The new global sustainability reporting standards will be published by June, having been approved in February by the International Sustainability Standards Board (ISSB).
It is linked to the International Accounting Standards Board (IASB) whose financial reporting rules are compulsory for listed companies in 167 jurisdictions. That includes all European Union (EU) countries, the UK, Canada, South Africa and Australia, for example. That reach of mandatory application is the goal of the ISSB, whose reporting standards will measure how companies protect themselves against environmental (especially climate) risk and other sustainability concerns, such as avoiding the use of forced or cheap labour.
The ISSB’s first two standards are IFRS (International Financial Reporting Standards) S1 General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2 Climate-related Disclosures, which will now be released by the end of Q2 2023.
These two standards lay down in practical detail how clothing and textile companies, and those from other sectors, can report how they are impacted by climate change and the environment and how they are preparing to deal with these issues, which can impact their bottom line. Their goal is to help global investors better assess the long-term value of listed companies, with sustainability reports issued alongside standard financial statements.
The ISSB chair, Emmanuel Faber, said: “There’s a need to address the fact that business cannot be as usual, and therefore accounting cannot be as usual. We need to change.” He said the standards would help deliver this through new reporting language reforming company cultures, organisation and processes. Investors would now receive reliable reporting data that will enable them to assess which companies are better prepared for climate change.
The final draft of S2, on climate disclosures, has a special appendix saying how clothing brands and manufacturers should go about this specifically – the ISSB has confirmed this will be written into the final standard as something companies must follow if they deliver data on “sustainability risk and opportunities”. The annex defines these as those handling the “design, manufacturing, wholesaling, and retailing of various products, including men’s, women’s, and children’s clothing, handbags, jewelry, watches, and footwear”. Stressing that industry products are “largely manufactured by vendors in emerging markets, thereby allowing companies in the industry to primarily focus on design, wholesaling, marketing, supply chain management, and retail activities,” the standard says reporting needs to cover suppliers.
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It tells brands and clothing manufacturers to report the “percentage of raw materials third-party certified to an environmental and/or social sustainability standard”, declaring the proportion covered by each standard. It also tells reporters to declare the number of their suppliers that transact directly with them (called ‘tier one suppliers’), “such as finished goods manufacturers (e.g., cut and sew facilities)”, rather than companies higher up the supply chain, such as “manufacturers, processing plants, and providers of raw materials extraction (e.g., mills, dye houses and washing facilities, sundry manufacturers, tanneries, embroiderers, screen printers, farms, and/or slaughter houses).”
The annex stresses that declaring such information is not just about demonstrating how a company is helping combat climate change or can honestly demonstrate good environmental practice against potential claims of greenwashing. It also is about demonstrating the longer-term value of a company to investors in an uncertain world: “The ability of companies to manage potential materials shortages, supply disruptions, price volatility, and reputational risks is made more difficult by the fact that they source materials from geographically diverse regions through supply chains that often lack transparency. Failure to effectively manage this issue can lead to reduced margins, constrained revenue growth, and/or higher costs of capital.”
And this is a key goal of the standards – helping investors identify companies truly charting a path towards sustainable profits. Martin Moloney, secretary general of IOSCO (the International Organization of Securities Commissions), said the aim “is to facilitate capital flows within and across countries…It’s about transparency to look across the world and view the facts about a security you were trying to evaluate,” he told an ISSB symposium staged during February in Montréal, Canada.
The UK, Singapore, Japan and others have already said they may base their own sustainability standards on ISSB guidance or authorise them as a formal option for reporting. The EU is considering adding on additional sustainability reporting requirements that would see companies declare information about their impact on the environment and climate as well as how climate and the environment affect their own profits – its detailed compulsory standards should be released by June (2023), with recent drafts reflecting ISSB standard structures. And while the USA is developing its own national sustainability reporting standards, it may authorise the use of ISSB standards for foreign companies operating in the US. The US Securities & Exchange Commission (SEC) should release its own rules by April.
Not all sustainability reporting organisations have rolled themselves into the ISSB, however. The GRI (Global Reporting Initiative), which remains independent of the ISSB, has announced it will create its own sustainability reporting standard for the clothing, footwear and textile sector. This new GRI Textiles and Apparel Standard will help assessments of human rights, waste and recycling challenges within retailers, manufacturers and their supply chains. The GRI is to establish a Textiles and Apparel Working Group to guide this work, looking for members from the industry, investors, labour organisations, mediating institutions and civil society.
Mia d’Adhemar, the GRI’s head of sector programme, said: “Production of textiles and apparel has numerous impacts, including on working conditions, health and safety, water consumption and pollution, waste, greenhouse gas emissions and the use of hazardous materials. Significant progress is needed to improve how textiles and apparel companies identify, manage and disclose their impacts on the economy, environment and people”.
GRI is widely used as a sustainability reporting model, for instance in South Africa, and is mandatory for listed company sustainability reporting in the United Arab Emirates (UAE).
But this year is the year when sustainability reporting comes of age, and clothing and accessory companies start to face up to mandatory declarations. The ISSB standard is likely to be most influential – but brands and manufacturers will have to keep a close eye on domestic legislation implementing reporting rules.