Beyond Compliance: Why U.S. SMBs Should Voluntarily Adopt ISSB Standards to Strengthen Financial Performance
Globally, there is a shift towards mandatory sustainability-related financial disclosures in general-purpose financial reports. With various sustainability standards and frameworks (e.g., SASB, GRI, CDSB, TCFD, TNFD) available for companies to adopt when preparing and reporting on sustainability-related matters, companies can better communicate these issues to their report users. However, disclosing sustainability-related data is relatively new and not mandatory in many jurisdictions.
In the U.S., small and medium-sized businesses (SMBs) choosing to report sustainability information may rely on multiple standards and frameworks to communicate to users, leading to less comparable data and inhibiting report users from discerning how sustainability-related information impacts financial position.
Studies have shown that favorable sustainability performance correlates to increased profitability. According to an S&P Global Ratings report, businesses that adopt a sustainable business strategy experience reduced costs, improved worker productivity, mitigated risk potential, and created revenue-generating opportunities[1]. As further discussed, voluntarily adopting the ISSB sustainability-disclosure standards can provide many advantages to a company beyond achieving financial outcomes.
[1] S&P Global Ratings (2018, April 8). The ESG Advantage: Exploring Links to Corporate Financial Performance. https://www.spglobal.com/ratings/en/research/pdf-articles/190408-the-esg-advantage-exploring-links-to-corporate-financial-performance
Introducing IFRS Sustainability Disclosure Standards (ISSB Standards)
On November 3, 2021, the IFRS Foundation formed the International Sustainability Standards Board (ISSB).Since its formation, the ISSB has issued the IFRS Sustainability Disclosure Standards (commonly referred to as ISSB Standards throughout this reading). These Standards produce material information associated with company-specific sustainability-related risks and opportunities. The ISSB Standards also complement U.S. GAAP (including other GAAP and IFRS Accounting Standards).
In the U.S., most SMBs do not have to disclose sustainability-related information (currently); however, U.S.-based companies looking to create long-term value, improve their operational performance, and strengthen their competitive advantage would benefit significantly from voluntarily adopting ISSB Standards.
While the ISSB Standards are evolving, companies that have already begun communicating the link between sustainability-related information and financial performance have witnessed a positive relationship between sustainability-related disclosures and economic returns.
Investors increasingly seek to incorporate sustainability-related information into their core investment analysis and decision-making processes. For U.S. SMBs, adopting the ISSB Standards will help them satisfy the growing need of investors looking to understand how they manage sustainability-related risks and opportunities and how these impact financial performance.
In the U.S., approximately 186 companies (both public and private) referred to the ISSB Standards in their corporate reports between October 2023 and March 2024 (IFRS Foundation, 2024). Furthermore, 60% of these companies provided a general reference to ISSB Standards, and 40% indicated they would align their reporting with the sustainability-related disclosure requirements in the ISSB Standards in the future[1]. Based on the latest data surrounding sustainability-related financial disclosures, there is a positive indication that more U.S. companies are moving towards voluntarily adopting the ISSB Standards. However, as 99.9% of all businesses in the U.S. are considered a small business (Google, July 2024), and less than 1% of such companies have reported sustainability-related information aligned with ISSB Standards, there lies a substantial gap between ISSB Standard-compliant U.S.-based SMBs.
[1] IFRS Foundation (2024). Progress on Corporate Climate-related Disclosures – 2024 Report. https://www.ifrs.org/content/dam/ifrs/supporting-implementation/issb-standards/progress-climate-related-disclosures-2024.pdf
Why U.S. SMBs Should Pay Attention (Even if Not Mandatory)
Anticipating Future Regulation
The U.S. Securities Exchange Commission (SEC) is moving towards mandatory climate-related disclosures; as hinted earlier, many regulatory bodies are adopting sustainability-related financial disclosure standards, such as the IFRS Sustainability Disclosure Standards. While states like California have already (or are in the process of) passing sustainability-related disclosure laws impacting both publicly listed and private companies, for SMBs operating in jurisdictions that currently do not mandate the reporting of sustainability-related information, early adoption will provide them with a head start and reduce compliance costs later.
