ISSB releases first IFRS Sustainability Disclosure Standards

The International Sustainability Standards Board (ISSB) announced in late June that new sustainability reporting standards will come into effect in the new year, via the International Financial Reporting Standards (IFRS) Foundation, a move long anticipated around the world.

As more companies hear from stakeholders about the importance of thoughtful Environment, Social, and Governance (ESG) strategies and policies, the new standards state emphatically that the significant impact these touchpoints have on society is not going away.

The IFRS S1 outlines requirements for disclosure of sustainability topics related to financial information and communication around the risks and opportunities a company faces resultant from these topics over the short, medium, and long term.

IFRS S2 requires companies to disclose information pertaining specifically to climate-related risks and opportunities.

Issuing these standards is just the beginning of the process. The ISSB is currently engaged in consulting, which is open to stakeholder feedback until Sept. 1, 2023, on future priorities to help determine what comes next. For companies adopting the standards, both IFRS S1 and S2 are effective for annual reporting periods beginning on or after January 1, 2024, though earlier application is permitted.

What is the ISSB?

Established by the IFRS Foundation in the fall of 2021, the ISSB exists to provide a comprehensive global baseline of sustainability disclosure standards.

To meet the information needs of investors and stakeholders, the goal of the ISSB is to produce standards that lead to high-quality, comprehensive sustainability disclosures. It was formed in response to strong demand across global capital markets for consistency where numerous standards and frameworks were creating confusion.

Both the IFRS S1 and S2 were introduced after 18 months of development and consultation from the ISSB which fully incorporated the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Importantly, the four pillars of the TCFD recommendations – Governance, Strategy, Risk Management, and Metrics – are cornerstones of the ISSB standards.

Alignment with the TCFD recommendations is observed across many proposed ESG reporting standards including the Canadian Securities Administrators’ Proposed National Instrument 51-107 Disclosure of Climate-related matters, and the U.S. Securities and Exchange Commission’s proposed rule on climate-related disclosures.

The ISSB’s Canadian counterpart, the Canadian Sustainability Standards Board (CSSB), has expressed its support of the new IFRS standards and has indicated it will be collaborating with Canada’s regulatory bodies around mandatory application rules for public companies. These standards are not currently mandatory in Canada and CSSB actions will influence the trajectory or mandatory disclosure standards across the country.

Publicly traded companies will likely be the most impacted by the new requirements in the near-term, but private companies will also experience increased demands for information from their customers and suppliers, as well as regulators and financial institutions.

What do these new standards look like?

IFRS S1 General Requirements for Disclosure of Sustainability-Related Financial Information

The broader of the two, IFRS S1, outlines a company’s need to disclose its short, medium, and long-term sustainability risks and opportunities and to provide stakeholders with the relevant data they need to make informed decisions.

The general requirements set out how an entity is expected to gather and present material sustainability-related financial information that could be reasonably expected to affect cash flow, access to finance, or cost of capital on an annual basis.

Disclosures must be provided as they relate to:

• Governance: The processes, controls, and procedures used to monitor, manage, and oversee sustainability-related risks and opportunities. This includes the governance body as a whole (the board, committee, or individual responsible for oversight) and management’s role in the process.
• Strategy: The company’s strategy for managing sustainability-related risks and opportunities that could reasonably impact their prospects, as well as the effects of the sustainability-related risks and opportunities on their business model, value chain, decision-making, and financials.
• Risk management: The processes used to identify, assess, prioritize, and monitor sustainability-related risks and opportunities, and the extent to which these processes are merged into a company’s existing risk management process.
• Metrics: Measurements used to gauge the efficacy of specific business models, activities, and other common features that characterize participation in an industry in relation to sustainability-related risks and opportunities. This includes progress made towards targets the company has set or that they are required to meet by law or regulation

Reports must be prepared for the same reporting entity as the related financial documents and must cover the same period as their related financial statements, including comparative information from the previous year.

