Companies will be required to use climate-related scenario analysis as part of their disclosures under new standards being developed by the International Sustainability Standards Board (ISSB) of the IFRS Foundation, according to a statement Wednesday by the ISSB.
The decision marks another significant milestone in the ISSB’s development of climate-related reporting standards, following the board’s announcement last month of the inclusion of Scope 3 emissions reporting in its new standards.
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.
Scenario analysis is one of the key tools used by some companies to assess the strategic and financial implications of potential climate-related risks and opportunities, including both transition risk and physical risk, yet a recent report from professional services firm EY found that less than half of companies are currently conducting climate-related scenario analysis.
The IFRS said that the board voted unanimously to confirm that companies will be required to use climate-related scenario analysis to report on climate resilience and to identify climate-related risks and opportunities to support their disclosures.
The board also stated that it will provide support for preparers on the application of climate-related scenario analysis, including providing guidance on which types of scenario analysis an entity should use, based on circumstances including industry and country exposure, and acknowledging that ‘off-the-shelf scenarios’ such as those of the Network for Greening the Financial System (NGFS) may be useful resources for companies. NGFS scenarios reflect a range of possible future climate policies, physical risks, including heat, drought and floods, and short and long-term risks stemming from the transition to a greener economy such as increasing carbon prices.
The ISSB is aiming to complete deliberations on its first 2 proposed standards for company sustainability and climate related disclosures around the end of this year, and to issue the final standards as early as possible in 2023.