Sustainability and climate reporting - International Sustainability Standards Board (ISSB) publishes first two global standards relating to sustainability and climate reporting

Two new global standards, issued in June 2023 by the International Sustainability Standards Board (ISSB); a new part of the IFRS foundation, are the first of two standards which are expected to be a suite of globally applicable requirements. The first – IFRS S1 – is a general standard on sustainability disclosures and the second – IFRS S2 – specifically on the impact of climate change. Neither prescribe the type of entity which these standards are applicable to, as this is not part of the ISSB’s role.

When are the standards effective?– The standards are effective for accounting periods beginning on or after 1 January 2024, with early application permitted provided both IFRS S1 and IFRS S2 are applied at the same time.

Will the standards be applicable in the UK? – The UK government has announced it wishes to support these standards, but it is not yet clear when, or in what form, they will be adopted for use within the UK or which entities will be affected. At this stage adoption is not envisaged before 2025 in the UK, but the exact timing is under close review. Adoption of these standards throughout the rest of the world is on a jurisdiction-by-jurisdiction basis, meaning that international groups will need to closely follow how and when the standards are adopted in different jurisdictions. For the time being, UK entities are required to continue to report under the SECR regulations, the Climate-related Financial Disclosures regulations and the TCFD framework as applicable to scope.

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

Scope – IFRS S1 sets out the general content for a complete set of sustainability-related disclosures, stating that the sustainability standards may be applied irrespective of whether the entity’s financial statements are prepared in accordance with IFRS Accounting Standards or another GAAP.

Objective – The sustainability-related disclosures should form part of the entity’s general-purpose financial reporting i.e. the annual report in the UK, with the aim to require an entity to disclose information about its sustainability-related risks and opportunities that is useful to primary users in making decisions relating to providing resources to the entity; such information could reasonably be expected to affect the entity’s cash flows, or its access to finance or cost of capital over the short, medium or long term.  The standard also aims to provide a basis for reporting on any material sustainability-related risk for which there isn’t a specific standard issued by the ISSB.

Qualitative characteristics & materiality – As required by IFRS Accounting Standards, the information must be relevant and faithfully represent what it purports to represent, and enhancing characteristics are for the information to be comparable, verifiable, timely and understandable. Only material information is required to be disclosed, however in practice this may become onerous for some entities.

Content – Much of the information required is in narrative form, describing an entity’s governance, systems, process, strategic approach, management, metrics and targets in relation to its sustainability-related risks and opportunities. However, there are many instances were substantial quantitative and objective data is also required to be provided. When considering an entity’s strategic approach, disclosures should provide an understanding of the current and anticipated effects of sustainability-related risks and opportunities on the entity’s business model and value chain, and its capacity to adjust to the uncertainties arising from sustainability-related risks. Such information provides a qualitative, and if applicable also a quantitative, assessment of the resilience of its strategy and business model covering an applicable time horizon.

Judgements & uncertainties – Similar to requirements within IFRS Accounting Standards, disclosures are required to include the significant judgements made in the process of preparing its sustainability-related disclosures as well as information about the most significant uncertainties over the amounts reported.

Timing – Sustainability-related disclosures are required to be reported at the same time as an entity’s related financial statements and cover the same reporting period.

IFRS S2 – Climate-related Disclosures

Scope – IFRS S2 sets out the specific requirements for reporting on climate-related risks and opportunities, being both climate-related physical and transition risks that an entity is exposed and climate-related opportunities that are available to the entity. Risks and opportunities that could not reasonably be expected to affect an entity’s prospects are outside the scope.

Objective – The aim is to disclose information about climate-related risks and opportunities that is useful to primary users of general-purpose financial reports in making decisions relating to providing resources to an entity; such information 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.

Content – The aim is to require disclosure of sufficient information about an entity’s exposure to climate-related risks and opportunities to allow users to assess: their potential effect on the entity’s prospects, resilience, business model and value chain, and its financial position, performance and cash flows. The standard builds on the requirements of the TCFD framework and is arranged under the same four pillars: Governance, Strategy, Risk management and Metrics and Targets. Detailed disclosure is required for scope 1, 2 and 3 GHG emissions, albeit there are additional areas where requirements are more prescriptive than the TCFD framework, such as the requirement to disclose amounts and percentages of assets or business activities exposed to climate transition and physical risks and those that are aligned with opportunities.

Industry-specific requirements – IFRS S1 requires the use of specific ISSB standards where these exist, for instance IFRS S2 in relation to climate, but sets requirements to refer to the disclosure topics arranged by industry in the Sustainability Accounting Standards Board (SASB) standards, where no ISSB standard is currently available. The reporting expectations of different industries are therefore significantly different. In practice, the requirements are therefore wide-ranging and may be onerous for some entities.

Transitional provision for first-time application – There are certain transitional provisions to help entities reduce the burden from first-time application. For IFRS S1, there is relief from presenting comparative information for and presenting the sustainability-related information at the same time as the related financial statements in the first year of application. For IFRS S2, there is also relief from presenting comparative information for the first-time, as well as relief from the requirement to publish Scope 3 GHG emissions and for measuring emissions based on the Greenhouse Gas Protocol for the first year of application.