ESMA Responds to ISSB Exposure Drafts on Sustainability Disclosures

In the response letter, ESMA welcomes the initiative of the IFRS Foundation to consolidate some of the existing standard-setting and framework initiatives and strongly supports the work of the ISSB to reach a common set of internationally accepted high-quality sustainability reporting standards that could serve as a global baseline. ESMA notes that while assessing the proposals in the exposure drafts, it has considered two main aspects on the suitability of the proposed requirements to serve well the information needs of investors. One of these aspects relates to the investors that operate in the European Union markets and are subject to the European Union-specific disclosure obligations; the other one relates to the potential for convergence of the ISSB proposed requirements with the draft European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG). Based on its analyses, ESMA is requesting the ISSB to reconsider its proposed requirements in the following five areas:

• Notion of sustainability-related financial information—ESMA states that the ISSB proposals do not define the sustainability-related matters addressed in the standards and recommends that the ISSB converges the scope and definition of what is meant by ""sustainability" with other major standard-setting initiatives.
• Overall approach to materiality—ESMA recommends that the terminology in context of the identification of risks and opportunities be clarified and made consistent across the standard. ESMA would also like the role of external "impacts" in assessing enterprise value creation to be clarified and made consistent with the impact identification process of other standard-setting initiatives (such as the ESRS).
• Use of entity-specific disclosures and metrics—ISSB envisages issuers being able to determine their own metrics and disclosures either to complement those already envisaged by an IFRS sustainability standard or where there is a lack of specific requirements as regards a certain matter. In ESMA’s view, where such metrics could qualify as "adjusted" versions of those mandated by the individual ISSB standards, they should be accompanied by adequate disclosures.
• Use of sector-specific guidance from the Sustainability Accounting Standards Board (SASB)—ESMA recommends that ISSB should consider how to introduce SASB guidance as part of its mandatory requirements in the climate-reporting standard, while excluding parts of the guidance not necessarily related to climate, amending aspects of the guidance not wholly suitable for global application given their jurisdiction-specific connotations, and considering a phased application of such requirements.
• Transition plans and emissions offsets—ESMA recommends that the ISSB should complement its requirements with additional key details critical to achieving the comparability and relevance of reported information and improve the convergence with the draft ESRS proposals.

Related Link: ESMA Response (PDF)

Keywords: International, Europe, Banking, Disclosures, ESG, Climate Change Risk, Sustainable Finance, ISSB, Exposure Draft, IFRS, ESRS, EFRAG, SASB, Reporting, ESMA