ISSB publishes final versions of first two global sustainability disclosure standards

The International Sustainability Standards Board (ISSB) has published the final version of the first two global sustainability disclosure standards - IFRS S1 and IFRS S2 (see ISSB press release). 

IFRS S1 sets out overarching requirements for an entity to disclose information about sustainability-related risks and opportunities that is useful to users of general purpose financial reports. IFRS S2 sets out supplementary requirements that relate more specifically to climate-related risks and opportunities. The information required by the ISSB Standards is designed to be provided alongside financial statements as part of the same reporting package

The aim is to provide investors globally with more consistent, complete, comparable and verifiable sustainability-related financial information and help companies "tell their sustainability story in a robust, comparable and verifiable manner", thus helping companies reduce the risk of greenwashing and enabling investors to make better informed decisions about capital allocation. 

Chaired by Emmanuel Faber (previously CEO at Danone), the ISSB was set up by the International Financial Reporting Standards (IFRS) Foundation in November 2021 during COP26 in order to develop comprehensive global standards for companies’ climate and other sustainability-related disclosures.

IFRS S1 and IFRS S2 

IFRS S1 on General Requirements for Disclosure of Sustainability-related Financial Information sets out the overall requirements for providing users of general purpose financial reports with a complete set of sustainability-related financial disclosures. 

The information required by IFRS S1 relates to general aspects of how an entity operates, in particular to its governance, strategy, risk management, and metrics and targets associated with sustainability-related risks and opportunities. IFRS S1 refers to these four aspects as the "core content", meaning the information is essential to users’ understanding of how an entity identifies, assesses, prioritises, monitors and manages sustainability-related risks and opportunities.

IFRS S1 applies to all sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s cash flows, its access to finance or cost of capital over the short, medium or long term. 

These risks and opportunities are collectively referred to as "sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects". 

The ISSB standards are intended to meet the information needs of the primary users of general purpose financial reports – i.e. investors, creditors and other lenders.

The ISSB has also clarified that the information to be provided in sustainability disclosures is based on a materiality assessment consistent with that used in the IFRS Accounting Standards:

"In the context of sustainability-related financial disclosures, information is material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports, which include financial statements and sustainability-related financial disclosures and which provide information about a specific reporting entity."

So although the concept of "enterprise value" has been removed from the ISSB standards (to avoid confusion), the aim is still to provide decision-useful information for investors. As opposed to the wider concept of "double materiality" used by the EU in its sustainability disclosure regime which is aimed at providing information for a much wider stakeholder group. 

IFRS S2 on Climate-related Disclosures sets out specific climate-related disclosures and is designed to be used with IFRS S1. IFRS S2 requires an entity to disclose information about climate-related risks and opportunities 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.

Both IFRS S1 and S2 fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

IFRS S1 and S2 are accompanied by guidance and illustrative examples. 

In addition, the ISSB has also published a number of supporting materials, including:

• Basis for Conclusions on IFRS S1 - which summarises the ISSB’s considerations in developing the requirements in IFRS S1;
• Basis for Conclusions on IFRS S2 - which summarises the ISSB’s considerations in developing the requirements in IFRS S2;
• Effects Analysis on IFRS S1 and IFRS S2 - which describes the likely benefits and costs of IFRS S1 and IFRS S2; and 
• Feedback Statement for IFRS S1 and IFRS S2- which summarises feedback on the proposals that preceded IFRS S1 and IFRS S2 and the ISSB’s response.

When will the ISSB standards apply?

IFRS S1 and S2 will apply to annual reporting periods beginning on or after 1 January 2024, with the first set of reports published in 2025.

In the first year of reporting using the ISSB standards, companies will be incentivised to prioritise putting in place reporting practices and structures to provide information about climate-related risks and opportunities. 

In the second year, companies will be required to provide full reporting on other sustainability-related risks and opportunities beyond climate. 

The ISSB has also decided that an entity need not disclose its Scope 3 GHG emissions in the first year of reporting:

"The temporary relief is granted in response to data availability challenges highlighted by respondents in the public consultation. The ISSB noted that by requiring disclosure of Scope 1 and Scope 2 GHG emissions earlier than Scope 3 greenhouse gas emissions, the temporary data availability challenge will be addressed to a significant degree. The ISSB noted this partly because some entities in a reporting entity’s supply chain will be subject to the proposed requirement to disclose their Scope 1 and Scope 2 greenhouse gas emissions, and partly because the relief will give a reporting entity more time to work with the entities in its value chain to estimate its Scope 3 greenhouse gas emissions."

Will the ISSB standards be mandatory?

