The Global Regulatory Landscape: A Call for Standardization
The harmonization of the Global Reporting Initiative (GRI) and the International Sustainability Standards Board (ISSB) as the dual pillars of corporate climate disclosures is a testament to the escalating global demand for robust and uniform sustainability reporting. This demand is being fueled by a multitude of regulatory bodies across the globe, including but not limited to the European Union, the United Kingdom, and the United States.
In the United States, the Securities and Exchange Commission (SEC) has been a proactive participant in advocating for enhanced corporate climate disclosures. The SEC has put forth new regulations that mandate publicly traded corporations to provide more comprehensive disclosures pertaining to their climate-related risks, greenhouse gas emissions, and their strategies for managing these risks. Across the Atlantic, the European Commission has proposed a Corporate Sustainability Reporting Directive (CSRD) that obligates all large corporations and all publicly listed small and medium-sized enterprises (SMEs) to report on a broad spectrum of sustainability matters. The CSRD is a component of the European Union’s overarching strategy to incorporate sustainability considerations into its financial policy framework.
The Global Reporting Initiative (GRI): Impact Materiality
The Global Reporting Initiative (GRI) is a preeminent standard for sustainability reporting that underscores the concept of impact materiality. Impact materiality pertains to the magnitude of an organization’s economic, environmental, and social impacts. The GRI Standards empower organizations to report on their most significant impacts, thereby offering a comprehensive overview of their sustainability performance.
The GRI’s methodology for materiality is an inside-out assessment, concentrating on the severity of the organization’s adverse impacts. This approach is predicated on the understanding that an organization’s impacts are or will become financially material over time. Consequently, the GRI’s standards are engineered to assist organizations in identifying, managing, and communicating their most significant sustainability impacts.
The GRI Standards are a modular system comprised of three series of Standards to be used together: Universal Standards, Sector Standards, and Topic Standards. The Universal Standards apply to all organizations and cover core sustainability issues related to a company’s impact on the economy, society,and the environment. The Sector Standards address impacts that are significant within a specific sector, and the Topic Standards cover specific sustainability topics.
The International Sustainability Standards Board (ISSB): Financial Materiality
Contrastingly, the International Sustainability Standards Board (ISSB) emphasizes financial materiality. Financial materiality refers to the significance of an organization’s sustainability impacts on its financial condition, operational results, and future prospects. The ISSB adopts the same definition of ‘material’ as used in IFRS Accounting Standards – information is material if omitting, obscuring, or misstating it could reasonably be expected to influence investor decisions.
The ISSB’s focus on financial materiality is designed to equip investors and other stakeholders with the information they need to make informed decisions. The ISSB’s standards aim to streamline reporting schemes and provide a clear, consistent, and comparable picture of an organization’s financial materiality. The ISSB, under the umbrella of the International Financial Reporting Standards (IFRS) Foundation, focuses on the standardization of sustainability-related financial disclosures. The ISSB’s inaugural standards, IFRS S1 and IFRS S2, mark a significant milestone in sustainability-related disclosures for capital markets.
IFRS S1 requires companies to communicate the sustainability-related risks and opportunities they face over the short, medium, and long term. The standard is designed to ensure that companies provide investors with information relevant to decision-making. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1. Both standards are based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The ISSB Standards allow companies and investors to standardize on a single, global baseline of sustainability disclosures for the capital markets, with any additional jurisdictional requirements being built on top of this global baseline. The ISSB’s work has received strong support from investors, companies, policy makers, market regulators and others from around the world, including the International Organization of Securities Commissions (IOSCO), the Financial Stability Board, the G20 and the G7 Leaders.
The ISSB Standards are built on and consolidate the TCFD recommendations, SASB Standards, CDSB Framework, Integrated Reporting Framework and World Economic Forum metrics to streamline sustainability disclosures. This consolidation helps companies to benefit from their investments they’ve already made in sustainability disclosures while reducing the ‘alphabet soup’ of sustainability disclosures.