New ISSB Reporting Standards: How Will Your Business Be Impacted?
On June 26, 2023, The International Sustainability Standards Board (ISSB) issued its inaugural sustainability standards: IFRS S1 and IFRS S2. These are standards that, in the words of ISSB Chair Emmanuel Faber, “have been designed to help companies tell their sustainability story in a robust, comparable and verifiable manner.” Faber also emphasizes that, “we have consulted closely with the market to ensure the Standards are proportionate and will result in disclosures that are relevant for investment decision-making.”
These are standards that have broad support from international policymakers, market regulators, investors, companies. Upon publication of the standards, Erkki Liikanen, Chair of the IFRS Foundation Trustees, stressed that the global baseline approach is, “supported by the G20 and others,” including the International Organization of Securities Commissions (IOSCO), the Financial Stability Board, and the G7.
But what do these standards mean for your business? And how should you prepare?
What is the ISSB?
The ISSB was established by the International Financial Reporting Standards (IFRS) Foundation Trustees in 2021 in response to market demand from investors for a global ESG disclosure standard to enable better comparative analysis of ESG performance.
Upon creation, the ISSB consolidated the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF). The VRF previously consolidated the Sustainability Accounting Standards Board (SASB) Standards and the International Integrated Reporting Council’s (IIRC) Integrated Reporting (IR) framework).
The ISSB’s launch also included the prototype climate and general disclosure requirements which had been developed by the Technical Readiness Working Group (TRWG) - which was a collaboration between various standard setting groups and NGOs to prepare for ISSB’s launch. These two prototype disclosure requirements received feedback from interested stakeholders (anyone in the general public could have submitted comments) as they progressed to IFRS S1 General Requirements for Disclosure of Sustainability-related Information and S2 Climate Related Disclosures Exposure Drafts in March 2022.
That brings us to today’s momentous launch of the finalized IFRS S1 and S2. These standards will continue the evolution of sustainability disclosure in a direction that will bring clarity, comparability, and consistency. With alignment to existing and upcoming disclosure requirements from standards like the Global Reporting Initiative (GRI) or European Sustainability Reporting Standards (ESRS), companies will be able to focus less on reporting requirements and more on achieving the impact they strive for.
What are the finalized IFRS Sustainability Disclosure Standards?
One of core precepts of the IFRS Sustainability Disclosure Standards is a focus on useful sustainability information. As explained in the standard, usefulness is enhanced if the information is “comparable, verifiable, timely and understandable.” This is bolstered by a requirement for the fair presentation of all material sustainability-related risks and opportunities.
Critically, all disclosures required by the IFRS Sustainability Disclosure Standards will need to be included as part of an entity’s “general purpose financial reports” and must include an explicit statement of compliance.
Further, all information will need to be clearly presented so that “users of a general purpose,” in particular the investors who are a primary concern for IFRS materiality practices, can understand the connections within sustainability-related financial disclosures and across its “sustainability-related financial disclosures and other general purpose financial reports published by the entity.” There will also need to be no ambiguity to how items being reported connect to the risks and opportunities that could affect an entity’s prospects.
An overview of IFRS S1
IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information requires entities to disclose information about all sustainability-related risks and opportunities that could “reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term.”
In alignment with the existing structure created by the Task Force on Climate-Related Financial Disclosures(TCFD)—despite IFRS S1 not having a focus on climate—compliance with the standard requires disclosures about:
- Governance—“the governance processes, controls and procedures the entity uses to monitor and manage sustainability-related risks and opportunities”
- Strategy—“the approach the entity uses to manage sustainability-related risks and opportunities”
- Risk management—“the processes the entity uses to identify, assess, prioritize and monitor sustainability-related risks and opportunities”
- Metrics and targets—”the entity’s performance in relation to sustainability-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation”
In addition to the IFRS Sustainability Disclosure Standards, the applicability disclosure topics within existing SASB Standards, the CDSB Framework Application Guidance, and other recent pronouncements of relevant standards-setting bodies can also be considered. The existing VRF/SASB Standards that were consolidated into the ISSB will remain in effect and the ISSB has an open consultation on how to best globalize the existing industry based standards, in addition to an open consultation on ISSB’s agenda priorities for the next two years.
