Last June the International Sustainability Standards Board (ISSB) issued the following two inaugural standards for environmental, social, and governance (ESG) related disclosure.
The ISSB was formed by the International Financial Reporting Standards (IFRS).
IFRS S1 – General Requirement for Disclosure of Sustainability-related Financial Information (IFRS S1).
IFRS S2 – Climate-related Disclosures (IFRS S2 and together with IFRS S1 the ISSB Standards).
These two distinct standards are the much-anticipated updates following the ISSB's consultation on its previously proposed international standards (Exposure Drafts), published on March 31, 2022.
The ISSB Standards are built upon, and comprehensively incorporate, the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD Framework), highlighting the importance of adhering to the TCFD Framework once again. The ISSB Standards aim to act as a global baseline for sustainability reporting that is comparable and consistent among proposed ESG-related disclosure frameworks internationally. The ISSB Standards also aim to provide a platform to help companies communicate their sustainability efforts "in a robust, comparable, and verifiable manner" and, as a result, enable stakeholders to gain a comprehensive understanding of how sustainability-related and climate-related factors are integrated into the company's performance. The Standards have been developed to be used in conjunction with any accounting requirements and are built on the concepts that underpin the IFRS Accounting Standards. They must be reported at the same time as their related financial statements and must cover the same reporting period. Further, the Standards may be applied by an entity irrespective of whether the entity’s financial statements are prepared using IFRS or other generally accepted accounting principles.
Disclosure Requirements – IFRS S1
IFRS S1 requires companies to disclose material information about "all sustainability-related risks and opportunities 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." In turn, information is material if "omitting, misstating, or obscuring that information could reasonably be expected to influence decisions that primary users of general purpose financial reports make based on those reports." Materiality is a company-specific evaluation and, accordingly, there is no universally predetermined threshold.
Aligned with the TCFD Framework, IFRS S1 is organized around the following four core pillars (each, a Pillar and collectively, the Core Pillars):
Governance
Strategy
Risk Management
Metrics and Targets
When addressing the Core Pillars, companies are expected to provide a "complete, neutral, and accurate depiction of sustainability-related risks and opportunities" to achieve a fair representation of how sustainability-related factors affect the company's overall business.
For each Pillar, companies would be required to disclose specific information, including the following.
Governance
Disclosure about the governance body(s) or individual(s) responsible for oversight of sustainability-related risks and opportunities, including, but not limited to:
how such responsibilities are reflected in the company's mandates, policies, or role descriptions;
how the company manages appropriate skills and competencies to respond to sustainability-related risks and opportunities;
how the company takes into account sustainability-related risks and opportunities in major transactions; and
how the company sets sustainability-related targets and monitors such targets.
Disclosure on:
the current and anticipated effects of sustainability-related risks and opportunities on the company's business model and value chain;
the effects of such risks and opportunities on the company's strategy and decision-making process;
the effects of such risks and opportunities on the company's overall financial position; and
the resiliency of the company's business model to such risks.
Specifically, IFRS S1 requires companies to provide quantitative and qualitative information about the various effects of sustainability-related risks and opportunities on the company's financial position. Concerning quantitative information, however, the ISSB carved out a narrow comply-or-explain approach. Companies are further required to specify over which time horizons — short, medium, or long term — the effects of identified sustainability-related risks and opportunities could materialize and affect the company's financial performance.
Strategy
How sustainability and climate-related risks and opportunities might impact planning horizons for strategic decision-making by explaining how the entity defines the short, long, and medium term in light of how these risks and opportunities might occur. The current and anticipated effects of these issues on the business model and value chain, and where these issues are concentrated in the entity. How the entity responds and plans to respond, to these risks and opportunities in strategy and decision-making, and any progress made since the last reporting period. The effect of these risks and opportunities on the entity’s financial position, performance, and cash flow and any anticipated effects in these areas, including how funding in this area is sourced and if there are any investment and disposal plans.
Risk management
Processes and related policies the entity uses to identify, assess, prioritize, and monitor sustainability and climate-related risks. For instance, information on the inputs and parameters used, if the entity uses scenario analysis, how the entity assesses the nature and magnitude of the risks, and how risks are monitored. Specifically for climate-related risks within IFRS S2, the entity must explain whether the risk is a physical risk or transition risk, and explain any mitigation and adaptation efforts along with any transition plan that the entity has.
Metrics and Targets
Metrics the entity uses to measure and monitor the sustainability and climate-related risks and opportunities, and any performance measures such as progress towards targets or adherence to law or regulation.
By Giacomo Breda
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