Transcript by Kensho.

Lindsey Hall: I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy.

We're just over 1 week away from Climate Week NYC. So in today's episode, we're going to be talking about the climate disclosure landscape. Investors and stakeholders around the world have clamored for more consistent and comparable climate-related disclosures for years. And in June 2023, the International Sustainability Standards Board, or ISSB, responded to that call by issuing its first 2 sustainability disclosure standards.

Esther Whieldon: The standards could become the basis for globally consistent climate disclosures if widely adopted, They build on the work of several existing frameworks, including the Taskforce on Climate-related Financial Disclosures, known as the TCFD. These ISSB standards are designed to streamline the regulatory alphabet soup that currently exists in sustainability reporting and disclosure. 

We've just published research using S&P Global Corporate Sustainability Assessment data to understand the widely varying levels of climate disclosure around the world, and we'll include a link to that research in our show notes. 

Lindsey Hall: Our regular contributor, Jennifer Laidlaw, is a member of the thought leadership team at S&P Global Sustainable1 One and one of that report's authors. For this episode, she talked to Sue Lloyd, the Vice Chair of the ISSB. So Jennifer is going to take the lead and help us understand more about the standards. Jen, welcome back.

Jennifer Laidlaw: Hi Lindsey. Hi Esther.

Lindsey Hall: So Jennifer, what should listeners know about these new standards before we dive into your interview with Sue?

Jennifer Laidlaw: So the standards will take effect from January 1, 2024. And as we heard, there's 2 of them. The first one, S1 ask companies to disclose sustainability-related risks and opportunities. And the second, S2, is a climate-related disclosure standard, which ask companies to disclose climate-related information and metrics such as greenhouse gas emissions. Let's now turn to my interview with Sue Lloyd. I started by asking her why the ISSB focused on those 2 standards first. 

Sue Lloyd: Our first 2 standards that we issued at the end of June really established this global baseline of comparable information to meet investors' information needs. And so S1 sets the scene by asking that companies provide information about all of the important sustainability risks and opportunities that are reasonably expected to affect the prospects of the company from an investor perspective and ask that, that information be provided along with the financial statements with connections to the financial statements established. So it's really setting up the framing of this new reporting system. 

And that standard is then used in conjunction with more detailed disclosure requirements. And the first set of more detailed disclosure requirements that we published was in S2 climate requirements, and we developed that specific set of disclosures first because people have said to us consistently that the most urgent pressing need for better information is in relation to climate-related risks and opportunities. 

So if I look across the S2 and sort of highlight the key aspects of S2, the first thing to say is that like S1, it builds on the TCFD recommendations that we all know and love. So it asked for information about governance, strategy, risk management and metrics and targets to do with the company's climate-related risks and opportunities, asking for information about the physical risks that the company is exposed to, such as the risk of flood, either transition risks that the company is exposed to, so how it might need to adjust its business model because of climate change, and also information about the opportunities that the company might have as a result of our climate change because our investors aren't only interested in risk, interested in the opportunities for upside, obviously, from an investment perspective. 

And then the last thing I'd say about S2, which is our special and a very important part of the ISSB standards, and we can see that both in S1 and S2 is that in addition to the cross industry information that we saw with the TCFD recommendations, where I'm essentially pretty much everybody, whatever industry you're in, is asked, for example, to give information on greenhouse gas emissions. An important part of our standards, including in S2 is that we ask for information about industry-specific disclosures about a company's climate-related risks and opportunities. And we've got examples set out in the appendix to the document of what those disclosures might look like for different industries. 

And that's a really, really important part of both S1 and S2 because when it comes to sustainability-related risks and opportunities, investors tell us that it's really important to understand how those risks manifest from an industry perspective. 

Jennifer Laidlaw: These risks that you're talking about. What are you doing to make companies aware of what these risks are? How are you supporting them and working with them to ensure that they are ready for these new standards? 

Sue Lloyd: Firstly, in terms of identifying what those risks are, we've got a definition of what a climate physical risk and a transition risk is in the document. And also, we include these industry-specific requirements, partly because that helps identify what particular types of climate risks might be relevant for different industries. 

So the industry examples in S2 and themselves are really important guidance to help companies to identify the types of risks to think about when they do this new type of reporting. And so that's the first thing. 

The other thing that we're doing is that we are entering into a really big capacity building program now, both directly and with partners where we really are planning to work with companies and others to make sure that they understand the requirements and the standards and how to apply them. And so this capacity building program that we're rolling out is a really important mechanism that we're using to really help was what you are saying there, helping people understand what we mean. 

