- The new Standards build on the work of prior sustainability disclosure initiatives, including the Sustainability Accounting Standards Board (SASB) Standards and the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations.
- The International Organization of Securities Commissions (IOSCO), the global standard-setter for markets regulation, is currently conducting an independent assessment of IFRS S1 and IFRS S2. Decisions to integrate the Standards into national reporting frameworks will be made by regulators on a jurisdiction-by-jurisdiction basis.
- The Standards will be effective for annual reporting periods beginning on or after January 1, 2024, which means that we can anticipate the first reports applying the IFRS S1 and IFRS S2 requirements to be published in 2025.
The IFRS Sustainability Disclosure Standards: IFRS S1 and IFRS S2
Significant progress has been made towards developing standards that provide a global baseline for sustainability-related financial disclosures since the launch of the International Sustainability Standards Board (ISSB) in November 2021. On June 26, 2023, the ISSB finalized and published its inaugural set of sustainability disclosure Standards, IFRS S1 and IFRS S2. ISSB Chair Emmanuel Faber unveiled the new Standards at the IFRS Foundation’s annual conference, noting: “Today represents the outcome of more than 18 months of intense work to deliver an inaugural set of sustainability disclosure standards for the global capital markets. The ISSB Standards have been designed to help companies tell their sustainability story in a robust, comparable, and verifiable manner.”1
The Standards establish a common global language for companies to communicate decision-useful sustainability-related information in a consistent and comparable way. The Standards build upon the work of widely used sustainability-related frameworks and standards, including the Sustainability Accounting Standards Board (SASB) Standards, which are now part of the IFRS Foundation, and the Task Force on Climate-related Financial Disclosures (TCFD) Framework. The ISSB has indicated that companies that have already adopted the SASB Standards and/or TCFD Framework are well-positioned to apply IFRS S1 and S2.2
IFRS S1 provides a set of disclosure requirements to enable companies to communicate the sustainability-related risks and opportunities they face over the short-, medium-, and long-term. Specifically, a company is required to provide disclosures on the following:
- 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, prioritize, 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.
IFRS S2 provides specific guidance on the disclosure of climate-related risks and opportunities and is designed to be used in conjunction with IFRS S1. IFRS S2 requires a company to provide disclosures on:
- climate-related risks to which the entity is exposed, which are:
- climate-related physical risks; and
- climate-related transition risks; and
- climate-related opportunities available to the entity.
Encouraging Adoption of IFRS S1 and S2: An Approach Inclusive of All Capital Markets Participants
Throughout the development of the Standards, the ISSB engaged in significant consultation to gather feedback from market participants and received over 1,400 comment letters from stakeholders. Notable themes that emerged over the course of these consultations and that are reflected in the rollout of IFRS S1 and IFRS S2 include proportionality, capacity-building, and interoperability.
Proportionality
Earlier this year, we highlighted that the ISSB’s stakeholder consultation process for IFRS S1 and S2 revealed a need for further support and guidance to enable the effective application of the Standards, especially for smaller companies. The concept of proportionality – namely, the need for some requirements to acknowledge the differences in the capabilities and preparedness of companies around the world – is an important theme on which the ISSB remains focused.
During the consultation process, stakeholders identified some proposed requirements that may pose initial challenges, including reporting sustainability-related financial disclosures at the same time as financial statements and measuring Scope 3 greenhouse gas (GHG) emissions. Recognizing the need to develop an inclusive baseline for global sustainability disclosures, the ISSB confirmed a package of temporary reliefs during the first annual reporting period in which a company applies the IFRS S1 and IFRS S2 requirements.
To enable companies to focus their initial efforts on providing climate-related information for investors, the ISSB introduced a temporary relief allowing a company to report only on climate-related risks and opportunities in the first year that it applies the Standards. The company would then be required to report in full on its sustainability-related risks and opportunities in the second year.
In addition, for the first annual reporting period, companies will not be required to:
- Disclose comparative information;
- Report sustainability-related financial disclosures at the same time as financial statements;
- Apply the GHG Protocol Corporate Standard to measure GHG emissions under specific conditions; and
- Disclose Scope 3 GHG emissions, including the requirements for companies that have asset management, commercial banking, or insurance activities to provide additional information about financed emissions.
Capacity-Building
In his keynote address launching the Standards, Faber noted that “capacity-building will be front and center for our work in the next several months, and probably several years.” The ISSB has indicated its intent to develop additional guidance for both preparers and jurisdictions alongside other capacity-building efforts that will help support implementation.3 The ISSB will create a Transition Implementation Group to help solicit and discuss stakeholder questions arising from the implementation of the new Standards and provide a channel to inform the ISSB about these questions. Over time, the ISSB intends to create a library of resources to help companies apply the Standards, and is working to enable the digital consumption of sustainability-related financial disclosures by developing an IFRS Sustainability Disclosure Taxonomy, which will be published for public consultation in Q3 2023.4
Interoperability
The concept of interoperability – the need for IFRS S1 and IFRS S2 requirements to work alongside jurisdictional requirements, specifically those of the European Financial Reporting Advisory Group (EFRAG) and the US Securities and Exchange Commission (SEC) – was another key theme raised during stakeholder consultations. Throughout the development of the Standards, the ISSB engaged regularly with IOSCO and the Financial Stability Board, and through its jurisdictional working group, worked closely with jurisdictions to ensure that IFRS S1 and S2 can provide a global foundation on which countries can add ‘building blocks’ tailored to the needs of their specific markets. In addition to jurisdiction-specific interoperability, the ISSB will also continue its work with the Global Reporting Initiative (GRI) to support effective reporting when the ISSB Standards are applied in combination with other reporting standards.
Closing Thoughts
With the finalization and publication of IFRS S1 and S2, the focus now turns to endorsement of the Standards by IOSCO, whose membership regulates more than 95% of the world’s securities markets. IOSCO is currently completing an independent assessment of the Standards and has stated its intention to complete its review promptly. Regulators across number of jurisdictions have indicated their support for the ISSB; in Canada, the Canadian Sustainability Standards Board (CSSB) was established to work with the ISSB to support the uptake of the ISSB standards, highlight key issues for the Canadian context, and facilitate interoperability considerations. As IOSCO Chair Jean-Paul Servais noted in June 2023, “Endorsement shall be a real game changer for regulators around the world in considering the use of the ISSB framework.”
1 https://www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2/
2 https://www.greenbiz.com/article/first-issb-reporting-standards-are-here-what-means-investors
3 https://www.iosco.org/news/pdf/IOSCONEWS699.pdf
4 https://www.ifrs.org/content/dam/ifrs/meetings/2023/july/itcg/ap2-ifrs-sustainability-disclosure-taxonomy-general-update.pdf
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