In June 2023, after an 18-month sprint, the International Sustainability Standards Board (ISSB) issued its inaugural global sustainability disclosure standards, IFRS S1 and IFRS S2, a comprehensive global baseline of sustainability-related financial disclosures to meet the needs of capital markets. A month later, the International Organization of Securities Commissions (IOSCO) endorsed the ISSB Standards and called on its 130 financial market members to consider ways in which they might “adopt, apply or otherwise be informed by” these standards in order to promote consistent and comparable climate and other sustainability-related disclosures for capital markets.
Since then, the ISSB standards have been widely embraced by IOSCO’s members, and their adoption and adaptation continues to accelerate worldwide. In the U.S., however, efforts to require comparable climate related disclosures to inform investors have been stymied, and there is no clear path to their adoption or implementation. As a result, the U.S. risks falling further behind in the rapidly evolving landscape of sustainable finance, potentially compromising its market leadership and investor confidence.
ISSB Standards Made Extraordinary Headway in the Year After Issuance
Following intense and in-depth outreach and capacity building efforts, the ISSB announced on May 28 that more than 20 jurisdictions have announced that they will use or take steps to adopt or adapt the ISSB Standards. Jurisdictional sustainability consultations have included the United Kingdom, Canada, Hong Kong, Singapore, South Korea, India, Brazil, Nigeria, Japan, New Zealand and Australia. According to the ISSB, these jurisdictions represent:
- Nearly 55 percent of global GDP
- More than 40 percent of global market capitalization (75 percent if the U.S. is excluded)
- More than half of global greenhouse gas (GHG) emissions
The European Union was an early adopter, announcing its Corporate Sustainability Reporting Directive (CSRD) established in June 2022 would incorporate ISSB Standards to the greatest extent possible. The ISSB worked closely with the European Commission, along with the European Financial Reporting Advisory Group (EFRAG), during development of the European Sustainability Reporting Standards (ESRS) that implement the CSRD requirements. On May 2, they jointly published interoperability guidance to illustrate the “high level of alignment” between the ISSB Standards IFRS S1 and S2 and the ESRS. This guidance includes what a company starting with either set of standards needs to know to enable compliance with both sets of climate disclosure requirements.
China is the most recent country to adopt the ISSB’s approach. On May 27, the Ministry of Finance of the People's Republic of China issued draft Chinese Sustainability Disclosure Standards for Business Enterprises-Basic Standard and Explanation of the Drafting, which is based on the ISSB Standards. China is proposing to issue them in 2027 with a goal to complete and implement a uniform national system of disclosure standards by 2030. The standards will be phased in and will ultimately apply to all Chinese companies, listed and unlisted. Like the ISSB Standards, the proposal includes provision for Chinese companies to apply the standards voluntarily before they are legally mandated.
To facilitate and further accelerate adoption or other use of the ISSB Standards, on May 28 the IFRS Foundation (ISSB’s parent) issued an Inaugural Jurisdictional Guide. The guide “aims to promote globally consistent and comparable climate and other sustainability-related disclosures for capital markets through the adoption or other use of ISSB Standards internationally.” In support of those efforts, the IFRS published a Regulatory Implementation Programme at the same time “summarising the tools, educational materials and capacity building the IFRS Foundation intends to provide in collaboration with its partners to support the growing number of jurisdictions seeking to make policy decisions and design and execute their roadmaps for the adoption or other use of ISSB Standards.”
Climate Disclosure Initiatives in the U.S. Have Stalled
A year ago, when IFRS S1 and S2 were issued, we reported that the ISSB had taken the lead on global sustainability disclosure standards and asked if the U.S. would follow. The answer has been a resounding “no.” While the ISSB had been building momentum, the efforts to promulgate a comparable set of climate disclosure requirements in the U.S. are mired in a political and legal morass.
The Securities and Exchange Commission’s climate related disclosures rules faced stiff political opposition from the time they were proposed in March 2022. They were challenged in numerous courts immediately after they were finalized in March 2024, and were voluntarily stayed by the agency on April 4 pending judicial review of the consolidated cases by the U.S. Court of Appeals for the Eight Circuit. The determination of those cases has been further complicated by the June 28 decision of the Supreme Court in Loper Bright Enterprises v. Raimondo overturning Chevron deference to agency interpretations.
In the absence of federal direction, it appeared the “Climate Accountability Package” enacted in California in October 2023 might fill the gap. This package includes the Climate Corporate Data Accountability Act (SB 253), which will require disclosure of Scope 1, 2 and 3 GHG emissions by companies that operate in California, and the Climate-Related Financial Risk law (SB 261), which will require companies to prepare a biennial climate-related financial risk report. However, these laws also are being challenged in court, budget funding for their implementation has not yet been approved, and there are ongoing legislative efforts to delay their implementation by two years, until 2028.
Given the intense lobbying and legal maneuvering, it is far from clear that any sustainability- or climate-related disclosures requirements will be implemented in the U.S. any time soon at either the federal or state levels.
However, this paralysis over domestic climate disclosure requirements does not relieve U.S. companies with international operations of all such disclosure obligations. Many U.S.-based multinational companies and their EU subsidiaries are already subject to mandatory climate disclosure requirements (including Scope 3 GHG emissions) that are being phased in from 2026-2029 under the CSRD, and will be subject to similar requirements in other jurisdictions that adopt or adapt the ISSB Standards.
Indeed, these looming disclosure obligations have fostered yet another heated political dispute. On June 4, 38 members of Congress urged the SEC to remind registrants that U.S. companies subject to alternative climate-related disclosure regimes, including the CSRD and ISSB Standards, must comply with those reporting requirements. The U.S. Chamber of Commerce responded on June 17, asserting that such “a statement by SEC would be imprudent and unprecedented.”
Takeaways
Investors need, and are demanding, climate risk disclosures that are reliable, verifiable, consistent, transparent and easily accessible to assess the climate risks associated with their investments. The rest of the world is responding while the U.S. dithers.
The ISSB has been full speed ahead for the past three years and shows no signs of letting up. To the contrary, all indications are that the ISSB and the IFRS Foundation will devote the resources necessary to do everything possible to simplify and expedite the process for jurisdictions to adopt or otherwise use the ISSB Standards. Additionally, the ISSB is doing so in a transparent manner so that investors and other stakeholders can satisfy themselves that disclosure requirements in various jurisdictions are globally consistent and that climate and other sustainability-related information is comparable.
Based on the continuing efforts of the ISSB and IFRS Foundation, and their keen focus on alignment and interoperability of IFRS S1 and S2 with the individual goals and needs of each jurisdiction, it is just a matter of time before comparable climate disclosures are required in most major economies and a growing number of emerging markets outside the U.S.
If the U.S. cannot find a way break the political and legal logjam, it risks being left behind in the global effort to standardize climate risk disclosures, ultimately jeopardizing its competitiveness in the global market and undermining investor confidence. The time to act is now, before the gap widens further and the U.S. finds itself outpaced and isolated in the critical arena of climate transparency and accountability.
For more information, please contact the Barnes & Thornburg attorney with whom you work or Bruce White at 312-214-4584 or bwhite@btlaw.com.