Full information about IFRS S1 can be found here.
An overview of IFRS S2
IFRS S2 Climate-related Disclosures requires entities to disclose information about climate-related risks and opportunities that “could reasonably be expected to affect the entity’s prospects.”
Also in alignment with the TCFD, compliance with IFRS S2 requires disclosures about:
- Governance—“the governance processes, controls and procedures an entity uses to monitor, manage and oversee climate-related risks and opportunities.”
- Strategy—“an entity’s strategy for managing climate-related risks and opportunities.”
- Risk management—an entity’s processes to identify, assess, prioritize and monitor climate-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process.”
- Metrics and targets—“an entity’s performance in relation to its climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation.”
Full information about IFRS S2 can be found here.
Are the IFRS Sustainability Disclosure Standards mandatory?
Not yet—although the UK and Japan have both already committed to use the standards if they pass their endorsement processes, with many other countries indicating interest. Right now, the ISSB will continue engaging with stakeholders to drive adoption. This will start with the creation of a Transition Implementation Group to support the organizations that apply the standards. If and when the IFRS S1 and IFRS S2 are made mandatory within your jurisdiction will depend on its adoption within local law, or if made a requirement within a stock exchange listing.
When are the IFRS S1 and S2 standards being adopted?
The effective date for the application of IFRS S1 and S2 is 2024, with the first reports published in 2025.
In addition to the support of the Transition Implementation Group, early adopters will also be supported with capacity-building initiatives that aim to support effective implementation. There is also support available for jurisdictions that want to include incremental disclosures above the global baseline.
How does the ISSB address investor demands?
For now, the initial standards introduced by the ISSB are voluntary. However, as Emmanuel Faber asserted during his keynote at the IFRS Foundation Conference on the day that the standards were announced, “we are standing now at a much, much more difficult and challenging, essential frontier for capital markets and for the future of accounting.” Macroeconomic conditions, paired with escalating climate catastrophes, have placed a fine point on the need for comparable, verifiable, timely and understandable sustainability information. This is what investors, globally, are demanding.
The ISSB has responded in kind. They have tried to make everything as simple as possible for businesses—in addition to consolidating existing VRF/SASB standards, they have also worked hard to align IFRS S1 and IFRS S2 with the Corporate Sustainability Reporting Directive’s (CSRD) ESRS E1 and ESRS E2 standards, respectively. The work to bring greater simplification to the wider sustainability reporting ecosystem is ongoing—more information about their continuing plans can be found here.
The ISSB’s new standards reflect a tidal shift in the way that sustainability information will need to be treated.
Like with the CSRD, the message is clear: sustainability information carries equal weight to financial information. Also key to the ISSB’s approach is the need to connect sustainability and financial information and to move away from using known financial language. During his keynote at the IFRS Foundation Conference, Emmanuel Faber said that they are aiming to, “open the box and the horizons of financial statements.”
How should you prepare for the ISSB’s new standards?
It’s the responsibility of organizations to ensure that they produce integrated reports that reflect the importance regulators, standards setters and stakeholders alike are placing on ESG metrics. Companies looking for a way to simplify their existing networks of frameworks are likely to look to the ISSB standards as one of their options.
A good first step to prepare for the IFRS Sustainability Disclosure Standards would be to establish robust materiality practices. For a definition of how the ISSB defines materiality, look to paragraphs B13-B37 within the standard document.
Next, assess your current reporting infrastructure. To build confidence and trust in all data, lead with transparency and meet the ISSB’s requirements, it’s critical to establish watertight collaboration between finance, sustainability and risk teams. Without unequivocal oversight over expanded datasets, processes and teams, it will be difficult to ensure compliance.
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