The ISSB (International Sustainability Standards Board) has set a new benchmark in sustainability reporting with the release of two groundbreaking standards, S1 and S2, on June 26, 2023. S1 focuses on general requirements and concepts surrounding material sustainability-related risks and opportunities, while S2 specifically addresses disclosures related to climate change. Aligned with the Task Force on Climate-related Financial Disclosures (TCFD) and the Integrated Reporting (IR) framework, companies can voluntarily start reporting in 2024. This blog explores how organizations can navigate and prepare for the ISSB standards effectively.
What is the ISSB
The ISSB was established by the International Financial Reporting Standards (IFRS) Foundation Trustees in 2021 in response to market demand from investors for a global ESG disclosure standard to enable better comparative analysis of ESG performance. The Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) became one organization when the ISSB was made. The Sustainability Accounting Standards Board (SASB) Standards and the International Integrated Reporting Council’s (IIRC) Integrated Reporting (IR) framework were earlier brought together by the VRF.
The ISSB’s launch also included the prototype climate and general disclosure requirements which had been developed by the Technical Readiness Working Group (TRWG) – which was a collaboration between various standard-setting groups and NGOs to prepare for ISSB’s launch. These two prototype disclosure requirements received feedback from interested stakeholders (anyone in the general public could have submitted comments) as they progressed to IFRS S1 General Requirements for Disclosure of Sustainability-related Information and S2 Climate-Related Disclosures Exposure Drafts in March 2022.
That brings us to today’s momentous launch of the finalized IFRS S1 and S2. These standards will continue the evolution of sustainability disclosure in a direction that will bring clarity, comparability, and consistency. With alignment to existing and upcoming disclosure requirements from standards like the Global Reporting Initiative (GRI) or European Sustainability Reporting Standards (ESRS), companies will be able to focus less on reporting requirements and more on achieving the impact they strive for.
Finalized IFRS Sustainability Disclosure Standards
One of the main ideas behind the IFRS Sustainability Disclosure Standards is that sustainability information should be helpful. The standard says that information is more useful if it is “comparable, verifiable, timely, and understandable.” This is made stronger by the need to fairly show all important risks and opportunities linked to sustainability.
It’s important to note that all the information needed by the IFRS Sustainability Disclosure Standards must be included in a company’s “general purpose financial reports” along with a clear statement that the company is following the rules.
Additionally, all the details will have to be shown in a way that makes sense to “users of a general purpose,” especially investors who are the focus of IFRS materiality practices. This way, they can see how sustainability-related financial disclosures and “other general purpose financial reports published by the entity” are related. Also, it must be clear how the things being mentioned relate to the risks and opportunities that could affect a business’s future.
Decoding IFRS S1
The primary focus of IFRS S1 is the disclosure of financial information that is connected to sustainability and has an impact on the cash flows, access to finance, or cost of capital of a business over a variety of time frames. In accordance with the Task Force on Climate-Related Financial Disclosures (TCFD), the International Financial Reporting Standards (IFRS) S1 mandates the disclosure of information about governance processes, strategy, risk management, KPIs, and targets. When it comes to thorough reporting, businesses are strongly encouraged to take into consideration the SASB Standards, the CDSB Framework, and industry-specific recommendations.
Decoding IFRS S2
The IFRS S2 addresses climate-related disclosures and places an emphasis on information that may have an effect on the prospects of a company. Disclosures on governance, strategy, risk management, as well as measurements and targets related to climate-related risks and opportunities, are required under IFRS S2 in order to comply with the recommendations of the TCFD.
Where to start?
- Identifying Material Sustainability-Related Risks and Opportunities: The initial step in adhering to IFRS S1 is identifying material sustainability-related risks and opportunities. Embracing Integrated Reporting principles, companies must understand the resources and relationships across their value chain that create or erode value in the short, medium, and long term.
- Utilizing SASB Standards and Other References: IFRS S1 recommends leveraging SASB standards as a guide for identifying sustainability risks and opportunities. Additionally, companies can refer to the CDSB Framework Application Guidance for Water and Biodiversity-related Disclosures, recent pronouncements of other standard-setting bodies, and insights from entities operating in the same industry or region.
How to Prepare?
- Engaging Stakeholders: To prepare a comprehensive report, companies need to identify key stakeholders through a thorough analysis of their value chain and impacts. Engaging with investors and other stakeholders helps gather diverse perspectives on sustainability risks and opportunities.
- Establishing Stakeholder Engagement Mechanism: Create a stakeholder engagement mechanism to understand opinions on sustainability-related matters. Functions like risk management, finance, and sustainability teams should collaborate to determine the financial materiality of identified issues.
- Identifying Climate-Related Risks (IFRS S2): For IFRS S2, focus on identifying both physical and transition risks related to climate change. Scenario analysis, software tools, or consulting companies can aid in recognizing acute and chronic physical risks, as well as transition risks arising from efforts to shift to a lower-carbon economy.
- Conducting Gap Analysis and Forming a Reporting Core Team: Undertake a gap analysis to align ISSB standards with the company’s readiness. Form a sustainability reporting core team responsible for collecting, consolidating, and validating data according to ISSB requirements.
- Consolidating Data and Performing Validation: Use software tools to consolidate data and perform validation checks. Ensure accurate data collection and, if needed, seek external assistance for complex calculations such as greenhouse gas emissions.
- Publishing the Report and Incorporating Feedback: Once data is consolidated and validated, publish the sustainability report. Use feedback from users to inform future sustainability strategies and enhance reporting quality.
Readying for the ISSB Sustainability Standards
Although the adoption of the standards is not yet mandatory, the United Kingdom and Japan have decided to implement them in the event that endorsement procedures are completed. Regulations imposed by the stock market, or the local law will determine whether or not adoption occurs. It is anticipated that the first reports will be submitted in 2025, with the effective date for applying IFRS S1 and S2 being 2024. ISSB will establish a Transition Implementation Group in order to provide assistance to organizations that are implementing the standards.
Recognizing global investor demands for comparable, verifiable, timely, and understandable sustainability information, the ISSB’s initial standards are currently voluntary. However, there is an ongoing effort to simplify sustainability reporting, aligning with the Corporate Sustainability Reporting Directive (CSRD) and responding to macroeconomic conditions and escalating climate challenges.
Organizations must prepare for integrated reporting that aligns with the significance placed on ESG metrics. A recommended first step is establishing robust materiality practices, as defined in ISSB standards. Assessing the reporting infrastructure is crucial, emphasizing collaboration between finance, sustainability, and risk teams for transparency and compliance. The ISSB’s aim to redefine financial statements emphasizes the equal importance of sustainability information.
The ISSB and its S1 and S2 standards are now live. This is a big step toward clear and consistent environmental reporting. The focus on understanding, comparability, and verifiability in the sharing of important climate and environmental risks information sets a new standard. As businesses get ready to voluntarily accept these standards, the advice given on practices for materiality, engaging stakeholders, and aligning with existing frameworks makes sure that the transition is complete and effective. The ISSB’s promise to help organizations through the Transition Implementation Group shows that it is ready to meet the needs of investors around the world for useful sustainable data.
Also, a lot of software programs, like IRIS CARBON®, can help businesses make records that follow any of these standards, which makes the whole process easier. Organizations that use integrated reporting that meets ISSB standards will be at the head of a more sustainable and accountable future as the world changes.