The International Sustainability Standards Board (ISSB) has taken the sustainability reporting landscape by storm with its newly unveiled International Financial Reporting Standards (IFRS) – IFRS S1 and IFRS S2. These standards aim to bring greater clarity and consistency to sustainability reporting for companies, resulting in useful, decision-making information for investors and other stakeholders.
The ISSB’s 4 Key Objectives
Developing standards for a global baseline of sustainability disclosures.
Meeting the information needs of investors.
Enabling companies to provide comprehensive sustainability information to global capital markets.
Facilitating interoperability with disclosures that are jurisdiction-specific and/or aimed at broader stakeholder groups.
In this article, we provide a quick overview of the IFRS S1 and S2 standards, and why companies should consider aligning with them in their future ESG or sustainability reports.
Introducing ISSB’s New Standards
At a high level, ISSB’s two new standards include:
- IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information. This standard outlines how a company should report its sustainability-related financial disclosures, covering governance, strategy, risk management, metrics and targets related to sustainability risks and opportunities.
- IFRS S2: Climate-related Disclosures. This standard focuses on reporting climate-related risks and opportunities, including climate-related physical risks and transition risks. It encourages companies to:
- quantify existing and long-term impacts as a result of climate through risk assessments and scenario analysis, and
- address such risks through strategic planning, goal-setting, and other mitigation and adaptation measures.
Following the publication of the inaugural ISSB Standards (IFRS S1, S2) the Financial Stability Board has asked the IFRS Foundation to take over the monitoring of the progress on companies’ climate-related disclosures from the Task Force on Climate-related Financial Disclosures (TCFD) essentially, IFRS S2 and TCFD will be synonymous. (Learn more here)
These new standards are intended to be applied together and will be part of a larger set of sustainability standards currently in development.
Why Report to ISSB’s IFRS 1 and 2?
Since the release of the new ISSB standards on June 26, 2023, several countries including Singapore, Canada, China, Brazil, and South Africa have already indicated their intentions to align with them. Private and publicly held companies should consider alignment for the following reasons:
- Address investor and stakeholder pressure: As the ISSB standards gain traction, investors, customers, and others may increasingly expect companies to adopt these guidelines for their sustainability reporting. This could lead to greater pressure on companies to improve their sustainability performance and disclosure practices.
- Simplify annual sustainability reporting: Companies can streamline their annual reporting by aligning with the ISSB standards, which were developed by combining guidance from other commonly used reporting frameworks such as the Climate Disclosure Standards Board (CDSB) the TCFD and the Value Reporting Foundations’ Integrated Reporting Framework and Sustainable Accounting Standards Board (SASB) industry-based standards. It also complements other commonly used frameworks such as the Global Reporting Initiative (GRI) the World Economic Forum’s Stakeholder Engagement Capitalism Metrics, and UN Sustainable Development Goals.
- Enhance risk management and organizational resilience: Reporting to the new standards can help companies better understand and address climate- and other sustainability-related risks and opportunities that they are currently facing or may face in the future.
- Compliance with regional mandates: There are regions where the new standards may be mandated or incorporated into regional reporting requirements. For example, the Hong Kong Stock Exchange released a consultation to mandate ISSB-aligned disclosure. As well, alignment with IFRS standards will position companies ahead of the regulatory curve in regions such as the U.S. where the SEC is considering mandating climate disclosure that closely aligns with ISSB’s climate standard.
Key Elements of the New Standards
IFRS S1 and IFRS S2 will be effective beginning in 2024. Companies that intend to report with these standards should allocate at least 12 months for preparation, as there are several key elements essential for alignment. They include:
- Financial Materiality of sustainability and climate-related risk. The approach will enable investors and stakeholders to make informed decisions based on a comprehensive understanding of a company's exposure to sustainability and climate-related risks, ultimately promoting responsible business practices and long-term value creation.
- Build upon and complement existing sustainability standards. The ISSB standards were developed by combining guidelines from the Sustainable Accounting Standards Board (SASB), Task Force on Climate-related Financial Disclosures (TCFD), GHG Protocol, and Climate Disclosure Standards Board (CDSB). Existing sustainability reporting standards from the Global Reporting Initiative (GRI) and Principles for Responsible Investment (PRI) may continue to be used as reference points or complementary sources. The aim is to reduce fragmentation and drive comparability in sustainability-related financial data.
- Robust quantitative disclosure. IFRS disclosures request companies to share quality, comparable sustainability data including environmental impacts, financial investments related to sustainability, and vulnerability to sustainability risks. Its set of climate standards builds upon TCFD’s recommendations and complements the GHG Protocol and CDP, and similarly, requests external verification to ensure the accuracy and quality of data.