New Board Will Create and Oversee Sustainability Disclosure Requirements

Amidst the many weighty matters discussed and debated at the recent COP26 climate conference, a major announcement with momentous potential effects on businesses may have gone unnoticed. The IFRS Foundation said at the climate conference that it would form the International Sustainability Standards Board (ISSB), which will be tasked with creating a single set of standards “to meet investors’ information needs.” The new board will, in essence, develop global sustainability disclosure standards and oversee their implementation.

The IFRS Foundation is a public interest organization that, according to its Web site, was established to “develop a single set of high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards—known as the IFRS Standards—and to promote and facilitate adoption of the standards.” Through the forthcoming sustainability disclosure requirements, it aims to combat “greenwashing” by companies. Greenwashing, sometimes also called “green sheen,” is creating a false impression, or providing misleading information, in an effort to portray a company and/or its products as more environmentally friendly than is, in fact, the case.

Investors are increasingly focused on sustainability and want clearer standardized information from companies on environmental, social, and governance (ESG) risks, which affect the value of their businesses. The ISSB, which is set to begin its work in 2022, will seek to help investors and regulators by creating baseline sustainability disclosure standards so that information is comparable across industries and financial markets.

The IFRS Foundation’s trustees made two other announcements of note at COP26. It stated that there is now in place a commitment by the current leading investor-focused sustainability disclosure organizations to consolidate into the new board. In addition, it announced the publication of prototype climate and general disclosure requirements developed by the Technical Readiness Working Group, a group formed by the Foundation’s trustees to undertake preparatory work for the new ISSB.

Widespread adoption of any new standards is likely to take time. Companies will be required to comply only once the new standards are adopted by national regulators. The timing will be affected to some extent by whether the International Organization of Securities Commissions, an umbrella group of financial markets regulators, backs the new standards. In the meantime, however, companies should note that new standards are forthcoming from a newly-announced body that may ultimately have an outsized effect on determining what is permissible in ESG disclosures.