At the end of June, the ISSB published its new standards in the form of IFRS S1 and IFRS S2 Climate-related disclosures along with guidance assisting companies on how to comply with these new standards.
The International Sustainability Standards Board (ISSB) which is part of the International Financial Reporting Standards Foundation (IFRS), was established to develop and implement sustainability disclosure standards, and in turn provide a global baseline to inform economic and investment decisions. Another major part of the ISSB’s objectives has been to consolidate existing climate and sustainability standards such as SASB standards and TCFD recommendations, building on the success and uptake of these frameworks that have already been adopted by thousands of companies worldwide, whilst also facilitating interoperability with disclosures that are jurisdiction specific.
What are the requirements of the new standards?
S1 focuses on company disclosures surrounding material information on ALL sustainability related risks and opportunities. Specifically, those 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 (collectively referred to as ‘sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects’).
IFRS S1 sets out the requirements for disclosing information about an entity’s sustainability-related risks and opportunities. In particular, an entity is required to provide disclosures about:
- the governance processes, controls and procedures the entity uses to monitor, manage and oversee sustainability-related risks and opportunities;
- the entity’s strategy for managing sustainability-related risks and opportunities;
- the processes the entity uses to identify, assess, prioritise and monitor sustainability-related risks and opportunities; and
- 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.
The objective of IFRS S2 is to require an entity to disclose information about its climate-related risks and opportunities that is useful to users of general purpose financial reports in making decisions relating to providing resources to the entity.
IFRS S2 applies to:
a. climate-related risks to which the entity is exposed, which are:
- climate-related physical risks; and
- climate-related transition risks; and
b. climate-related opportunities available to the entity.
Going further, IFRS S2 sets out the requirement of an entity to disclose information which is very closely aligned to the TCFD’s recommendations detailing the following:
- the governance processes, controls and procedures the entity uses to monitor, manage and oversee climate-related risks and opportunities;
- the entity’s strategy for managing climate-related risks and opportunities;
- the processes the entity uses to identify, assess, prioritise 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; and
- the 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.
Each of the standards also provide guidance on how information should be disclosed and what information should be included. These will be made as part of a company’s general financial reporting package.
Reaction to the ISSB publications have largely been positive with many interested parties, including the FCA here in the UK, supporting the move towards globally consistent, comparable and reliable disclosures https://www.fca.org.uk/news/news-stories/fca-welcomes-launch-issb-standards .
As an independent standard setter, the ISSB development of these disclosure standards means they can be adopted by regulatory organisations across the world and can be mandated and combined with jurisdiction-specific requirements or requirements aimed at meeting the information needs of broader stakeholder groups beyond investors. The first official reporting periods where the standards can be implemented are from January 1st 2024, and to be included in financial reporting published the following year in 2025.
Article originally published by Landmark Information Group.