional variation in reporting requirements is likely to continue. Investors and other stakeholders will continue to ask for additional disclosures, in particular relating to an organization’s broader impact. Companies will also continue to receive reporting requests driven by the growing set of ESG ratings and indices alongside the need to align their reporting to existing and emerging mandatory standards (eg ESRS and IFRS S1 and S2 in some jurisdictions).

Moving forward, it will be essential that the ISSB develops a set of standards that addresses the varied social and environmental topics that are relevant for the primary users of disclosed information, as well as supports the practical implementation of finalized standards. We are delighted to support the Board with both these aims, the former via participating in consultation and engagement and the latter via our Partnership Framework.

Thank you for the opportunity to respond to this consultation. We would be delighted to discuss any of our comments in more detail should further input be of assistance, and we look forward to continuing to support CFOs, investors, accountants and the wider finance community in navigating this rapidly evolving landscape.

Yours faithfully,

Jessica Fries, Chair

Martina Tessari, Global Reporting Lead

References

[1] For more information on macro stewardship, see FCA’s DP23/1: Finance for positive sustainable change (3.85-3.92)

[2] We note that the ISSB standards are not currently fit for purpose for public sector or nonprofit entities given the materiality definition adopted. As such, it will be important for the International Public Sector Accounting Standards Board (IPSASB) to work in close collaboration with the ISSB to close this gap.

[3] For examples of interconnectedness between biodiversity loss and the social dimensions, see “5 Concerning Effects of Biodiversity Loss (Earth.org) and the WHO’s information on the linkage between biodiversity and health.

[4] According to the 2022 EY Global Reporting Survey, 40% of finance leaders and 44% of investors see the disconnect between ESG reporting and mainstream financial information as a challenge to the usefulness and effectiveness of corporate ESG reporting.

[5] Implementing Integrated Reporting – PwC’s practical guide for a new business language

[6] An example of a key difference consists of the inclusion of governance as an element of required disclosures by the <IR> Framework, which the Management Commentary exposure draft does not include. The ISSB standards highlight governance as part of the required disclosures, so this is an area where better alignment of the approaches would be of benefit.

[7] For more information see UN – Biodiversity, our strongest natural defence against climate change or Horizon - Nature and climate crises: two sides of the same coin