The ISSB claims that the new standards will usher in "a new era of sustainability-related disclosures in capital markets worldwide" but much will depend on how many companies decide to voluntarily apply the standards and which countries decide to adopt them.

The ISSB global standards are voluntary so it will be up to national governments and regulators to decide whether to make compliance with these standards compulsory in their jurisdictions. 

A number of countries (UK, Canada, Japan, Singapore, Nigeria, Chile, Malaysia, Brazil, Egypt, Kenya and South Africa) have indicated they are considering adopting the ISSB standards and  the ISSB is actively discussing with various regulators global uptake of the new framework.

The International Organization of Securities Commissions (IOSCO) is expected to endorse the new standards - which could have a significant influence on whether national authorities across the globe decide to adopt of the ISSB standards.   

However, the chair of the ISSB is under no illusions of how difficult it will be for some companies to start reporting on sustainability issues using the new standards, in what Emmanuel Faber has described as a very significant learning curve: 

"[Sustainability reporting] is a language that will be spoken only if we start speaking it ... But we won’t speak that language fluently before some years. And that’s why it’s urgent to start” (see FT coverage).

In the Effects Analysis on IFRS S1 and IFRS S2, the ISSB analyses the likely benefits and costs. Although applying the new standards could bring substantial costs to preparers of the information initially (in the form of one-time costs of developing and implementing systems for reporting and internal controls on data, and personnel costs to source the appropriate talent to manage data collection and disclosure processes), it also has potential benefits such as a lower cost of capital. And, over time, the costs are likely to decrease as preparers set up systems and become familiar with the disclosure requirements.

Next batch of ISSB sustainability standards 

The ISSB will be developing more sustainability disclosure standards and is currently consulting on its next priorities. 

It has identified four potential projects:

• biodiversity, ecosystems and ecosystem services;
• human capital;
• human rights; and
• researching integration in reporting.

That consultation closes on 1 September 2023. See our previous blog post for more information.

How will the ISSB standards operate with other key sustainability disclosure standards?

The main concern at the moment is about the interoperability of the ISSB global standards with other key sustainability disclosure standards being developed in other countries - in particular in the EU, US and UK. 

We recommend having a look at the section called "Global baseline and interoperability with jurisdictional and regulatory initiatives" in the Basis for Conclusions that accompanies (but is not part of) IFRS S1. 

The ISSB sees their standards as a single, global baseline of sustainability disclosures, with any additional jurisdictional requirements being built on top of this global baseline (for countries that choose to adopt the ISSB standards) (see IFRS - Ten things to know about the first ISSB Standards). 

However, despite what the ISSB says, there are still many questions about how companies will be able to navigate several overlapping, but not identical, disclosure regimes - in particular for large multinationals operating in various regions across the globe. 

In the EU:

• The EU recently adopted the Corporate Sustainability Reporting Directive (CSRD), which will require in-scope entities (both EU-based and non-EU entities operating in the EU) to make extensive sustainability disclosures in line with mandatory European Sustainability Reporting Standards (ESRS).
• The ESRS, which are currently being developed, are expected to start applying in a phased manner from January 2024.
• The head of the ISSB has stressed that the ISSB and EU authorities have been working closely to align their two disclosure requirements to make them as "interoperable" as possible. However, one of the key differences between the EU and ISSB standards is the concept of "double materiality" (discussed above). 
• Our understanding is that ISSB staff are currently working with EU authorities on a table comparing the ISSB and ESRS standards and that this will be made available later in the year once the ESRS are finalised. And according to Reuters (see here), the ISSB and EU are expected to issue guidance on avoiding duplication in the coming months.
• For more information on the CSRD and ESRS, see our CSRD Demystified materials.

In the US: 

• The US Securities and Exchange Commission (SEC) consulted on its climate disclosure proposal in March 2022.
• The consultation closed on 17 June 2022 and the SEC was expected to publish the final rules in April this year but this has been delayed until October. 
• For more information on the SEC proposal, see our previous client briefing. 

In the UK: 

• The UK government has said it plans to adopt the ISSB sustainability standards into UK law as part of the forthcoming Sustainability Disclosure Requirements (SDR) regime.
• According to the FCA statement published alongside the ISSB announcement this week, the UK will be establishing a mechanism for formal endorsement and adoption of the ISSB standards and the FCA will update its climate-related disclosure rules to reference the ISSB standards.
• The government has said it plans to set out further detail on the SDR implementation timeline in the summer/Q3.
• For more information on the SDR, see our previous client briefing and blog post.

If you would like to discuss any aspect of the ISSB standards, including interoperability with other key sustainability disclosure regimes, please reach out to the contacts on this post or your usual Linklaters contact.