Market participants have called on the UK to implement the first two International Sustainability Standards Board (ISSB) standards with as little alteration as possible in order to ensure interoperability with other standards, in particular those in the EU.
In responses to a consultation by the UK Sustainability Disclosure Technical Advisory Committee, auditors, investors and corporates urged UK policymakers to make minimal deviation from ISSB’s general (IFRS S1) and climate (IFRS S2) standards when implementing them into law.
The response from auditing giant EY, for instance, called on the UK to implement the ISSB standards “unamended” in order to preserve the benefits of a global baseline. This was echoed by Mazars, which said it was “imperative” the standards be endorsed without amendment other than in “truly exceptional cases”.
This was echoed by Shell, the only non-financial corporate to respond. The energy giant warned that any deviation or addition to the ISSB standards could undermine global progress towards consistent and comparable financially material sustainability information.
Any justification for deviation, it said, “must therefore meet a high bar with clear, specific and transparent rationale”.
The need for interoperability, particularly with the EU’s Corporate Sustainability Reporting Directive (CSRD), was one of the key messages from respondents.
Pension scheme Railpen said global comparability and interoperability are “essential”, adding that ISSB frameworks should be interoperable with other standards across the globe.
KPMG and EY both highlighted the importance of equivalence agreements for other reporting standards.
KPMG said that ensuring UK requirements were fully aligned would be “important” for discussions on the topic, and warned that nationally adjusted IFRS standards could be ineligible for equivalence agreements.
This was echoed by EY, which said that unamended implementation could improve the likelihood of equivalence decisions being granted by other jurisdictions.
Similarly, M&G and Mazars noted their expectation that the UK would push the ISSB on interoperability with sustainability reporting frameworks, explicitly naming the Corporate Sustainability Reporting Directive (CSRD) as an example. M&G also stressed that the ultimate aim should be equivalence.
Another issue mentioned repeatedly was materiality definitions. Respondents warned that the definitions were unclear in the standards and called for further guidance. The UK Environmental Law Association said there was “substantial room for interpretation”, while M&G called for more clarity on the meaning of materiality to ensure consistency of practice.
The Quoted Company Alliance also said that, while the definition is clear, it was challenging to transfer from a financial to a sustainability context. The Financial Reporting Council should offer more support and guidance than the ISSB has already, it said.
While many respondents welcomed the reference by the ISSB standards to Sustainability Accounting Standards Board (SASB) standards for sector-specific materiality, some warned that companies should not fully rely on them and should develop their own entity-specific requirements.
Railpen, for instance, said companies should identify material risks and opportunities themselves, which might mean going beyond S1 and S2 requirements.
“We use SASB standards as a highly useful starting point, but we supplement the standards where necessary to get as complete a picture as feasible of relevant sustainability-related value drivers,” it said.
The dispute over double materiality standards smouldered on in consultation responses, with some respondents suggesting the UK add in requirements to meet the demand for impact disclosures.
In October, the debate on single versus double materiality was re-ignited by ISSB chair Emmanuel Faber, who questioned what he called the market’s “simplistic” push for the latter.
Double materiality is a European concept that refers to capturing a company’s impact on the environment and society in addition to the impact of sustainability factors on the company.
The EU’s focus on double materiality is a key difference between the European Sustainability Reporting Standards (ESRS) developed by EU standards body EFRAG and those from the ISSB, which focus on “enterprise value”, or single materiality.
In its response to the UK consultation, Norges Bank Investment Management (NBIM) said it supported the ISSB’s decision “to focus on information that is relevant for investors and other providers of capital through a financial materiality lens”.
UK pension fund USS, on the other hand, said in its comments on referencing SASB standards it would welcome the introduction of disclosures on double materiality.
This was backed up by the Principles for Responsible Investment (PRI), which said the UK government “should consider adopting disclosure requirements additional to the ISSB standards that capture further information on companies’ sustainability impacts, building on requirements within the Global Reporting Initiative standards and ESRS”.
PwC proposed a compromise position, suggesting that entities be required to produce an additional sustainability report alongside the strategic report, in which they could include a full set of sustainability-related information. This could “satisfy a wider range of interested parties than the primary users identified in ISSB standards”, the consultancy said.
Comments, concerns and questions
Other issues raised by respondents included timing, the impact on executive pay, and consolidated reporting.
Many respondents urged the UK to follow the transition relief offered by the ISSB standards, allowing entities to delay reporting on some aspects. The Quoted Company Alliance even recommended this delay be extended to two years, rather than the one year set out by the ISSB.
KPMG noted that restating sustainability information could impact ESG-linked executive pay if it affected the achievement of targets on already paid-out remuneration. It recommended the UK’s Technical Advisory Committee liaise with other regulators on this.
Finally, both Legal & General Group and Lloyds Banking Group called for reporting to be at the consolidated group level, with no requirement for wholly owned subsidiaries to report separately.