Letter from Lord Callanan to the International Sustainability Standards Board regarding their exposure drafts IFRS S1 and IFRS S2

Published 1 August 2022

Dear Mr Faber

The UK Government strongly welcomes the publication by the International Sustainability Standards Board (ISSB) of two exposure drafts, covering climate and general sustainability disclosure requirements. We congratulate the ISSB on reaching this important and significant step towards a globally consistent baseline standard for sustainability disclosures. Information on sustainability increasingly needs to be on the same reliable, decision-useful footing as financial reporting is today, with a standard that all jurisdictions can integrate, and against which all companies are able to report. The ISSB remains the most appropriate body to issue global sustainability standards, and we are encouraged to see that other standard setters have folded into and supported this process.

The UK has long been a champion internationally of the ISSB. On 10 November 2020, the UK Government and UK financial regulators published a joint statement supporting the IFRS Foundation’s consultation to establish the ISSB. Last year, the G7 Finance Ministers and Central Bank Governors meeting in London, chaired by the previous Chancellor, agreed to support the IFRS Foundation’s programme of work in this area. This was subsequently taken up at G20 level. And the ISSB was launched at COP26 Finance Day in Glasgow, with 41 countries backing its creation. The UK is now actively calling on other countries to prepare the ground for formal adoption of the ISSB standards in their jurisdictions.

The UK Government is itself preparing the ground. In October 2021, the UK announced that UK adopted ISSB standards will form the central component of the UK’s Sustainability Disclosure Requirements. In the coming months, we intend to consult on an adoption process. This will involve creating a mechanism to assess, adopt and endorse the standards for use in the UK. The UK assessment process will consider costs and benefits of reporting against each disclosure standard, and whether the standards provide sufficient clarity to achieve compliance. The views of stakeholders, through a UK consultation process, and the expert opinions of UK regulators, will form an important part of this process.

Given the critical importance of the ISSB standards, we have asked the relevant UK regulators to provide substantive comment letters on the exposure drafts with the expertise informed by their various regulatory functions. Specifically:

  • the Financial Reporting Council has responded taking into account its role as regulator of auditors, accountants and actuaries, and as the UK body that issues corporate reporting, audit, assurance, and actuarial standards and guidance, and sets the UK’s Corporate Governance and Stewardship Codes, and the ethical standards
  • the Financial Conduct Authority has responded primarily in its role as the UK’s securities regulator
  • the UK Endorsement Board has responded given its responsibilities for endorsing and adopting international accounting standards, and has provided views from that perspective, including how the sustainability standards interact with accounting standards
  • the Bank of England will provide input to the responses of regulatory authorities in its role as prudential regulator for the largest financial services firms

As the UK Government, we want to make four high-level and strategic points to support the development of the final standards. This has been informed by broad consultation across the UK, including companies, investors and accounting firms. This engagement has highlighted widespread support for the ISSB’s direction of travel, and the development of standards that build from the familiar base of the TCFD’s recommendations. It has also revealed a clear and strong desire for a step change in sustainability reporting to be brought about by the ISSB. At the same time, stakeholders provided some important steers on strategic direction; in particular, that the ISSB should:

  • set a baseline standard which is accessible for use on a global scale. This means the disclosure standards need to be suitable to be adopted by all jurisdictions and a wide-range of different organisations, including those in emerging and developing markets, some of which may not yet have any familiarity with sustainability-related reporting, and smaller and medium-size businesses.Our consultation across the UK has highlighted that some elements of the exposure drafts will initially prove challenging for even the largest UK companies with a long history of sustainability reporting – for instance, the monetisation of risks and opportunities and the industry-based content in Appendix B to the Climate Standard. We support an ISSB standard that is comprehensive, but we must also mitigate against the risk that this will prove too challenging to adopt in full for some jurisdictions and organisations, at least initially, which could lead to further disclosure fragmentation
  • be implemented in a proportionate and scalable way to accommodate the circumstances of different organisations and jurisdictions. The recent G7 Finance Ministers and Central Bank Governors communique of 20 May 2022 stressed the importance of a baseline that is “practical, flexible and proportionate”. Given the UK’s history as a leader in sustainability reporting, the challenges expressed by UK companies indicate that it will be necessary for the ISSB to consider options to scale certain requirements or implement the standards in a phased manner for the standards to be accessible for use as a truly global baseline. As part of this, the ISSB could usefully outline which elements form the core and minimum standard that would apply globally from the outset as a fundamental component of doing business in international capital markets, and which could be implemented in a phased approach
  • be principles based. The UK Government supports international sustainability standards that are principles based. Principle based standards, accompanied by application guidance, will enable jurisdictions to adopt the standards in a manner consistent with the local legislative framework while still delivering an effective global baseline of comparable disclosures. Initial outreach has indicated that the rules-based nature of the industry-based content in Appendix B to the Climate Standard may prove challenging if implemented from the outset as a mandatory requirement
  • provide precise definitions and clarity on what is required to achieve compliance. Outreach suggests that certain areas of the draft standards will require additional clarity. Comment letters from the UK regulators offer observations on areas where more precise definitions, language or concepts may be necessary and also on areas where it is essential that the material is subject to ISSB due process before issuing in final form

The UK Government congratulates you for the excellent momentum in your work to date, and the great progress in producing these exposure drafts. The UK Government looks forward to continuing to work with you to achieve the goal of widely adopted global baseline sustainability standards. UK Government officials would be very happy to meet with you to discuss the matters identified in this letter in order that we can realise the UK’s ambition of being the first country in the world to endorse and adopt the IFRS Sustainability Disclosure Standards for use in the UK.

Lord Callanan