ISSB-SASB-GRI-ESRS interoperability coming to life: What you need to know

Key points:

  • Interoperability essentially means standards coming together as a mosaic to fill each other’s gaps. It can work to drive comprehensive and consistent standards faster- and is finally becoming more than simply standard setting jargon.
  • There is a clear recommendation from IFRS staff for reporting companies to be allowed to use GRI standards and ESRS where there are gaps in the IFRS standards - pending ISSB decision.

The latest “emergency meeting” staff paper published by ISSB on the “Sources of guidance to identify sustainability-related risks and opportunities and disclosures” offers some illuminating examples of how the highly anticipated “interoperability” across the different standards may work in practice.

The paper provides some recommendations concerning the sources that may (optional) or shall (mandatory) be considered for the identification of sustainability-related risks and opportunities in the absence of relevant IFRS standard (which currently means all the remaining ESG topics except climate). In other words, those sources that are key for a materiality assessment.

Here’s a practical visualization of the staff recommendations:

Identifying sustainability-related risks and opportunities
Shall consider the disclosure topics in the industry-based SASB Standards
May consider the CDSB Framework application guidance for water - and biodiversity-related disclosures
the most recent pronouncements of other standard-setting bodies whose requirements are designed to meet the needs of users of general purpose financial reporting
the sustainability-related risks and opportunities identified by entities that operate in the same industries or geographies
Identifying disclosures, including metrics about sustainability-related risks and opportunities
Shall consider the metrics associated with the disclosure topics included in the industry-based SASB standards
May consider the CDSB Framework application guidance for water - and biodiversity-related disclosures
the GRI standards
the European sustainability Reporting Standards
the most recent pronouncements of other standard-setting bodies whose requirements are designed to meet the needs of users of general purpose financial reporting
the metrics used by entities in the same industries or geographies

When identifying ESG topics that may be material risks or opportunities, companies must always consider SASB standards. There’s also a non-binding recommendation to look at other standards that target users of general purpose financial reporting (not GRI and ESRS because they address a broader audience); as well as the CDSB framework and how peer companies in the same industry or geography are reporting. Again, only in the absence of the relevant IFRS standards.

When deciding which disclosures should be used to report on the material sustainability-related risks and opportunities, the same sources mentioned above shall (SASB) or may (CDSB framework and peers reports) be considered. Additionally, GRI standards and ESRS may also be considered. 

Despite these standards addressing a broader audience than only the users of general purpose financial reporting, this recommendation highlights the “practical benefits for preparers of being able to source disclosures from the GRI standards and ESRS”.

In short, there is a clear recommendation to open the door for reporting companies to be allowed to use GRI standards and ESRS where there are gaps in the IFRS standards.

 

What’s next?

Is this it then? The staff paper ends with an interesting note on potential further recommendations that may emerge after subsequent meetings on the fundamental concepts included in the draft S1. It’s interesting to look at the observations on interoperability from the ESRS perspective, as the staff noted:

“Following a similar concept to that outlined regarding the benefits for preparers and users of information of using ESRS as a source of guidance in the absence of a specific IFRS Sustainability Disclosure Standard, there would be benefits for those using ESRS when ‘gaps’ could be filled using IFRS Sustainability Disclosure Standards to assist in meeting the objectives of ESRS […] It is proposed by EFRAG that ESRS 1 would note that in developing entity-specific disclosures, consideration should be given to comparability between entities including by considering other disclosure frameworks.”

Using the materials of the ISSB would foster such comparability. In particular, comparability could be fostered in the near term if it were the case that for climate-related disclosures both those using ISSB Standards and those using ESRS (E1) were referred to Appendix B of [draft] S2 as a basis for providing industry-specific information. Industry-specific requirements are an important component of the ISSB Standards and thus utilising this material (even if illustrative initially) emphasises an important feature of the ISSB’s standards. 

The inclusion of such a reference within ESRS would provide a similar role to the proposals set out in this paper with regard to ESRS in that the ISSB’s materials would be relevant in the absence of a specific ESRS requirement and to the extent it assists in meeting the objectives of ESRS requirements. This approach would result in the ISSB adopting similar methods to assist in providing interoperability.

The last sentence sounds like a pragmatic and beneficial quid pro quo.

Interoperability essentially means standards coming together as a mosaic to fill each other’s gaps. It’s a solid starting point, as it can drive comprehensive and consistent standards faster. And it may open doors for further and deeper interoperability - other interesting staff papers - like this one - look specifically at aligning language and clarifying concepts to make sure their meaning is harmonized across other standards, frameworks and recommendations like TCFD. Deliberations like the decision to include Scope 3 emissions are also a reflection of the efforts to achieve interoperability.

In a recent webinar organized for The Good Governance Academy's 8th Colloquium, an interesting interoperability table for corresponding standards (i.e. standards regarding sustainability issues covered both by IFRS and ISSB) was presented. The goal is to maximize the standards in column B and minimize those in columns A and C:

Aligning disclosure requirements:

Column A

Column B

Column C

Disclosures only for ISSB

Disclosures relevant to both ISSB & ESRS

Disclosures only for ESRS

For now, it is promising to see that interoperability is finally more than simply standard-setting jargon.

While ISSB has confirmed the presence of SASB and CDSB as sources of guidance, a deliberation on GRI and ESRS is still pending. With reports pointing to increased activity on the interoperability front, and the announcement IFRS made today at COP27, would it be too ambitious to hope for a major breakthrough soon?