With the introduction of new sustainability and climate disclosure guidelines — IFRS S1 and IFRS S2 — from the International Sustainability Standard Board in January, institutional investors now have the opportunity to gain alignment in measuring environmental, social and governance risks associated with their investment portfolios.
Read: Research finds pensions struggle to determine metrics for ESG goals
The IFRS S1 guideline is a reporting mechanism for disclosures on sustainability risks and opportunities and the IFRS S2 is a reporting mechanism for climate-related risks. While voluntary, the standards were launched to help flesh out the disclosure material information that is included in financial reports.
In a press release, the Canadian Securities Administrators said it was encouraged by the ISSB’s proposed capacity building efforts to support the adoption of the new standards. As well, Financial Reporting & Assurance Standards Canada established the Canadian Sustainability Standards Board to develop guiding principles that aligned with the ISSB’s global baseline for these type of disclosures.
Still, while there’s overwhelming support for these guidelines, it’s difficult to predict the speed of their adoption among investors and companies alike, despite strong backing for the rules, says Vanessa Allen, vice-president of TD Asset Management’s ESG research and engagement team. However, she notes companies that have investment from pension plan sponsors will benefit from reading up on these standards since not demonstrating proper disclosures in these areas could pose reputational risk.
Read: Survey finds 75% of global asset managers have an ESG policy
Indeed, in a 2023 sustainability report John Graham, the Canada Pension Plan Investment Board’s president and chief executive officer, said the investment organization encourages companies it invests in and those seeking its investment capital to “embrace the inaugural ISSB standards.”
The dialogue surrounding ESG metrics as it relates to institutional investors’ risk management strategies is evolving to include the need for these standards, not just for the benefit of environmental or social outcomes but also to meet fiduciary responsibilities to plan members, says Allen. “I think it’s not an ESG conversation, it’s an investment conversation.”
She expects the ISSB to next address accuracy in impact reporting on human capital, or more specifically, human rights risks along supply chains, as well as biodiversity. But there’s still a long way to go in terms of global adoption of the initial two guidelines released earlier this year, she adds.
“A lot of investors want ISSB to focus on just getting people to take on [these] . . . disclosures before . . . advancing to another focused set of standards.”