Jennifer Laidlaw: The IFRS Foundation, which develops international accounting standards launch the ISSB to create standards that would complement its accounting rules, known as IFRS standards, which are used by companies around the world. I asked Sue if she expects the new standards to have the same global reach as other IFRS standards. 

Sue Lloyd: And that's certainly the hope and the dream. So if you look back to why the ISSB was established, it was because the market told us that there was a need for high-quality globally comparable information to inform investment decisions, knowing that our capital markets are global. So that's the foundation. 

And you're right that the IFRS Foundation, which is the home of the International Accounting Standards Board is very well known for its success in having now more than 140 jurisdictions around the world using the IFRS accounting standards. So that's the vision that sort of inspired the International Sustainability Standards Board having a home within the IFRS foundation. 

And a really important step towards the crystallization of that vision now that we've published our first 2 standards is at the international securities regulators, IOSCO [International Organization of Securities Commissions], in July this year indoors standards, which means that they've called upon their 130 members around the world to look at the S1 and S2 standards and to move towards considering the use of those standards in jurisdictions around the world.

And that's really important because it was exactly that same endorsement process that was very much the catalyst for the success of the use of the IFRS accounting standards around the world. So it's a really important first step towards that global adoption of our standards to achieve this reporting that we're all looking for. 

Jennifer Laidlaw: One of the things we've seen is a lot of countries actually saying that they will make these stands mandatory. And I'm just wondering as well, how is the ISSB working with different jurisdictions to help the rollout of mandatory sustainability standards?

Sue Lloyd: Yes. So the hope is that they will be mandatory, and that's good because it then means that we can be confident that all the companies are doing the same thing, if you like. So it's a really important foundation for this robust information that investors have been asking for. And really getting this adoption around the world and the movement to mandatory application of the standard starts with the way that we develop the standards, making sure that it's not just the ISSB that's working on these standards, but we're working with jurisdictions. 

So the first thing that we've done is set up a couple of working groups, including what we call our jurisdictional working group, where we have regulators and other authorities from around the world, actually sitting at the table with us and giving us advice as we build our standards. And that means, therefore, that the standards that we've published, have been developed really with their input and support, which is a really good basis then to see the adoption of the standards around the world. 

Then the next thing that we're doing is following from the IOSCO endorsement is then having conversations with regulators in different jurisdictions about how they might onboard the use of the standards around the world. And so you'll see at the moment that there's a lot of consultations going on around the world, for example, in the United Kingdom, in Australia, Singapore, amongst others. And we are very involved in the conversations with those regulatory bodies around the world when they're getting feedback from their stakeholders to help guide them in terms of how the standards might be applied in different jurisdictions. 

So we really work alongside jurisdictions to really help them to move towards the infrastructure and mechanisms they need in place to support the use of the standards and also to stand ready to assist them again with this capacity building that I was talking about, so that they can be confident that if they require their companies in their jurisdiction to use these standards that the companies, that the regulators, and that the assurers, and even the investors in the market are prepared for using these standards and using the information that comes from their application. 

Jennifer Laidlaw: Now you mentioned different geographies such as the U.K. that is looking at potential mandatory sustainability standards. I was wondering what kind of differences are you seeing between geographical regions? Are there areas in the world that are more advanced in mandatory sustainability standards and other regions that are less advanced?

Sue Lloyd: So a really interesting trajectory that we're actually seeing in the space. And what's really striking actually is that even in sophisticated capital markets and even in developed economies, even with some large companies, it still might not be easy to start to use these standards. 

What's really making a difference is sort of what's gone on in jurisdictions before. So some jurisdictions are off to a good start because, for example, the TCFD recommendations were already part of the reporting infrastructure. 

But we're actually seeing that there's sort of 2 broad camps I think, in the jurisdictions. There's some very large sophisticated capital markets. So the U.K. and Australia would be examples of those, which have moved quite quickly to ask their stakeholders about using the standards in their jurisdictions. 

Japan is another example, where they very early on, have indicated an intention to develop Japanese standards that are based on S1 and S2. And we see those markets which are very well known for having quite stringent reporting requirements being early movers in terms of indicating an intention to use our standards. 

But then there's a really different population, which is also moving really quickly. And the poster child for that is really the African continent, where very early on, we've seen Nigeria and Ghana, for example, indicate an intent to move to apply their standards early on. And the catalyst there is quite different. The consequence in terms of an intention to adopt quite quickly as the same. But the catalyst there has been a real opportunity that's been identified to use our standards to attract capital to fund really important transitions. And so we've seen emerging markets really moving quite quickly as well. So similar trajectories, but for really different reasons, which is a really interesting thing to see that I actually didn't expect if you'd asked me a year ago.

