The IFRS Foundation’s International Sustainability Standards Board (ISSB) announced today the official launch of its new global sustainability and climate disclosure standards, expected to form the basis for emerging sustainability reporting requirements by regulators around the world, and marking a major step towards the integration of sustainability reporting into the broader financial reporting process.
The new standards will begin applying for annual reporting periods beginning as of January 2024, with companies beginning to issue disclosures against the standards in 2025.
Erkki Liikanen, Chair of the IFRS Foundation Trustees, said:
“The global baseline approach, supported by the G20 and others, will provide investors with globally comparable sustainability-related disclosures that have the potential to move market prices, without constraining jurisdictions from requiring additional disclosures. This will help companies and investors by tackling duplicative reporting.”
The ISSB was officially launched in November 2021 at the COP26 climate conference, with the goal to develop IFRS Sustainability Disclosure Standards, driven by demand from investors, companies, governments and regulators to provide a global baseline of disclosure requirements enabling a consistent understanding of the effect of sustainability risks and opportunities on companies’ prospects.
Speaking at a London Stock Exchange Group (LSEG) event Monday morning marking the launch of the new standards, ISSB Chair Emmanuel Faber said:
“Our objective is to bring information that is useful to the primary users of general purpose financial reporting when they are considering providing resources to entities.”
“The flurry of about 500 different ESG standards, metrics and disclosures over the last decade is evidence that despite the very comprehensive accounting systems that we operate that we operate and have been operating for decades that have been refined and completed, there is apparently something that market participants are needing and do not find in the current system… Essentially, what we are doing here is bringing a solution which is an accounting-based language. It is not a suite of ESG metrics or disclosures – it is a comprehensive language which is deemed to be consistent, verifiable and therefore decision useful.”
Regulators in major jurisdictions around the world including Europe, the UK and the U.S., among others, have introduced or are preparing mandatory sustainability reporting requirements for companies, and most will be heavily influenced by the ISSB standards.
The two new standards include “IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information,” and “IFRS S2 Climate-related Disclosures.” The core content of each standard includes disclosures relating to general sustainability and climate-specific risks and opportunities, respectively, including Governance, or the processes controls and procedures used to monitor and manage those risks and opportunities; Strategy, or the approach used to manage the risks and opportunities; Risk management, or the processes used to identify, assess prioritize and monitor the risks and opportunities, and; metrics and targets, including progress towards targets the company has set, or is required to meet by law or regulation.
IFRS S1 requires companies to disclose information about sustainability-related risks and opportunities that would be useful to primary users of general purpose financial reports, including 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.”
Risks and opportunities under the standard can be those arising “out of the interactions between the entity and its stakeholders, society, the economy and the natural environment throughout the entity’s value chain,” including direct and indirect interactions resulting from the business’ operations. The standard notes that in addition to direct impacts and dependencies, sustainability-relates risks “also relate to resources and relationships throughout the entity’s value chain,” such as supply and distribution channels, and consumption and disposal of products, as well as its investments.
IFRS S2, designed to be used with S1, sets out specific climate-related disclosures. Climate-related metrics required under S2 include reporting of Scopes 1, 2 and 3 greenhouse gas (GHG) emissions – although the ISSB recently announced that it will allow companies an extra year to report on Scope 3, or indirect value chain, emissions – as well as the amount and percentage of assets and business activities vulnerable to both climate-related physical and transition risks and those aligned with climate-related opportunities, and the amount of capital expenditure, financing and investment deployed towards climate-related risks and opportunities. The standard also requires reporting on how climate-related considerations are factored into executive remuneration, and the percentage of executive pay linked to climate considerations.
Following the launch of the new standards, the ISSB said that it will work with jurisdictions and companies to support the standards’ adoption, starting with the creation of a Transition Implementation Group to support companies applying the standards. ISSB Chair Faber also recently stated that the board may soon add requirements to the climate reporting standard covering areas including connection to natural ecosystems, deforestation, biodiversity and the connection to the just transition.
In a statement marking the launch, Faber added:
“We know that better information leads to better economic decisions. Today’s publication is just the starting point as we consult on our future priorities, beyond climate.”
Click here to access the new standards.