On June 26, the International Sustainability Standards Board (ISSB) released its first-ever global ESG reporting standard, which provides more detailed requirements for corporate social, environmental and governance risk disclosures, paving the way for companies in all regions to disclose harmonized climate and sustainability information, effective after January 1, 2024. This is a milestone in the field of ESG investing.
IFRS Sustainability Disclosure ESG Reporting Standards
The term ESG was first coined by a team affiliated with the United Nations in 2004, and over the past decade, ESG has become a trillion-dollar business. In 2022, the total size of global ESG funds has reached $2.497 trillion. In the face of multiple sets of ESG (environmental, social, governance) information disclosure standards around the world, the world's most authoritative standards may have been born recently. The IFRS released the ESG reporting standard for sustainability disclosure, which stipulates the disclosure requirements for corporate sustainability-related governance, strategy, risk management, and KPIs and targets.
1) Disclosure of sustainability-related risks and opportunities
Governance processes, controls and procedures used by entities to monitor, manage and oversee sustainability-related risks and opportunities; Strategies for entities to manage sustainability-related risks and opportunities; The entity's procedures for identifying, assessing, prioritizing and monitoring sustainability-related risks and opportunities; The entity's performance in terms of sustainability-related risks and opportunities, including progress towards any objectives that the entity has set or that are required by law or regulation.
2) Disclosure of climate-related risks and opportunities
This entity is used to monitor, manage and supervise governance processes, controls and procedures for climate-related risks and opportunities; the entity's strategy for managing climate-related risks and opportunities; The procedures used by the entity to identify, assess, prioritize and monitor climate-related risks and opportunities, including whether and how these procedures are integrated into and informed by the entity's overall risk management procedures; The entity's performance in terms of climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets required to be achieved by law or regulation.
At present, the main disclosure standards in the world are actually "tripod", including the above-mentioned Pru standard developed by the ISSB committee under IFRS, as well as the Sustainability Reporting Standard (ESRS) developed by EFRAG in the European Union and the Climate-related Financial Disclosure Working Group (TCFD) promoted by the Securities Regulatory Commission in the United States.
Qiu Ciguan, a professor at Shanghai Advanced Institute of Finance (SAIF) of Shanghai Jiao Tong University, previously told reporters that the most important difference between the above three sets of standards is the difference in values, which is reflected in the disclosure object of ESG sustainability reports. TCFD is a standard American standard, and its disclosure object is shareholders; The ISSB's International Sustainability Disclosure Standard (ISDS) also targets shareholders; The EU's ESRS will be closer to China's and will be disclosed to stakeholders. The difference in values makes these three sets of standards themselves ununified, that is, there can be no unified set of standards in the world. In her view, each country has its own borders, and the application of ESG standards must comply with local laws.
But even so, the ISSB's standards are considered more authoritative and are expected to lead future ESG-related disclosures. EY believes that the issuance of the ISSB standard marks a shift from voluntary disclosure to mandatory disclosure requirements in the field of sustainable information disclosure, and the impact on many stakeholders cannot be underestimated.
The ISSB promotes high-quality financial disclosure standards
In recent years, with the concern of all sectors of society on sustainable development, especially climate change, many organizations have established and provided a variety of sustainability-related reporting standards and frameworks. The application of a wide range of non-mandatory disclosure frameworks and standards lays the foundation for sustainable disclosure, but at the same time report users face inconsistencies and incomparability. There is no shortage of arguments that inconsistencies in global disclosures on relevant information will affect a smooth transition to a low-carbon economy. There is growing demand for a globally consistent set of sustainability disclosure standards.
With broad support from international organizations and stakeholders, including the International Organization of Securities Commissions and the G7 Finance Ministers and Central Bank Governors' Meeting, the IFRS Foundation (IFRS Foundation) announced the establishment of the ISSB at COP26 in November 2021 to develop sustainable disclosure standards.
The ISSB aims to provide a comprehensive global baseline against which users of general-purpose financial reports can be judged on high-quality sustainability-related financial disclosures.
In the field of sustainability reporting, the materiality principle is divided into single materiality and double materiality. Among them, single materiality refers to the definition of materiality from the outside in, considering only the impact of environmental and social issues on the company's financial baseline; The dual importance measures the importance of issues from both the inside-out perspective and the outside-inside perspective, considering not only the impact of environmental and social issues on corporate value, but also the impact of corporate business activities on the external environment and society.
A number of experts in the field of ESG research in the industry told reporters that IFRS is an international financial reporting standard, and most of the current financial information disclosure standards of foreign enterprises follow the IFRS standard, and the IFRS Foundation is a foundation to supervise and control the international financial reporting standard, which has previously been in the field of financial information, and currently has added a sustainable non-financial information field. China's Ministry of Finance (MoF) and The Stock Exchange of Hong Kong Limited (HKEX) have expressed their support and solicited opinions on behalf of the ISSB, and it is believed that China should also try to align with international standards.
It is also closely related to Chinese enterprises
The newly published ISSB guidelines will take effect during the annual reporting period commencing on or after 1 January 2024 and allow for early adoption. ISSB standards aim to provide more consistent, complete, comparable and verifiable sustainable financial information, and their application will have a wide impact on mainland enterprises, information users and third-party institutions.
At present, many Chinese enterprises have paid great attention to the development of the situation. EY believes that the impact of the new standards on Chinese companies includes that Chinese companies, especially Hong Kong and other overseas listed companies, may be actively or compelled to apply ISSB standards or similar standards when preparing sustainability reports. For example, the Hong Kong Stock Exchange's Climate-related Disclosures (Consultation Paper) under the Enhanced Environmental, Social and Governance Framework issued in April 2023 builds on the ISSB's climate-related disclosure standards, introduces new climate-related disclosure requirements, and proposes to upgrade climate-related disclosures from "comply or explain" to mandatory. Enterprises should actively develop an action plan and consider the control system, information system and other infrastructure that need to be established to comply with the disclosure requirements of the ISSB standard.
At the same time, for information users, how to read and effectively use sustainability-related financial information contained in general purpose financial reports, analyze how sustainability-related risks and opportunities affect investees, and make investment decisions, it is also necessary to first understand the relevant background and requirements of the standard.
In addition, to support globally consistent sustainability reporting practices, it is inevitable that corporate sustainability information will be subject to external assurance. This requires a proactive response from third-party institutions providing assurance services to fully prepare for the upcoming assurance services.
Jun Yu perspective
The ISSB Code will become a common language for sustainability-related exchanges between entities and capital markets, and the ISSB's disclosure framework lays the foundation for a globally harmonized ESG disclosure standard. As a leading asset management company in the Asia-Pacific region, Junyu Asset Management pays close attention to ESG disclosure standards and related policy orientations to escort investors' investment.