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.

Here’s an extract:

• The Exposure Draft proposes that sustainability-related financial information would be required to be provided for the same reporting entity as the related general purpose financial statements. The Exposure Draft proposals would require an entity to disclose material information about all of the significant sustainability-related risks and opportunities to which it is exposed. Such risks and opportunities relate to activities, interactions and relationships and use of resources along its value chain such as:
  • its employment practices and those of its suppliers, wastage related to the packaging of the products it sells, or events that could disrupt its supply chain;
  • the assets it controls (such as a production facility that relies on scarce water resources);
  • investments it controls, including investments in associates and joint ventures (such as financing a greenhouse gas-emitting activity through a joint venture); and
  • sources of finance.

The basis for conclusions provides various examples of the disclosures that might result from this, for instance:

• a beverage company might need to disclose the risk of water use, especially in areas identified to be of high water stress. It might describe how its use of water affects the supply available to meet its operational needs. It might also discuss the effects on communities close to the company’s operations, which could lead to risks of reputational damage and loss of customers, or the imposition of taxes or limits on the use of the resource. It could also describe how these risks have been assessed throughout the supply chain.

These comments are from the European Securities and Markets Authority (ESMA):

• ESMA supports the definition of reporting entity (i.e., mirroring financial statements boundaries). However… It would be beneficial to draw a distinction between the reporting entity (whose perimeter should squarely match that of financial reporting consolidation) and the sustainability reporting boundary which may go beyond the reporting entity and include associates and value chains.
• In general…it is ESMA’s view that issuers may have difficulty in providing information relating to value chains, and particularly suppliers, when they do not control these operators, which may impair the quality of the reported information. It would be important to envisage alternative mechanisms in an initial phase of the mandatory reporting for issuers to gather the necessary information when relevant data is not available directly from suppliers or is incomplete. Provisions in this regard could include the use of estimates (accompanied by appropriate disclosures on the nature and source of estimates/data and implementation guidance) and the list of material entities in the value chain for which information was not directly available and the reasons for this fact.

The Dutch Financial Markets Authority threw in an industry-specific perspective:

• …in the absence of clear guidance in this respect, financial enterprises will experience particular difficulties in applying consistent interpretations of the extent and breadth of their value chains which are relevant to sustainability-related risks and opportunities. Apart from their supply chains and service providers, it may be assumed that the counterparties to loans, insurance contracts and investments done (or securities held) by financial enterprises are relevant to the value chains of financial enterprises. We believe, however, that it may be difficult for financial enterprises to apply in consistent ways this extended conception of their value chains in their sustainability reporting…

Many respondents expressed a desire for further elaboration in this area. On behalf of one of its clients, DLA Piper UK LLP commented: “Our client considers that the requirement to disclose value chain information is not sufficiently clear and unlikely to be capable of consistent application. In particular, in many cases suitable value chain data is unlikely to be available. In the first instance, disclosure should be limited to supplier relationships over which entities have direct control or influence (i.e. direct or tier 1 suppliers) in order to provide for consistent application across entities. ‘Safe harbour’ style provisions should be considered as a means of facilitating a transition to enhanced supplier and value chain reporting, particularly given anticipated challenges in obtaining suitable data.”

EY illustrated the difficulties as follows:

• It is not clear what extent of information is required across the value chain, for tier 1, tier 2 or even tier 3 suppliers. For example, in the case of a clothing store, the factory that assembles a piece of clothing would be a tier 1 supplier which obtains fabrics from another supplier (tier 2 to the clothing store), which, in turn, obtains raw materials like cotton from yet another supplier (tier 3 to the clothing store). We agree that requiring the entity to obtain insight into the different tiers in its value chain will further enable the entity to understand how to scope other disclosure requirements relating to the value chain. However, when entities are required to obtain information on tier 3 suppliers, there may be difficulties if the information is not available, and/or because the coordination among bodies throughout the tiers of the value chain may not yet be possible.

With the ISSB surely working at breakneck speed, it seems inevitable that some kind of practicality must win out on this and all such issues raised…

The opinions expressed are solely those of the author