Jennifer Laidlaw: That is really interesting, actually. Are there any specific examples of where you see that capital going into an emerging market? You mentioned Nigeria but just wondered if there's any other examples of countries that been able to get capital because they're actually going to be using these standards?

Sue Lloyd: I think it's early days because we're just starting this journey. And so at the moment, it's a lot of discussion about the benefits of it. And it's really the idea that by being visible about the opportunities for investment and also being part of the high-quality reporting that's expected and the comparable information that means you can give confidence to investors to invest. They feel that they're not going in blind that, that really gives opportunity for capital to be attracted. And so at the moment, it's sort of a plan rather than evidence as such. But it's really interesting to see that.

And it's also interesting to see the level of political support for that vision. So the African Finance Ministers about a year ago were very early movers in terms of showing support for the ISSB because of this vision of the real opportunity that could come from using these standards. 

Jennifer Laidlaw: How are you actually managing the whole process of trying to ensure that your standards aren't too different from other standards out there? 

Sue Lloyd: Yes. So the first thing on this front is, of course, that when we were set up, one of the first things we did was to consolidate with some existing standard setters. And so the Sustainability Accounting Standards Board and the Climate Disclosure Standards Board was sort of brought into the IFRS foundation. And so we remove some of the complexity of the standard setting environment in establishing our Board and with the publication of the new standards. 

But then you're right, there's other ongoing initiatives. So one of the really important things that we have talked about right from the start with our Board is that we know that it's not only going to be the ISSB, and it's not only going to be investors who are interested in sustainability reporting. That we are going to have interactions with jurisdictions and also that some of those jurisdictions are going to be interested in reporting not only to meet investor needs but also broader stakeholder needs and we need to have a way to work with them. 

And so a couple of the really important things we talk about is that jurisdictions can take S1 and S2 to get this global comparable information, but we are very receptive and expecting, in fact, jurisdictions to potentially add on some specific disclosures that might be of interest in a market that we haven't identified for global use. 

For example, when I talk to the Japanese standard setter in this space, they've been thinking about whether something specific on earthquake risk might be relevant, particularly in Japan. So that's one example. 

But then we have the most tricky interaction of all, which is where we need interoperability and Europe is the poster child for that. So as many listening will know, the European Union were very quick to move towards our sustainability reporting as part of their green deal. And in fact, they started on their sustainability reporting journey before the ISSB was even established. 

So there wasn't really the possibility in Europe to take the S1 and S2 standards and use those as a base and then add on to extra disclosures that Europe needed for public policy and other reasons. 

So what we're doing in the case of Europe is really back solving for interoperability to make sure that companies can efficiently report using the ISSB standards as well as complying with the European reporting obligations. So to get back to work, to answer your question, we have been sitting in meetings with the European Commission and the European standard setter, EFRAG, and making sure that where we have common disclosures, we are as consistent as we possibly can be and that we then also identify where we might have differences and disclosures. And the idea here is that at the end of the day, our standards are as similar as possible and that we are able to describe to our stockholders how to navigate between the 2 standards. So that's one really important conversation. 

The other one that I'll mention is in the U.S., really important for us that the U.S. SEC [Securities and Exchange Commission] is a member of one of these jurisdictional groups that I was talking about, which means we talk to them a lot. They've been involved in our decision-making. And we would plan also to keep talking to them to make sure that when they decide where they land in terms of the climate role that they're still considering in the U.S. that we're looking at the interoperability between the standards to make sure that we can make this as efficient a process again for companies who might need to use both our requirements and the U.S. requirements and to make sure that investors aren't confused because there's a commonality of information that's out there. 

Jennifer Laidlaw: How are you approaching materiality? And how will the standards help companies define climate as a material risk? 

Sue Lloyd: So when we talk about materiality at the ISSB, the anchor really is the audience that we are focused on. So we are asking for information that makes investors information needs. And the particular information that we're focusing on is information about the sustainability-related risks and opportunities that are reasonably expected to affect an entity's prospects. And by that, we mean its cash flows, its access to funding and its cost of capital over the short, medium and long term. So that sort of establishes the types of topics that should be reported on. 

And then when it comes to the particular pieces of information that need to be provided, we use a concept which we have in common with our sister board, the Accounting Standards Board. 

So in the same way that when you prepare financial statements, you screen to make sure that the information provided is the really important stuff. We have the same test, which is to say that the particular piece of information that's provided needs to be so important that if it was missing or if you got it wrong, it would be reasonably expected to actually influence an investment decision. And so that's the materiality filter that we use. 

