A huge wave of information disclosure - Using the crisis as an opportunity

Zeroboard Research Institute Takayoshi Sonoda

Introduction

Today, the social role of companies is expanding beyond economic performance to include environmental, social, and governance (ESG) aspects. In particular, issues related to climate change are becoming important Issue that affect the very survival of companies. In this context, you may be aware that the rules for disclosing sustainability-related information, which have previously been mocked as alphabet soup, are gradually being unified.

The mainstream of this trend is undoubtedly the launch of the ISSB(International Sustainability Standard Board).

About ISSB

Its predecessor is the TCFD(Task Force on Climate-related Financial Disclosures), which was established in 2015 by the Financial Stability Board (FSB).

The ISSB was announced at COP26 in November 2021 after deliberations in the WG from March 2021, and in August 2022, it merged with the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) to form its current form.

IFRS S1 and S2*1), which will be released by the ISSB at the end of June 2023, can be said to accelerate the trend toward unification.

From voluntary disclosure to legal disclosure

S1 and S2 only provide a framework for use in each country and jurisdiction. ISSB recommends that each country's supervisory authorities formulate disclosure rules based on this framework. In other words, the TCFD means that voluntary disclosure rules will become mandatory.

In Japan, the Sustainability Standard Board Japan (SSBJ) is Create a draft, and other countries, including Singapore, Australia, the UK, and Canada, are already taking steps to implement the standard.

This is already a worldwide trend.

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However, unification is not something that can be achieved overnight.

While directives and initiatives governing the disclosure of sustainability-related information, such as the EU's Corporate Sustainability Reporting Directive (CSRD) and Global Reporting Initiative (GRI), take a dual-materiality stance, ISSB takes a single-materiality stance.*2) Furthermore, S1 and S2 are based on the US-originated Sustainability Accounting Standards Board (SASB), which was absorbed into ISSB. Although SASB's internationalization project is progressing, there are still questions about whether US standards will be globally compatible.

However, scheme owners who follow these disclosure rules share the Issue that double standards and double disclosure should be avoided.

As evidence of this, the ISSB is currently promoting a project to enhance interoperability. It has also stated that it will closely share information not only for S1 and S2, but also for the formulation of disclosure rules for biodiversity, human rights, human capital, and other areas that are planned for the future. *2

Information disclosure as a strategy

Until now, various initiatives and directives have set their own standards, and companies have been forced to disclose information to comply with their respective rules. However, although it may take time, it is certain that these things will become integrated. This not only maintains the integrity of information, but is also expected to reduce the effort and burden of information disclosure.

This is an important move for executives and those in charge of sustainability departments. This will increase the transparency of your company's disclosed information, build trust with stakeholders, and allow your company to be evaluated not only for its economic performance but also for its social performance. The time has come to understand the flow of unification and reconsider how we should proceed with disclosure from now on.

New regulatory trends are making reducing carbon emission amount an Issue for businesses.

Some countries and regions are beginning to introduce legal regulations that impose charges based on carbon content and carbon Intensity , such as the Carbon Border Adjustment Mechanism ( CBAM ) in Europe and the Clean Competition Act (CCA) in the United States.

The introduction of carbon pricing is also being considered in Japan. In light of this, companies are being asked to calculate emission amount, Settings reduction targets, and begin concrete efforts to reduce emissions.

This not only reduces future regulatory risks but also directly leads to business opportunities such as increased ESG investment. The regulatory environment is changing rapidly. Understanding this trend, formulating appropriate countermeasures, and taking concrete actions will be important elements that support the survival and growth of companies.

*1) Sustainability information disclosure standards

S1: General requirements for the disclosure of sustainability-related financial information

S2: Climate-related disclosure

While S1 sets out general standards for the disclosure of sustainability-related information, S2 is a thematic standard focused on the disclosure of climate-related information.

*2) Materiality

Materiality has two aspects: the impact that environmental and social issues have on corporate activity and performance, and the impact that corporate activity have on the environment and society. Of these, the approach that emphasizes only the former is called "single materiality," while the approach that emphasizes both is called "dual materiality."

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<Reference source>
*1, *2: IFRS announcement "ISSB issues inaugural global sustainability disclosure standards" (reference: August 2023)
https://www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2/