As an example of the future of financial reporting, beginning January 1, 2026, SMBs operating in California will be required (with exceptions) to present climate-related financial disclosures under the Climate Corporate Data Accountability Act (CCDAA) (SB 253) and Climate-Related Financial Risk Act (SB 261). While SB 261 specifically requires companies to follow the Task Force on Climate-related Financial Disclosures (TCFD) Framework when preparing such disclosures, the ISSB Standards were derived from and based on the four pillars of the TCFD Framework. Companies that have prepared sustainability-related financial disclosures using the TCFD framework are likely on their way to meeting the requirements of the ISSB Standards and may have internal controls and processes in place to collect and report sustainability data, so adopting ISSB Standards for such companies may not require substantial effort.
Shifting Investor and Lender Expectations
Investors and lenders are increasingly observant of companies that present information regarding their sustainability-related risks and opportunities, management, and the impacts of these risks and opportunities on financial performance when considering providing resources to a company. Banks such as Citi and Bank of America are major players in sustainability underwriting. Citi is a top bank actively financing the transition to a low-carbon economy[1].
For SMBs looking to improve their access to capital, aligning their sustainability-related financial disclosures with ISSB Standards ensures the sustainability-related information communicated via disclosure enables a clear understanding of the management of sustainability-related risks and opportunities and the impact on economic performance.
Furthermore, sustainability information disclosed per ISSB Standards provides investors and lenders with a clear view of the risks and possible investment outcomes associated with a company. For instance, IFRS S1-General Requirements require information about company governance, strategy, risk management, performance metrics, and targets.
[1] Citi (2025). https://www.citigroup.com/global/our-impact/sustainability
Enhanced Response to Value Chain
Per the ISSB Standards, the value chain is considered a reporting entity's full range of interactions, resources, and relationships related to its business model and the external environment in which it operates[1].
The value chain can be considered a valuable source for identifying relevant sustainability-related risks and opportunities that may impact financial performance. As no company operates in complete isolation, and the ability to create value depends on various interactions with differing risks and opportunities, an SMB would benefit from understanding its value chain.
Shifts in the value chain can affect an SMBs financial performance, position, and prospects. By comprehending its value chain, SMBs can identify where specific sustainability-related risks and opportunities impact the company (e.g., procurement, distribution) and respond appropriately. The design of the ISSB Standards supports SMBs in understanding the interdependent nature of their sustainability-related risks and opportunities, including how well they manage their internal, external, direct, or indirect resources and relationships.
[1] IFRS S1 (June 2023). Appendix A, Defined terms.
Operational Benefits
Within the ISSB Standards (specifically, IFRS S2-Climate-related Disclosures), companies must disclose performance metrics and targets specific to their industry. To meet this requirement, companies can refer to required sources of guidance (e.g., SASB Standards, CDSB Framework, investor-focused standard setters) per ISSB Standards.
As most SMBs are affected by sustainability-related risks and opportunities beyond climate change, the SASB Standards are particularly useful in enabling SMBs to identify non-climate-related risks and opportunities. The SASB Standards include industry-specific performance metrics and targets that SMBs can leverage to quantify sustainability-related information and provide decision-useful information through qualitative metrics.
Furthermore, metrics help to evaluate the financial impact (including the likelihood, timing, and magnitude) that sustainability-related risks or opportunities will have on a company. This insight will provide an enhanced understanding of operational performance and support improved strategic planning and long-term value creation.
Practical Considerations for U.S. SMBs
SMBs considering adopting the ISSB Standards should first understand their current reporting capabilities. Three sources of information may be helpful to such SMBs:
Gap Analysis
Internal Controls
Assurance Readiness
Gap Analysis
A gap analysis helps to determine the type of sustainability data to collect and the necessary process. As financial reporting requires significant resources and new reporting requirements can place additional burdens on SMBs, performing a gap analysis can enable an SMB to determine how much more sustainability-related information it should collect, how it should collect it, and how much effort it will require to disclose required sustainability information compliant with ISSB Standards.