So when you get to climate, we ask for information about a company's climate-related risks and opportunities. And we set out an S2 the types of information that has been identified by us as being of interest to investors. 

One of the disclosures that we have in there is that a company provide information about its greenhouse gas emissions because knowing about the company's greenhouse gas emissions really helps investors understand how they might need to change their business to transition as a result of climate change. 

We set that out there, and it's not strictly speaking, mandatory. What we say is if that information is material for the investor of that company, then it should be provided. And so that's the materiality test we use. 

Jennifer Laidlaw: You are holding consultation at the moment about what the ISSB should be looking at in the future, for example, biodiversity. So what can we expect in the coming years in terms of additional standards? 

Sue Lloyd: So in terms of our additional work going forward, the answer to that question is going to be informed by the feedback. You're right. We're consulting at the moment. So we have a document that's out for comment until the 1st of September asking our stakeholders a couple of really important questions. 

The first is, how should we balance our activities. So for example, how much time should we spend in the next 2 years, which is the period we've asked for feedback to plan for on helping companies to actually get going using S1 and S2 and answering questions and providing capacity building to assist in that regard? And how much time should we spend writing new standards? So that balance question is a really important question in there. 

And then when we get to new standard setting, we have asked our stakeholders for input on what they think we should work on with most urgency in the next 2 years. And we've set out there 4 potential areas of work, 3 that are sustainability related, and one which would be working on a project to further look at integrating the information are provided in financial statements and in sustainability reporting. So an integrated reporting style project that might be done with our sister Board, the International Accounting Standards Board. 

Then we ask about 3 other potential projects, all of which are sustainability related. The first is biodiversity, ecosystems and ecosystem services or BEES for short. The second is human capital. So for example, whether we need to work on a project to provide information about our workforce, perhaps diversity, equity and inclusion, for example, that would be of interest to investors. And then the third sustainability topic we ask for feedback on is in relation to human rights. And this isn't -- is the company a good company or a bad company, but rather, if I look, for example, about the policies in place for the company when it thinks about the treatment of workers in its supply chain, information on that or how does a company perhaps engage with Indigenous communities if we're looking at the access to land, for example, for projects.

 And so we, I'm looking forward to the analysis and the letters, reading the letters to see what our stakeholders think is most important. We'll take that feedback and then work out what we think of those 4 projects, we should prioritize and that will form the basis for our work plan for the next 2 years.

Jennifer Laidlaw: Okay, fantastic. Is there anything else you would like to add or that you think is important? I mean you haven't touched upon?

Sue Lloyd: I think the other things to note, looking ahead for the next few years, this is a massive change in reporting in the market. So I think a lot of our attention and the intention of the market is going to be on implementing S1 and S2, really getting used to these new ideas and concepts and developing this new type of reporting. That's going to keep us busy I'm sure answering questions and help them with capacity building. 

The only other thing I would say, I think, is that it's a really great opportunity, I think, for us all to embrace this new type of reporting. And something I've been saying to a lot of people that I talk to is -- this really should be an opportunity for us all to take a step back and to really think about how sustainability risks and opportunities are really important to understand to run a business well to run a business in a way that you're really sustaining value and creating value in the future, both to inform management decisions and for investors. 

And it's a really, I think, exciting turning point in the journey. And so I really encouraging people to pick up our standards and read them to start thinking about this new type of reporting and to really get involved and to really stay involved in consultations with us because at the end of the day, the quality of our standards is really determined by the quality of the input that we get to inform our decision-making. 

And I'd also point people to our website, ifrs.org, where you can find not only S1 and S2, but lots of other materials that really give you context and information to help in applying these new standards.

Jennifer Laidlaw: Okay, fantastic. And yes, I think it will be very exciting to see the rollout of these standards and their impact on the market. Okay. Well, thanks so much for joining us.

 Sue Lloyd: It's a pleasure. Thank you.

Lindsey Hall: We heard Sue talk about how the ISSB could incorporate biodiversity risk into its future standards. We've talked a lot on this podcast about the importance of addressing climate and biodiversity risks in tandem. I'm curious to see whether the Board's consultation will come to the same conclusion.

Jennifer Laidlaw: Yes, exactly and how companies should address diversity, inclusion, human rights could also be on the ISSB's agenda. That reflects what we've heard from other podcast guests, the importance of taking a holistic approach to sustainability issues and not treating them in silos.

Esther Whieldon: Thanks for joining us, and please keep us updated on the ISSB's plans.

Jennifer Laidlaw: I certainly will. 

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider, and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.

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