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The ISSB and the IFRS Sustainability Disclosure Standards: Aiming for Comparability in ESG Reporting
Sustainability

The ISSB and the IFRS Sustainability Disclosure Standards: Aiming for Comparability in ESG Reporting

By | August 4, 2022

UPDATE (November 16, 2022): The International Sustainability Standards Board (ISSB) and non-profit sustainability disclosure platform provider CDP recently announced that CDP will integrate the ISSB’s climate-related disclosure standards (IFRS S2 Climate-related Disclosures) into the CDP’s disclosure platform. Once the ISSB standards are finalized, they will be included in the CDP questionnaires issued to companies each year. In 2022, 18,700 companies worth nearly $61 trillion have used the CDP’s disclosure platform to disclose their environmental information.  

The ISSB has also confirmed that under its IFRS S1 general sustainability requirements, reporting companies must consider Sustainability Accounting Standards Board (SASB) Standards when identifying which sustainability matters to report on and in developing appropriate disclosures.  

Finally, in yet another ISSB-related update, the board has unanimously confirmed that companies will be required to use climate-related scenario analysis to support analysis of their climate resilience. Reporting businesses will also be required to use climate-related scenario analysis to identify climate-related risks and opportunities. The ISSB has agreed to offer application support for preparers, which includes the use of materials developed by the Task Force on Climate-related Financial Disclosures (TCFD), to guide preparers on how to conduct scenario analysis.     

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UPDATE (October 24, 2022): The International Sustainability Standards Board (ISSB) announced on Friday, October 21, that Scope 3 emissions will be included in the IFRS Sustainability Disclosure Standards, the body’s climate-reporting standards.  

While hard to track and calculate, Scope 3 emissions typically represent the largest portion of a company’s carbon footprint. Scope 3 emissions disclosures are included in several proposed reporting frameworks, including the climate-related disclosure requirements from the U.S. Securities and Exchange Commission (SEC) and the requirements of the EU Corporate Sustainability Reporting Directive (CSRD).  

The ISSB voted unanimously to require company disclosures on Scope 1, 2 and 3 greenhouse gas (GHG) emissions in its October meeting. The body also announced that it will develop “relief provisions” to help businesses apply the Scope 3 requirements. The provisions, which will be decided at a later meeting, may include additional time for companies to provide Scope 3 disclosures, as well as “safe harbor” provisions that offer protection or reduced liability on disclosed Scope 3 information. Finalized standards are due to be released in early 2023.  

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ORIGINAL ARTICLE:  Corporate sustainability officers have a lot on their radar screens, given the many moving parts associated with emerging, climate-related reporting standards. Most recently, the comment period for the International Sustainability Standards Board’s (ISSB’s) proposed standards for sustainability disclosures closed on July 29, and the comment period for the Corporate Sustainability Reporting Directive’s (CSRD’s) proposed standards ends on August 8. In the months to come, relevant bodies will review comments and recommendations as they work to finalize these reporting standards.  

Read on for a closer look at the ISSB and its proposed disclosure standards. And for more information on the CSRD standards, visit our previous blogs on the European Sustainability Reporting Standards and the CSRD rules agreed by the Council of the European Union and the European Parliament.    

What Is the ISSB?

During COP26—the UN’s 2021 climate change conference held in Glasgow, Scotland—the International Financial Reporting Standards (IFRS) Foundation announced the formation of the International Sustainability Standards Board (ISSB). The aim of the ISSB is to create a comprehensive global baseline for sustainability disclosures. And again, the driving force is investor demand for more transparent reporting of sustainability-related risks and opportunities—the same need that prompted new climate-related reporting standards from the U.S. Securities and Exchange Commission and the CSRD standards in Europe.  

