Decoding the International Sustainability Standards Board’s Climate Disclosures Draft
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The International Sustainability Standards Board (ISSB) was established on November 3rd, 2021, by the International Financial Reporting Board (IFRS) foundation. It was created to harmonize various sustainability disclosures, and to formulate a unified universally acceptable sustainability framework. In its own words, it aims “to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities.”[i]. The ISSB is currently working on two sets of standards: “climate-related disclosures”, and “general sustainability- related disclosures”[ii] for a cross industry, global roll out.
To ensure widespread acceptance, the ISSB seeks to build on the existing foundation of guidance issued earlier by the Task Force on Climate-Related Financial Disclosures (TCFD). In its efforts include various streams of sustainability disclosures, the ISSB has also secured the active participation of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) . The ISSB Technical Readiness Working Group (TRWG) is collaborating with CDSB, VRF, TCFD, International Accounting Standards Board (IASB), World Economic Forum (WEF), International Organization of Security Commissioners (IOSCO), and International Public Sector Accounting Standards Board (IPSASB) . It is also coordinating with the Global Reporting Initiative (GRI) and Carbon Disclosure Project (CDP)[iii] to have a truly unified approach between all prominent and popular sustainability disclosure standards.
In addition to involvement of climate-oriented institutions, the ISSB has secured participation of governmental agencies as well. The Jurisdictional Working Group (JWG) has enlisted the participation of Chinese Ministry of Finance, The European Commission (EC), The European Financial Reporting Advisory Group (EFRAG), Japanese Financial Services Authority (JFSA), Sustainability Standards Board of Japan Preparation Committee (SSBJPC), Financial Conduct Authority (FCA), Financial Reporting Council (FRC) of UK and Security and Exchange Commission (SEC) of USA.[iv] With this vast network of collaborators and stakeholders, the ISSB is working to expedite sustainability disclosure standards and make it as widely accepted as possible. The ISSB’s draft proposition includes four disclosure categories: Governance, Strategy, Risk & Opportunities and Metrics. The components of these four categories is shown in Figure 1.
Figure 1
The first category of Governance delves into roles and responsibilities, staffing, and the appointment of a person to helm a sustainability unit. The second category of Strategy covers identifying risks & opportunities and assessing impacts of climate change on its business and financial positions. The Risk & Opportunity category, on the other hand, covers identification of specific risks and incorporating them into risk and enterprise management functions. This category also includes identification, assessment, analysis, monitoring of organizational risks. The Metrics category is quite wide ranging. It specifies disclosure metrics required on emission accounting, physical and transition risks, emerging opportunities, sustainable financing, and sustainability linked remuneration’s structure.
The Metrics and Strategy categories are picked up for further elaboration in the draft guideline, so let’s take a closer look at each. The Strategy Disclosure is quite comprehensively laid out. Specific details for various aspects of this disclosure are shown in the Figure 2.
Figure 2
The Identification section under this category lists impact time horizon, forecasting time horizon as well as categorization, assessment, and disclosure of risks. The next section, Business Impact Disclosures, covers impact and concentration of the risks through the value chain. The other three sections on Decision Impact, Financial Impact and Resilience, include several sustainable strategy related items. These sections cover key ingredients of strategies on meeting the climate action target, offsetting excess carbon footprint, strategies to handle financial implications of climate action, including, financing plan, and financial performances. it is also worth mentioning the requirement for elaboration under the section on Resilience about the rationale for either adopting a particular option under scenario analysis strategies or choosing an alternate option under non-scenario strategies. This section also highlights the need to disclose the justifications for selecting a particular scenario analysis in terms of the applicable business environment and internal control factors. This requirement ensures that the Strategy Disclosure factors in the readiness appropriate to the size as well as complexities of the operations of the reporting entity.
Similar to Strategy Disclosures, the Metrics Disclosures is also covered in a greater detail in the draft guideline. An overview of the sections providing detail elaboration can be seen in Figure 3.
Figure 3
As seen in Figure 3, the section on Metrics Type provides for defining the metrics using attributes like generic, industry, KPI, target and baseline. A metric can be classified as a Generic Metric if it applies across industry or geographies. The metrics specified in the section on Emission Accounting requires capturing Absolute Values as well as well as Emission Intensities. Also, these metrics must be reported not only for Reporting Entity but also for Accounting Group and the Wider Organization linked to the Reporting Entity. metrics on emission amount must be reported under headings Scope 1 and Scope 2. Besides, Scope 3 emissions should also be reported for the downstream and upstream value chain of the Reporting Entity, by the fifteen subcategories as specified in the GHG protocol. In addition to the foregoing metrics, the ISSB draft also requires disclosures on Physical Risk, Transition Risk and Climate Change Linked Opportunities using appropriate quantitative metrics. The draft guideline also mandates disclosure of metrics in relation to sustainability linked spend analytics in form of EU Taxonomy classifications as well as by way of Marginal Abatement Carbon Cost and Internal Carbon Price. The guideline also stipulates disclosure of specific metrics to usher in accountability for sustainability and climate risks management. It requires disclosure of sustainability linked performance goals and also disclosure of the actual sustainability performance as against the set goals.
From the above discussion on disclosure requirements laid down in draft guideline of ISSB, it emerges that every reporting entity needs to put in place an elaborate system for sustainability data management, climate impact modeling and sustainability analytics, sustainability visualization dashboard apart from a metrics management and disclosure reporting solution. In short, every reporting entity requires to have a digital sustainability spine like the one provided by TCS Intelligent Urban Exchange™ to host algorithms and models for emission computations, emission forecasting, emission benchmarking, emission and sustainability scenario analysis, and stress testing, metrics value estimation, spend analytics, climate risk modeling and value chain intelligence gathering. In addition, the Reporting Entities also need to equip themselves with appropriate solutions for Metrics Management and Disclosure Reporting. Since this guideline is expected to come in force starting 2024, with first reports becoming due in 2025, not much time is left for preparing for adoption of this guidelines. Fortunately the preparatory work being done for disclosure reporting specified by national laws and regulators like the SEC, will support ISSB disclosures as well.
About TCS Intelligent Urban Exchange™ (IUX) for sustainability is an enterprise software solution from TCS Digital Software & Solutions. It is an advanced AI and ML powered solution that delivers comprehensive insights, recommendations, and metrics for environmentally clean organizational and value chain operations. The aggregate system-wide impact of TCS IUX for sustainability results in substantial emissions reduction, cost savings, and resource conservation. while also advancing corporate environment stewardship, compliance, and social responsibility.
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Tata Consultancy Services (TCS) is an IT services, consulting and business solutions organization that has been partnering with many of the world’s largest businesses in their transformation journeys for over 50 years. TCS’ proactive stance on climate change and award winning work with communities across the world have earned it a place in leading sustainability indices such as the MSCI Global Sustainability Index.
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About the Author:
Dwarika Mishra is Head of Product Management at TCS and a specialist in sustainable operations.