As we’ve addressed many times, the International Sustainability Standards Board issued its first two exposure drafts, General Sustainability-related Disclosures (S1) and Climate-related Disclosures (S2), which were both open for comment until July 29, 2022.

The core objective of S1 “is to require an entity to disclose information about its significant sustainability-related risks and opportunities that is useful to the primary users of general purpose financial reporting when they assess enterprise value and decide whether to provide resources to the entity.” But the exposure draft doesn’t provide a definition of that central term “sustainability-related” – something commented on in one way or another by plenty of commenters (Deloitte for instance said “we believe it would be helpful for the ISSB to explain the types of information that may be covered.”). Consequently, the ISSB arrived at the following:

• In its session on 13 December 2022, the ISSB agreed how to describe sustainability and clarified that a company’s ability to deliver value for its investors is inextricably linked to the stakeholders it works with and serves, the society it operates in, and the natural resources it draws on.
• The decision builds on concepts from the Integrated Reporting Framework, which helps companies articulate how they use and effect resources and relationships for creating, preserving and eroding value over time.
• Sustainability will be described in (S1) as the ability for a company to sustainably maintain resources and relationships with and manage its dependencies and impacts within its whole business ecosystem over the short, medium and long term. Sustainability is a condition for a company to access over time the resources and relationships needed (such as financial, human, and natural), ensuring their proper preservation, development and regeneration, to achieve its goals.
• By referring to this articulation of the value creation process, a company will be better placed to explain to its investors how it is working sustainably within its business ecosystem—addressing the impacts, risks and opportunities that can affect its performance and prospects—to ultimately deliver financial value for investors.

Against that backdrop, let’s look at some input contained in the comment letter from the Business and Human Rights Resource Centre, an organization which seeks “to play a constructive role as a global non-profit organization at the heart of the business and human rights movement”:

• We use our research and other evidence to engage stakeholders, including investors, and to highlight the need to transform business models to promote human rights and environmental regeneration.
• Common, robust sustainability standards are one mechanism by which such change is possible. The implementation of standardized, international sustainability reporting has the potential to both markedly increase the number of companies publishing relevant sustainability data, but also to ensure that this information is more consistent, complete, comparable, and verifiable. This will aid in enhancing both the utility and usability of sustainability information for capital market participants, with significant related benefits over time for other stakeholders. This includes workers, individuals, and communities along an organization’s value chain whose rights bear the brunt of irresponsible business practices. Indeed, the link between better corporate disclosures and improved corporate practice is clear.

The Centre’s comment letter submits “that current sustainability reporting frameworks fall short in respect of proper disclosure requirements on human rights in particular, and that this should matter for all investors.” It expands: “As the widening inequality gap poses risks to communities, democracies – and businesses – across the world, a sustainability reporting framework that does not require companies to report on their underlying human rights and social risks and impacts, risks falling short. Disclosure of a wide range of information, including how a company’s operations affect people and planet, is imperative.” The letter argues for stronger materiality guidance, noting that “human rights…have historically received less focus as part of the ‘S’ in ESG investment methodologies as a starting point, as compared with the ‘E’ and ‘G’. Standardized materiality determinations including in respect of human rights will aid in what continues to be a significant transparency gap across a range of sectors… At a minimum, universal disclosures on human rights due diligence, in addition to environmental due diligence, should be a requirement.

The Rights CoLab,  representing “institutions with collectively many decades of experience working to improve the rights of workers globally,” made some related points, also tying these to the core notion of materiality:

• Investor protection dictates that companies must not omit information on topics that investors consider material. The definition of material sustainability-related information changes over time, and mainly concerns externalities – social and environmental impacts produced by company operations. Companies may or may not be assessing their externalities, and therefore may not be aware of them. For these reasons a sustainability-related materiality assessment must be grounded in consultation with investors. A key weakness of the Exposure Draft is that it doesn’t account for this, but instead provides vague and inadequate guidance that allows managements to decide arbitrarily whether a disclosure topic is material or not.
• The ISSB should provide guidance for best practice in a sustainability-related materiality assessment and require disclosure of every company’s process for determining what is material….

They advocated that “any materiality assessment include a description and result of each issuer’s human rights and environmental due diligence assessment (HREDD) – “the best practice method for an issuer to determine its most salient externalities that contribute to idiosyncratic risks to its enterprise value, as well as systemic risks affecting investors’ portfolios.”

Did the ISSB sign on? Check back next time…

The opinions expressed are solely those of the author