The ISSB’s Focus on Nature and Human Capital Disclosure: A New Frontier in Sustainability Reporting

The International Sustainability Standards Board (ISSB) has emerged as a key player in the development of global standards for sustainability-related financial disclosures. The ISSB, which operates under the oversight of the International Financial Reporting Standards (IFRS) Foundation, has been pivotal in shaping the narrative of sustainability reporting through its inaugural standards, IFRS S1 and IFRS S2. As investor demands grow and businesses become more attuned to environmental, social, and governance (ESG) criteria, the ISSB is expanding its research efforts to include two critical areas: nature-related risks and human capital disclosure. This expansion is expected to address key gaps in the sustainability landscape, offering a more comprehensive framework for investors and stakeholders. 

This blog explores the ISSB’s new research projects on nature and human capital disclosure, delves into its approach to building upon existing frameworks, and examines how this initiative will impact global sustainability reporting. Our primary focus will be on human capital disclosure, one of the core areas of the ISSB’s new direction. 

The transition to a sustainable economy has become a pressing concern for investors and corporations alike. While the ISSB’s initial focus on climate-related disclosures laid the groundwork, there is increasing recognition that biodiversity, ecosystems, and human capital are equally vital components of long-term business success. These factors not only affect financial performance but also influence corporate reputation and stakeholder trust. 

The ISSB’s new research projects were sparked by a consultation on future priorities, during which investors emphasized the importance of transparency and disclosure in areas beyond climate. Chair Emmanuel Faber stressed that while the ISSB remains committed to its climate initiatives, there is a growing need to expand the focus to include nature and human capital as part of a company’s overall sustainability strategy. 

The ISSB’s new research projects will focus on the risks and opportunities associated with two broad areas:

1. Biodiversity, Ecosystems, and Ecosystem Services: These encompass the natural systems and resources that businesses depend on and impact. The ISSB aims to explore how these elements can affect a company’s financial performance and its ability to sustain operations over the long term.
2. Human Capital: This includes workforce management, employee well-being, skills development, and overall human resources strategy. Human capital is increasingly recognized as a crucial element of value creation, and its proper disclosure can help investors gauge a company’s long-term sustainability.

These projects are aimed at filling information gaps and providing decision-useful data to investors. By focusing on common investor needs, the ISSB will work to establish frameworks for assessing whether and how risks and opportunities related to nature and human capital could impact a company’s prospects.

The importance of human capital disclosure has been gaining traction as investors and stakeholders seek to understand how companies manage their workforce and foster a productive, innovative, and sustainable work environment. Human capital includes all aspects of workforce management—from recruitment and retention to training and employee well-being. It also considers the value of diversity and inclusion, which has become a vital factor in driving innovation and productivity.

Human capital disclosure helps investors assess how well a company is equipped to deal with future challenges and opportunities, particularly in terms of talent management and workforce resilience. Moreover, with the increasing trend toward automation and digital transformation, investors want insights into how companies are preparing their human capital to adapt to these changes.

The ISSB’s focus on human capital will likely address several key areas:

1. Workforce Development and Skills: How companies invest in upskilling their workforce to meet evolving business needs.
2. Employee Well-being and Safety: Disclosure of workplace health, safety practices, and overall employee well-being, which is becoming more important in light of recent global health crises.
3. Diversity, Equity, and Inclusion (DEI): Companies that prioritize DEI initiatives tend to outperform their peers in terms of innovation, risk management, and corporate reputation.
4. Employee Engagement and Retention: High employee engagement correlates with increased productivity and profitability, while high turnover rates can indicate potential risks for business continuity.

By addressing these aspects of human capital, the ISSB aims to create a more robust and transparent framework for disclosure, enabling investors to make informed decisions.

As the effects of climate change become more evident, companies are beginning to recognize the importance of biodiversity, ecosystems, and ecosystem services. These natural resources and systems are critical to the survival of businesses, particularly in industries that rely on natural resources such as agriculture, manufacturing, and energy. Degradation of ecosystems can lead to supply chain disruptions, increased costs, and regulatory risks, all of which can impact a company’s bottom line. 

The ISSB’s research will delve into how companies can better disclose the risks and opportunities associated with biodiversity and the ecosystem services they depend on. This includes understanding how natural systems contribute to a company’s operations and what steps are being taken to mitigate negative impacts. 

The ISSB plans to build upon existing frameworks like the Sustainability Accounting Standards Board (SASB) Standards and the Task Force on Nature-related Financial Disclosures (TNFD). These frameworks have already made significant progress in setting standards for sustainability-related disclosures, particularly in specific industries. 

The SASB Standards are industry-specific and provide a cost-effective way for companies to disclose material sustainability information that is relevant to their operations. As investors demand more sector-specific data, the ISSB aims to enhance these standards to include the newly researched areas of nature and human capital. 

The TNFD is another key initiative that the ISSB will leverage in its research on nature-related risks. The TNFD’s framework is designed to help organizations report on risks and opportunities related to nature in a manner that aligns with financial reporting. By incorporating insights from the TNFD, the ISSB hopes to create a comprehensive framework for nature-related disclosures that meets the evolving needs of investors. 

Despite growing awareness of the importance of sustainability, many companies still struggle with disclosing material information on nature and human capital. Existing frameworks do not always provide enough guidance or specificity, leading to inconsistent reporting practices. This lack of standardization creates challenges for investors who seek to compare performance across companies and industries. 

The ISSB’s research aims to identify these limitations and propose solutions. By engaging with stakeholders and leveraging feedback from its consultation process, the ISSB will work to develop more specific disclosure requirements that can be integrated into the global baseline of sustainability-related financial reporting. 

The ISSB’s priority for the next two years remains the implementation of IFRS S1 and IFRS S2, which focus on general requirements for sustainability-related disclosures and climate-related disclosures, respectively. However, the new research projects on nature and human capital represent a significant step toward expanding the scope of sustainability reporting. 

The ISSB plans to share its work plan for the next two years in June 2024, outlining how it will approach these new areas and integrate them into its existing frameworks. The work plan will likely include timelines for research, stakeholder engagement, and potential standard-setting activities. 

The ISSB’s decision to expand its focus to include nature and human capital disclosure marks an important development in the evolution of sustainability reporting. As investors demand more transparency and decision-useful information, the ISSB’s research projects aim to fill critical gaps in current disclosure practices. By building on existing frameworks like the SASB Standards and the TNFD, the ISSB will enhance the global baseline of sustainability-related financial disclosures, providing investors with the tools they need to assess risks and opportunities effectively. 

As businesses face increasing pressure to demonstrate their sustainability efforts, the ISSB’s work in nature and human capital disclosure will help pave the way for more transparent and consistent reporting, ultimately supporting a more sustainable global economy.