ISSB Issues First Global Sustainability Disclosure Standards

Author

Damian Carnell
July 06, 2023

On 26 June 2023 the ISSB, the new sustainability standard setting arm of the IASB, published IFRS S1 and IFRS S2.

IFRS - International Sustainability Standards Board

www.ifrs.org/groups/international-sustainability-standards-board

These are effective for reporting periods beginning on and after 1 January 2024.

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

IFRS S1 requires an entity to disclose information on all sustainability related risks and opportunities that might reasonably affect the entity’s cash flows, access to finance, and cost of capital over the short, medium or long-term.

It describes how an entity must prepare and report on sustainability related financial disclosures, including the content and presentation of those disclosures in a way that is useful to the users of accounts.

There is a particular focus on sustainability related risks and opportunities including:

  • The governance process, controls and procedures used to monitor, manage and oversee sustainability related matters

  • The strategy for managing sustainability related risks and opportunities

  • The process by which the reporting company identifies, assesses, prioritises and monitors sustainability related risks and opportunities; and

  • The entity’s performance on sustainability related risks and opportunities, including:

    • progress towards any targets the entity has set,

    • or is required to meet by law or regulation

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IFRS S2 Climate Related Disclosures

IFRS S2 has similar requirements to IFRS S1, but applies to:

  • Entity climate related physical risks

  • Entity climate related transition risks, and

  • Entity available climate related opportunities

The core content of the disclosure standard includes disclosure requirements relating to:

  • Governance

  • Strategy

  • Risk management

  • Metrics and targets

In addition, it provides detailed sector specific guidance for eleven major sectors.

In concept, IFRS S1 and S2 replicate the disclosure framework of the current TCFD disclosure regime, as well as providing much of the detail on sector specific issues previously set out in SASB guidance.

IFRS - ISSB issues inaugural global sustainability disclosure standards

www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2

Newspoint view

Sustainability and ESG reporting is important, but is often fragmented and inconsistent.

The ISSB has taken on a major global challenge to create a well marshalled set of reporting standards which will be consistent:

  • over time

  • between countries and companies; and

  • with a read across to financial statements

This is to be much welcomed.

The advent of IFRS S1 and S2 are an important first step which builds on the earlier work of the TCFD and SASB.

Vitally, these standards set out disclosure requirements - not performance standards.

Some believe that not requiring performance standards is a major weakness. However, disclosure of current performance and required disclosure against any internally set, and any required external yardsticks, is a good guide for investors and others.

Interestingly, climate targets set for executive compensation purposes may well trigger disclosure of the companies progress against those targets, now not as a good governance matter, but rather to comply with the disclosure reporting standards.

The existence of the standards, and the ongoing professionalisation of ESG and narrative reporting, means investors will increasingly rely on these additional disclosures for their investment decisions.

Material mis-statement of financial disclosures is obviously highly undesirable and a direct invitation to those suffering loss as a result, to take legal action in consequence.

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Investors relying on sustainability disclosures can reasonably expect a similar level of material accuracy. This remains the case, irrespective of whether the disclosures are subject to a formal audit or verification process or not.

Directors of reporting entities might wish to examine their D&O Insurance position to ensure that their potential personal liability as a director of the reporting entity is fully appropriate, both in activity scope and the depth of the insurance cover provided.

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Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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