Internal Controls
Most SMBs have established internal controls over financial reporting. However, when it comes to sustainability-related data, there may not be sufficient controls in place to capture this data. If an SMB is not currently collecting sustainability-related information but is considering adopting ISSB Standards, it should first design and implement internal controls over sustainability reporting (ICSR). Once ICSRs are in place, SMBs should engage an independent third party to assess the effectiveness of such controls to ensure the data captured and disclosed is accurate.
Assurance Readiness
If financial statements and internal controls undergo an external audit, report users will have increased confidence that the information disclosed is accurate and reliable. Many companies have elected to have their sustainability-related financial data, including internal controls over sustainability reporting, assured to validate that reported information is useful.
After implementing proper internal controls and processes related to sustainability-related data, a qualified auditor can evaluate an SMBs readiness to undergo an independent review of sustainability information. The ISSB Standards help entities prepare for and support an independent third-party assurance engagement.
Hypothetical Business Case: Voluntary Adoption as a Strategic Advantage
A small family-owned restaurant, A Good Diner (the Diner), sells heavily processed food such as fried chicken, French fries, and pizza. Lately, the Diner has noticed a decline in revenue and customer retention. The Diner believes that the healthy eatery that has recently opened next door is part of the reason for the business decline. The new restaurant serves plant-based food items such as vegan burgers and salads. Most of the foot traffic in the area appears to be highest near the new plant-based restaurant.
The Diner has been desperately seeking ways to improve business performance and has stumbled across the topic of sustainable business strategies. The Diner has learned that a sustainable business strategy is a plan to proactively enhance financial performance by managing the risks and opportunities that impact the ability to create value (IFRS Foundation, 2023). With this knowledge, the Diner adopts a sustainable business strategy and incorporates the effects of shifting stakeholder trends.
The Diner has identified an opportunity to incorporate plant-based items on their menu and reduce the number of processed items to reposition its brand as a balanced restaurant offering traditional fast-food items and plant-based alternatives. In addition, the Diner recognizes the increased costs of sourcing higher-quality ingredients for their plant-based menu items.
To develop its sustainable business strategy, Diner refers to the ISSB Standards to identify the appropriate metrics and targets correlated to its identified sustainability-related risks and opportunities (higher costs of plant-based ingredients and alternative menu offerings) that affect its ability to generate cash flows. Leveraging the relevant metrics and targets per the ISSB Standards, the Diner (with support from their CPA) analyzes the data yielded from the metrics and transforms this analysis into appropriate actions to improve the business and reinvent its business strategy, ultimately generating value for the Diner.
As shown in this hypothetical case, A Good Diner identified the most relevant metrics linked to its ability to generate financial returns via the ISSB Standards. Additionally, the Diner improved its understanding of sustainability-related risks and opportunities and the impacts on economic performance.
Final Thoughts for U.S. SMBs
U.S. SMBs looking to integrate sustainability-related information into their financial reporting process should look to the IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board as a guide for getting started. As discussed, sustainability-related risks and opportunities can affect an SMBs financial performance and access to capital.
The trend of mandatory reporting of sustainability-related financial disclosures is pointing upward in the U.S. (at the state level, as is the case in California, and at the Federal level, U.S. SEC). U.S.-based SMBs who voluntarily comply with the requirements of the ISSB Standards presently may have a strategic, operational, and financial advantage compared to their competitors who didn't adopt the Standards.
Globally, investors (and other report users) are focusing more on understanding how sustainability-related risks and opportunities may impact financial performance to determine if they will provide capital to a company. To assist report users in understanding the link between sustainability-related risks and opportunities and economic performance, U.S. SMBs should consider adopting the ISSB Standards to depict this connection.
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