Like a tree with many roots, the ISSB is built on several different frameworks and bodies. One of the roots is the Technical Readiness Working Group (TRWG)—a group representing organizations with expertise in sustainability and standard-setting to meet the needs of investors. To prepare for the formation of the ISSB, the TRWG established a foundation based on international initiatives that focus on enterprise value. When the IFRS Foundation announced the ISSB in November 2021, it also announced the publication of the TRWG’s recommendations and prototypes.       

The other roots that lie beneath the ISSB are the Climate Disclosure Standards Board and the Value Reporting Foundation, which were consolidated in the creation of the ISSB.  

The Sustainability Accounting Standards Board (SASB) also figures largely in the ISSB. SASB standards identify the subset of ESG issues that have the greatest impact on financial performance and enterprise value in each of 77 industries. The ISSB assumes responsibility for SASB standards this month; they were previously maintained by the Value Reporting Foundation 

Additional roots support the tree that is ISSB. As an initiative that builds on existing recommendations and standards, the ISSB also incorporates the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) in its disclosure standards.  

Introducing the IFRS Sustainability Disclosure Standards

The ISSB is a standard-setting board within the IFRS Foundation, and its proposed standards are known as the IFRS Sustainability Disclosure Standards. The standards were released earlier this year in two exposure drafts: IFRS S1 General Requirements for Disclosure of Sustainability-Related Financial Information and IFRS S2 Climate-Related Disclosures. The exposure drafts are based on the TRWG prototypes. 

IFRS General Requirements for Disclosure of Sustainability-Related Financial Information

Under the general requirements: “A reporting entity shall disclose material information about all of the significant sustainability-related risks and opportunities to which it is exposed.” This exposure draft also notes that a “complete, neutral and accurate description of sustainability-related information” must be included in a company’s general purpose financial reporting. For further clarification, the draft states that:  

Sustainability-related financial information is broader than information reported in the financial statements and could include information about:  

  • An entity’s governance of sustainability-related risks and opportunities and its strategy for addressing them. 
  • Decisions made by the entity that could result in future inflows and outflows that have not yet met the criteria for recognition in the related financial statements.  
  • The entity’s reputation, performance and prospects as a consequence of the actions it has undertaken, such as its relationships with people, the planet and the economy, and its impacts and dependencies on them. 
  • The entity’s development of knowledge-based assets.   

The exposure draft for IFRS S1 also notes that sustainability-related information should be 

  • Comparable with the entity’s sustainability-related financial information of previous periods and with the sustainability-related financial information from other entities.  
  • Connected to the other information in the entity’s general purpose financial reporting.  

IFRS Climate-Related Disclosures

The exposure draft for climate-related disclosures incorporates the TCFD’s recommendations, and Appendix B of the draft lays out the disclosure requirements derived from industry-specific SASB Standards.  

At a high level, this exposure draft identifies the information required to help the audience understand:  

  • The governance processes, controls and procedures that a company uses to monitor and manage climate-related risks and opportunities.  
  • The climate-related risks and opportunities that could enhance, threaten or change a company’s business model and strategy. 
  • How climate-related risks and opportunities are identified, assessed, managed and mitigated by a business. 
  • The metrics and targets used to monitor and manage a company’s performance in relation to climate-related risks and opportunities.  

Will the IFRS Sustainability Disclosure Standards Apply to You?

As with all disclosure frameworks currently taking shape, the proposed IFRS Sustainability Disclosure Standards have drawn strong opinions from market participants. Surely corporate sustainability officers are wondering if these standards, once formalized and published, will apply to their companies. The ISSB’s response is: “Jurisdictional authorities would decide whether to require the application of IFRS Sustainability Disclosure Standards.”  

The response doesn’t offer the certainty businesses are looking for, but a better answer may lie in the global need for comparability. In July 2021, the World Economic Forum (WEF) highlighted the lack of consistent, comparable reporting against a universal set of ESG metrics as a significant challenge for investors and other stakeholders. The IFRS Sustainability Disclosure Standards offer a possible solution, and given that standards finalization is planned for the end of 2022, investors may enter 2023 with a better sense for where these standards will take hold.   

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