On June 26, 2023, in a tremendous undertaking in the world of standard-setting, the International Sustainability Standards Board (ISSB) issued in final form its first two standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. This is a significant milestone in establishing a global baseline with one common language to communicate an entity’s sustainability risks and opportunities, starting with those driven and/or impacted by climate change.
The standards have been developed by building from existing frameworks and standards, most notably the TCFD and SASB Standards. Given the wide adoption and use of both TCFD and SASB, this starting point was an important factor in the speed at which ISSB standards were finalized. To provide context on their wide reach, last year 2,231 global companies used SASB Standards in their public company communications, and around 3,900 organizations are TCFD supporters.
But a notable difference between the ISSB’s standards and the existing standards is the focus on reinforcing the connectivity with financial statement impacts (despite the Gaap that may be applied) and the overall implications for financial results and reporting. This is in response to market demand and concerns raised by investors.
The final standards are centered on four thematic areas: governance, strategy, risk management and metrics & targets. While there is significant depth in the data, both quantitative and qualitative, the ISSB has taken a pragmatic approach to implementation through the use of 1) transitional relief provisions and 2) the concept of ‘undue cost or effort’.
Transitional relief
The ISSB introduced a number of areas of transitional relief in the final standards, acknowledging the level of transformational change that reporting on these topics may require. For example, they give relief in the first year of using ISSB standards on the following requirements:
- Providing ISSB disclosures beyond climate-related information
- Providing ISSB disclosures at the same time as related financial statements
- Reporting on Scope 3 disclosures
- Measuring Scope 1, Scope 2 and Scope 3 greenhouse gas emissions in accordance with the Greenhouse gas protocol: A corporate accounting and reporting standard
- Providing comparative information.
Undue cost or effort
In developing these standards, the ISSB acknowledged that the data needed to fulfill disclosure requirements often involves a high level of ‘measurement or outcome uncertainty’. For this reason, the concept of ‘reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort’ was introduced to allow for a more proportional approach in adopting the standards.
What’s next?
Climate-related risks and opportunities are increasingly creating measurable financial impact for companies, and that’s why many capital markets participants are looking for consistent, comparable and reliable climate-related disclosure. Standards can drive quality reporting for organizations and the ISSB’s work to establish a global baseline for sustainability standards can help meet the information needs of investors.
With IFRS S2 Climate-related Disclosures’ effective date of January 1, 2024, the next step will be how individual jurisdictions mandate the use of ISSB standards. There are commitments already made in a number of jurisdictions to adopt the ISSB standards, including the UK, China and Japan, as well as the statements of support issued by the G7, G20 and the International Organization of Securities Commissions. We expect to observe advancement in this area through voluntary adoption of the ISSB and continued evolvement by regulators globally.
Kristen Sullivan is global audit & assurance sustainability and climate services leader, Deloitte & Touche
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