As we addressed here, the International Sustainability Standards Board has issued its first two exposure drafts, General Sustainability-related Disclosures and Climate-related Disclosures, which were both open for comment until July 29, 2022.

The exposure draft on general disclosures sums up the overall approach as follows:

• The Exposure Draft sets out overall requirements with the objective of disclosing sustainability-related financial information that is useful to the primary users of the entity’s general purpose financial reporting when they assess the entity’s enterprise value and decide whether to provide resources to it. Proposals in the Exposure Draft would require an entity to disclose material information about all of the significant sustainability-related risks and opportunities to which it is exposed. The assessment of materiality shall be made in the context of the information necessary for users of general purpose financial reporting to assess enterprise value.

We looked here at some of the issues relating to the reliance on the “enterprise value” concept. That’s just one respect in which, for many respondents, the exposure draft stumbles right at the start; we’ll glance at just a few such comments today. These are from Ian McConnell,:

• It is unclear what level of detail is required in many of the sections. For example, in question 1 “overall approach,” it first states that only significant sustainability-related risks and opportunities information will be required, but goes on to say that “all of the sustainability-related risks and opportunities to which the entity is exposed, even if such risks and opportunities are not addressed by a specific IFRS Sustainability Disclosure Standard,” are what is required. There is a large gap between “significant” and “all”. Furthermore, ISSB Chair Emmanuel Faber has said on multiple occasions that entities will be able to “pick and choose” what is necessary to report. This contradicts what is actually in the draft disclosures and contravenes the proposed statement of compliance….

Many other respondents made similar or related points. This is from Deloitte:

• We believe that the ED clearly states that an entity would be required to identify and disclose material information about all the significant sustainability-related risks and opportunities to which the entity is exposed, even if such risks and opportunities are not addressed by a specific IFRS SDS. However, we recommend further clarity and guidance is provided in relation to ‘significant’ sustainability-related matters. The proposals do not give sufficient information to help preparers understand exactly what ‘significant’ means in this context, how they would go about identifying all significant matters, and what level of due diligence to apply in that process. Given that there is some confusion between the terms ‘significant’ and ‘material’, we recommend that the ISSB considers an alternative term such as ‘principal’ in relation to the identification of risks and opportunities.
• In addition, we consider that there is a need for clarification of the use of the word ‘all’ in reference to ‘significant’ sustainability risks and opportunities. Our understanding is that this is constrained by the word ‘significant’ and therefore does not require entities to make an assessment of the entire universe of potential sustainability risks and opportunities that may affect the entity…

BNP Parabas Group commented: “It is important to recognize that broadly diversified investors use corporate disclosures for a variety of purposes, including to evaluate portfolio and economy-wide systemic risks, not solely risks to enterprise value. Without an explicit requirement to disclose certain key external impacts, investors, policymakers – and issuers – will remain inadequately equipped to mitigate the most significant financial risks we face.” And the International Corporate Governance Network threw in: “One can debate whether the given definition of enterprise value is the best metric, but it is a fair starting point. We would observe, however, that ICGN’s focus is not only on enterprise value at a moment in time, but also in sustainable value creation over time, reflecting the long-term perspectives of our investor members, particularly those funding pensions or other forms of longterm saving. So there is a dynamic dimension to this notion of enterprise value that your definition may not fully capture.”

This is from the HSBC Bank (UK Pension Scheme:

• Enterprise Value is a backward-looking, lagging indicator which is unsuitable for the current needs of asset owners….The point at which that an entity concludes that an issue has reached enterprise value materiality levels is far later than the point at which investors need to understand the potential impact of an emerging issue. A failure to recognize this “double materiality” concept with respect to sustainability risks is likely to result in too narrow a focus being applied on sustainability risks, which is backward looking and only “one way” with respect to the impact of sustainability risks on an entity but not the impact of the entity on its external environment. This forward-looking focus is important for us as an asset owner.

And, of course, there’s plenty more where those came from. They received 728 comment letters! And some of them are really long!

The opinions expressed are solely those of the author