Other general requirements of the IFRS S1 include:

• A statement of compliance
• Cross references
• Location of information
• Judgements and uncertainties
• Prior period errors
• Consistent data and assumptions
• Sensitive information

IFRS S2 Climate-Related Disclosures

As the ISSB’s first topic-based standard, IFRS S2 requires disclosures on specific, climate-related information.

The objective of IFRS S2 is to require a company to disclose material information about their exposure to climate-related risks and opportunities so that users of this information (e.g., customers, suppliers, financial institutions, regulators) will be informed in making decisions related to their dealings with the company including the provision of capital and resources.

Like IFRS S1, S2 requires a company to disclose information that could reasonably be expected to affect their cash flow, access to financing, or cost of capital over the short, medium, and long term.

The company must spell out whether these climate-related risks are physical or transitional risks, i.e., risks that exist as a company operates within and adapts to an economy moving towards net zero.

Disclosures will also have to include much of the same information as S1 related to the four pillars of governance, strategy, risk management, and metrics/targets. Examples include:

• How a company plans to achieve any established climate-related targets
• Information about any current and anticipated changes to a company’s business model (including changes to strategy and resource allocation to address climate-related risks and opportunities), and its current and anticipated direct and indirect mitigation/adaptation efforts
• Information around plans that a company may have or is developing to transition to a lower-carbon economy
• A company’s assessment of its climate resiliency. This includes climate-related scenario analysis, of which the IFRS S2 provides guidance.

The IFRS S2 will also require companies to disclose their Greenhouse Gas (GHG) emissions, in metric tonnes of CO², generated during the reporting period which has been broken down into Scope 1, Scope 2, and Scope 3. This reporting will also need to include the approach used to make this calculation, along with the inputs and assumptions used in the measurement.

Transition relief

For the first year of reporting, companies will get some relief from the full scope of disclosures within the IFRS S1 as the priority is climate-related disclosures from IFRS S2. Adoption and implementation of S2 in year one (2024) is the priority followed by S1 in year two (2025). However, companies are still encouraged to adopt both in year one where feasible.

During consultation for the standards, stakeholders took issue with Scope 3 due to data availability and quality challenges that came with its reporting. Accordingly, with respect to IFRS S2, the ISSB will allow companies to submit their first report without disclosing their Scope 3 GHG emissions measurement if they have not disclosed this information in prior reports.

If a company discloses Scope 3 GHG emissions, it must describe the categories included within its measurement of GHG emissions so that users can understand which emissions have been included or excluded form the report.

For the first year that ISSB standards are adopted and used, companies do not need to include reporting on:

1. Disclosures about sustainability-related risks and opportunities outside of climate-related information
2. Annual sustainability-related disclosures at the same time as the related financial statements
3. Comparative information
4. Scope 3 Greenhouse Gas (GHG) emissions
5. The GHG protocol to measure emissions if they are currently using another approach

Companies but they must disclose that they are taking the allowed relief.

To facilitate future reporting quality, the ISSB provides detailed guidance around GHG measurement, aggregation, and analysis for future reporting.

Impact

The success of any company is directly linked to their interactions between stakeholders, society, the economy, and the natural environment they interact with and operate in.

The resources and relationships within this value chain create their own system and within that, dependencies on those resources and relationships impact sustainability-related risks and opportunities.

The people within the company, individuals and companies along its supply, marketing, and distribution chains, and the financial, geographical, geopolitical, and regulatory environments in which a company exists are all important factors and drivers that contribute to sustainability-related risk and opportunity.

For companies that have delayed developing their own set of sustainability standards, these new regulations offer an opportunity to gain a deeper insight into their operations and grow existing ESG policies and strategies.

MNP’s ESG team has many years of experience assisting clients in the development and implementation of ESG strategies and practices. To learn more about how your company will be impacted by these new standards and for further information on how to build an impactful ESG strategy, take our ESG Assessment and reach out to a member of our team today.