ISSB Issues Inaugural Global Sustainability Disclosure Standards

Additional Author: Oliver Williams

On 26 June 2023, the International Sustainability Standards Board ("ISSB") issued its long-awaited inaugural global sustainability disclosure standards: IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) (together, the "Standards").¹ The ISSB also released a related Sustainability Standards Navigator tool and a three-minute video. The ISSB's aim is for the Standards to be the global baseline of all sustainability-related disclosures.

Background

The ISSB, first announced at COP 26, was established by the International Financial Reporting Standards Foundation ("IFRS Foundation") to develop a comprehensive global baseline of sustainability disclosure standards to meet demands from investors for transparent, reliable and comparable reporting by companies on climate and other sustainability-related matters.

The first draft versions of the Standards were published on 31 March 2022 and were made available for public consultation until 29 July 2022. The ISSB subsequently reviewed the comments made during the public consultation period and has now published finalised versions of the Standards (for further background information on the ISSB and the Standards, read our earlier blog posts here, here and here).

The Standards

Disclosure requirements

IFRS S1 requires entities to disclose material information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity's prospects. For the purposes of IFRS S1, "prospects" refers to the entity's cash flows, access to finance or cost of capital over the short, medium or long term, whilst "material information" refers to information that if omitted, misstated or obscured could reasonably be expected to influence the decisions of users of financial reports, such as investors.
The specific disclosures required under IFRS S1 are grouped into four categories:

1. Governance: entities must disclose the governance processes, controls and procedures that they use to monitor and manage sustainability-related risks and opportunities. This must include, among other things, information about the governance body(s) for oversight of sustainability-related risks and opportunities, as well as management's role in the processes and controls used to oversee sustainability-related risks and opportunities;
2. Strategy: entities must disclose the approach that they use to manage sustainability-related risks and opportunities. This must include, among other things, information to enable users of financial reports to understand the sustainability-related risks and opportunities that could reasonably be expected to affect the entity's prospects and the effects of any such risks and opportunities on the entity's strategy and decision making;
3. Risk management: entities must disclose the processes that they use to identify, assess, prioritise and monitor sustainability-related risks and opportunities. This will include information about, among other things, the inputs and parameters that the entity uses, whether and how the entity uses scenario analysis to inform its identification of sustainability-related risks and whether and how the entity prioritises sustainability-related risks relative to other types of risk; and
4. Metrics and targets: entities must disclose their 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. This must include, among other things, the metrics used to set targets and to monitor progress towards reaching targets, the specific quantitative or qualitative targets the entity has set or is required to meet and the period over which the targets apply.

IFRS S2 builds upon IFRS S1 by requiring entities to disclose material information about climate-related risks and opportunities that could reasonably be expected to affect the entity's prospects. It is designed to be used in addition to IFRS S1.
The specific disclosures required under IFRS S2 are grouped into the same four categories as IFRS S1:

1. Governance: entities must disclose, among other things, information about the governance body(s) for oversight of climate-related risks and opportunities, as well as management's role in the governance processes, controls and procedures used to monitor, manage and oversee climate-related risks and opportunities;
2. Strategy: entities must disclose, among other things, information to enable users of financial reports to understand the climate-related risks and opportunities that could reasonably be expected to affect the entity's prospects and the effects of any such risks and opportunities on the entity's strategy and decision making;
3. Risk management: entities must disclose the processes that they use to identify, assess, prioritise and monitor climate-related risks and opportunities. This will include information about, among other things, the inputs and parameters that the entity uses, whether and how the entity uses climate-related scenario analysis to inform its identification of climate-related risks and whether and how the entity prioritises climate-related risks relative to other types of risk; and
4. Metrics and targets: entities must disclose, among other things, the quantitative and qualitative climate-related targets they have set to monitor progress towards achieving their strategic goals, as well as any targets that they are required to meet by law or regulation, including any greenhouse gas emissions targets.

Together, IFRS S1 and IFRS S2 fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures ("TCFD") (for further information on the TCFD Recommendations, read our earlier blog posts here and here).

Timing

The Standards are intended for use by companies for annual reporting periods beginning on or after 1 January 2024, meaning that the earliest they could be disclosed is in companies' 2025 annual reports. The requisite disclosures should be reported at the same time as the entity's related financial statements and should cover the same reporting period as the financial statements.

"Transition relief" is available for certain entities that apply the Standards, including entities that participate in asset management, commercial banking or insurance activities. If relevant entities decide to use this "transition relief", they do not have to make certain disclosures in the first annual reporting period in which the Standards apply, including (for example) their scope 3 greenhouse gas emissions and additional information about their financed emissions.

Application

The Standards are voluntary and so it is up to the governments of jurisdictions across the globe to decide whether they want to mandate them. In its Green Finance Strategy, the UK Government has, for example, stated that it intends to launch a formal assessment mechanism to determine whether the Standards are suitable for UK companies, following which the Standards could be brought into national legislation (for further information on the UK Green Finance Strategy, read our earlier blog post here).

Given that the extensive ISSB stakeholder consultations included the US Securities and Exchange Commission ("SEC") and other global standard setters to ensure "interoperability" of the Standards across various jurisdictions, the governments of other jurisdictions may well follow a similar approach to the UK Government and consider mandating the Standards. As a result, the Standards may be a "preview" of various future sustainability-related disclosure requirements, including (for example) the SEC's climate disclosure final rule expected in October 2023 (for further information on the SEC's climate disclosure rule, read our earlier update here).

Related publications

A related ISSB release provides more details regarding the Standards. The ISSB also published an overview of the ISSB project and a feedback statement summarising the proposals contained in draft IFRS S1 and draft IFRS S2, the feedback on the proposals and the ISSB's response.

What next?

The ISSB will now work with governments and companies across the globe to support the adoption of the Standards. To do so, the ISSB will firstly create a Transition Implementation Group to support companies that apply the Standards and launch capacity-building initiatives to support their effective implementation. The ISSB will also continue to work with governments that wish to mandate the Standards, as well as with the Global Reporting Initiative to support efficient and effective reporting when the Standards are applied in combination with other reporting standards, such as the TCFD and SASB standards (for further information on these standards, read our earlier article here).

¹ To view the related Standards please follow the links provided. Note, registration is required for access: IFRS S1 and IFRS S2.