On 26 June 2023, the International Sustainability Standards Board (ISSB) issued its first two international sustainability standards that become effective for periods beginning on or after 1 January 2024.
The ISSB sits alongside the existing International Accounting Standards Board (IASB), with both standard-setting boards operating under the oversight of the IFRS Foundation. Although the ISSB and IASB are separate and independent boards, they work alongside each other to enhance interconnectedness between financial reporting and sustainability reporting.
The ISSB aims to establish through the issuance of these Standards a global baseline of sustainability-related financial disclosures. All the standards the ISSB will issue will aim to provide the right information to support investor decision-making and facilitate international comparability to attract capital.
The sustainability standards that have been released are:
- IFRS S1 ‘General Requirements for Disclosure of Sustainability-related Financial Information’
- IFRS S2 ‘Climate-related Disclosures’.
These Standards create a common language for disclosing sustainability risks and opportunities, initially focusing on climate related risks and opportunities. They fully incorporate and build on the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) which have already been in force for a few years.
IFRS S1 sets out the overall requirements for a reporting entity to disclose sustainability-related financial information about its sustainability-related risks and opportunities. It requires companies to disclose material information regarding their governance, strategy, risk management, and the metrics and targets used to measure and manage sustainability related risks and opportunities. These are summarised as follows:
- Governance – information disclosed helps investors to better understand the company’s governance process, controls, and the producers used to regulate sustainability-related risks and opportunities.
- Strategy – information disclosed helps investors to understand the strategy used by the company to manage its sustainability related risks and opportunities.
- Risk management – information disclosed allows investors to understand how a company identifies, assesses, prioritizes and monitors sustainability related risks and opportunities.
- Metrics and targets – information disclosed helps investors to understand the sustainability related targets set by the company (or required by law) and how it is progressing against these targets.
It is designed to allow reporting entities to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term.
IFRS S2 sets out specific requirements for the identification, measurement and disclosure of climate-related financial information and is designed to be used in conjunction with IFRS S1. These include:
- Governance – a company must disclose information to allow investors to understand the company’s governance processes, controls and procedures used to monitor and manage climate related risks and opportunities.
- Strategy – climate change represents risks and opportunities for nearly all companies, and so companies are required to disclose the climate related risks and opportunities that can be reasonably expected to impact the company’s outlook. Information required to be disclosed includes anticipated changes to the business, mitigation and adaptation strategies, low carbon transition plans, climate related targets and how it intends to achieve these targets. Additionally, a company must disclose any financial impacts (positive or negative) resulting from climate related risks and opportunities, as well as any anticipated future impacts on the company’s financial position. It must also provide information on company resilience including its operational and financial capacity to adjust to the impacts of climate change.
- Risk management – information must be disclosed to help investors understand how the company identifies, assesses, prioritizes, and monitors climate related risks and opportunities. Including how these processes are incorporated into the company’s overall risk management strategy.
- Metrics and targets – information must be disclosed regarding a company’s climate related targets (either voluntary or legal), and any industry or cross-industry metrics (for example climate related transition risk, physical risks, opportunities etc), as well as how it measures progress against these targets and metrics. IFRS S2 also requires that a company disclose its greenhouse gas emissions (scope 1, 2 and 3).
IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024. This means the first reporting will be seen in 2025 for reporting entities applying the Standards to their 31 December 2024 reporting cycles. Early adoption is permitted.
In order to claim compliance with IFRS Sustainability Disclosure Standards, reporting entities need to apply both Standards together.
The ISSB has provided relief from some requirements in the first year the Standards are applied, which are detailed below:
- reporting information about sustainability-related risks and opportunities beyond those relating to climate-related risks and opportunities
- reporting sustainability-related financial disclosures, including climate-related financial disclosures, at the same time as the related financial statements. This means a reporting entity will be permitted to report its sustainability-related financial disclosures after its financial statements, allowing for more time to collate and report on sustainability.
- disclosing Scope 3 greenhouse gas (GHG) emissions information and using the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (GHG Protocol Corporate Standard) to measure Scope 1, Scope 2 and Scope 3 GHG emissions if they are using a different approach; and
- disclosing any comparative information.
Why do we need sustainability disclosures?
Many stakeholders – including investors – now expect companies to disclose information relating to their sustainability and climate change policies and performance. The problem was there have been a range of different frameworks and standards to choose from, which makes it difficult for companies to know where to start, and raises issues regarding the reliability and comparability of information.
What if my entity uses UK GAAP (e.g. FRS 102) rather than IFRS?
The Government has also set TCFD disclosure requirements through The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/31). This places requirements on certain publicly quoted companies, large private companies and LLPs (>£500m turnover and > 500 employees) to incorporate TCFD-aligned climate disclosures in their Strategic Reports for accounting periods beginning on or after 6 April 2022.
Although smaller companies can disclose on a voluntary basis, it is expected these thresholds are likely to reduce to include further entities in the not too distant future.
For advice and assistance with these new reporting standards or to discuss any aspects of this article please get in touch with our expert below.