The ISSB Board has voted last Wednesday (21 September) to proceed with the scalability mechanisms for the draft IFRS sustainability standards, with the aim to help smaller companies and companies in emerging economies to comply with the standards.
The mechanisms were presented to the board by Caroline Clark-Maxwell on behalf of the ISSB technical staff. One mechanism would amend the disclosure requirements so that entities would not be required to report on particular disclosures that they are unable to fullfill and could also provide an alternative disclosure.
Another proposed mechanism is to differentiate the disclosure requirements as 'basic', which every entity would be expected to be able to report on, and 'advanced', which would be more challenging for many entities to report on. This would enable a phased approach as certain entities would only be required to report on 'basic' disclosure requirements in the initial phase of implementation.
"The mechanisms tried to make sure that we don't have to lower the ambition of the ISSB whilst at the same time accommodating for preparers that are less able to provide these disclosures," Clark-Maxwell said as she introduced the proposed mechanisms.
Jeff Hales said that it would not only be smaller companies that would find it challenging to comply with the standards but also large and complex companies, such as conglomerates. Clark-Maxwell agreed and stressed the importance of considering a range of factors, rather than just size, when the ISSB creates the criterion for the entities covered by the mechanisms.
Sue Lloyd, vice-chair of the ISSB, expressed her support for the phased approach as it is aspirational that every entity will report on a full set of disclosures but also "empathetic" to the challenges some may face in complying from the start.
Hiroshi Komori, asked whether the differentiated standards would create two tiers to the global baseline.
Clark-Maxwell accepted that the 'basic' disclosure would effectively become the de facto baseline but reassured the board that this would be temporary as the proposal would only differentiate the standards for the transition phase and would not be permanent.
Several board members raised concerns that the mechanisms would undermine the ISSB's ambition of serving as the global baseline for sustainability reporting as it would reduce the comparability of the reports and different jurisdictions may take different approaches to scalability.
However, Emmanuel Faber, chair of the board, said that a transitional and progressive approach to implementing the standards would be necessary to create a "truly global baseline" by gradually raising the reporting standards of all entities.
Lloyd added that "having that phasing and that aspiration means we've got the best chance of getting really good quality ultimate global baseline", whereas having a set of unrealistic standards from the start would undermine their role as the global baseline.
Ten board of the 14 board members voted in favour of the proposals, through a show of hands, meaning that technical staff will use these mechanisms when they analyse future papers. The board will vote on the individual mechanisms at a later date.
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