ESG: ISSB Exposure drafts – ESMA submits its comments

The ISSB and its Exposure Drafts

The International Sustainability Standards Board (ISSB) was created on 3 November 2021 by the IFRS Foundation Trustees 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 to help them make informed decisions”.

As part of this work, in March 2022, the ISSB published two exposure drafts (EDs) for comment:

• ED/2022/S1 IFRS S1, “General Requirements for Disclosure of Sustainability-related Financial Information” and
• ED/2022/S2 IFRS S2, “Climate-related Disclosures”.

The period for responses closes on 29 July 2022.

ESMA’s response

On 13 July 2022, ESMA published its response to the ISSB’s drafts.

ESMA’s detailed comments are set out in an appendix. But the covering letter from Verena Ross makes some interesting points regarding ESMA’s views as to the future development of global and regional or jurisdictional standards.

The letter includes the following remarks:

• the comprehensive set of European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD), which is currently under development, aims to take into account some key EU specificities, notably:
  • the need to cover the entire spectrum of ESG topics
  • the importance of the ‘double materiality’ principle and
  • the need to be consistent with major pieces of sustainable finance legislation (the Taxonomy Regulation, the SFDR and the Benchmarks Regulation)
• such regional standardisation and international efforts must go hand-in-hand so issuers can rely on high-quality reporting standards which are consistent, interoperable and as far as possible, global (but, where necessary, regional or jurisdiction-specific)
• ESMA strongly supports the work of the ISSB to reach a common set of internationally accepted high-quality sustainability reporting standards which could serve as a global baseline
• ESMA believes that the EU’s work on corporate sustainability reporting and that of the ISSB can reach common ground on three main areas:
  • basic elements of the standard-setting process such as the architecture of the requirements, the reporting boundaries and, where possible, the terminology
  • disclosure requirements for information on material risks and opportunities from the perspective of enterprise value creation and
  • the approach for identifying sustainability-related impacts that reporting entities generate on the environment and the people
• ESMA encourages the ISSB to work closely with the European Financial Reporting Advisory Group (EFRAG) on these areas and to facilitate tripartite discussions with the Global Reporting Initiative (GRI) which has, for some time, been setting standards to reflect sustainability-related impacts.
• ESMA also strongly supports the collaboration between the ISSB and GRI to ensure good international convergence between financial materiality and impact materiality as well as the work with the Jurisdictional Working Group to help drive the necessary establishment of a “comprehensive and truly interoperable standard-setting solution for sustainability reporting”
• ESMA has considered two main aspects in assessing the ISSB EDs:
  • how far the ISSB’s proposals serve the information needs of investors, especially those that operate in EU markets and are subject to EU-specific disclosure obligations and
  • how far they can converge with EFRAG’s draft ESRS.
• ESMA invites the ISSB to reconsider its proposed requirements in the following five areas:
  • the notion of ‘sustainability-related’ financial information – ESMA considers that the ISSB’s proposals do not define what are the sustainability-related matters addressed in the standards and recommends that the ISSB converges the scope and definition of what is meant by ‘sustainability’ with other major standard-setting initiatives
  • the overall approach to materiality – ESMA recommends clarification around the terminology relating to identification of risks and opportunities and that this is made consistent across the standard. ESMA would also like the role of external ‘impacts’ in assessing enterprise value creation to be clarified and made consistent with the impact identification process of other standard-setting initiatives (such as the ESRS and GRI standards)
  • the use of entity-specific disclosures and metrics - the ISSB envisages issuers being able to determine their own metrics and disclosures either (a) to complement those already envisaged by an IFRS sustainability standard or (b) where there is a lack of specific requirements as regards a certain matter. In ESMA’s view, where such metrics could qualify as ‘adjusted’ versions of those mandated by the individual ISSB standards, they should be accompanied by adequate disclosures – for example, ESMA’s Guidelines on Alternative Performance Measures and accompanying Q&As
  • the use of sector-specific guidance from the Sustainability Accounting Standards Board (SASB) – ESMA suggests that the ISSB consider how to include SASB guidance as part of its mandatory requirements in the climate-reporting standard, while (a) excluding parts of the guidance not necessarily related to climate, (b) amending aspects of the guidance not wholly suitable for global application given their jurisdiction-specific connotations and (c) considering phasing in such requirements gradually
  • transition plans and emissions offsets - ESMA recommends that the ISSB should complement its requirements with additional key details critical to achieving the comparability and relevance of reported information and which would improve convergence with the draft ESRS proposals.

On a related note, for our summary of ESMA’s Securities and Markets Stakeholder Group (SMSG) advice on EFRAG’s consultation regarding the first set of ESRS Exposure Drafts, see here.