Sustainability reports are gaining global salience. What started as a voluntary activity many years ago is rapidly coming mainstream with reporting mandates rolling out and reporting standards emerging such as those from the International Sustainability Standards Board (ISSB). Incidentally, the Glasgow COP saw the birth of ISSB, the sister organization to IFRS. It is good to see that the ISSB has got down to work with gusto.
I happened to be there at the IFRS Foundation conference in London where the ISSB, in a landmark event, published S1 and S2, two key sustainability reporting standards that we should hear a lot about in the coming years. These standards are ready now to be woven into the fabric of the IFRS financial reporting standards that around 140 countries have embraced across the world.
Let’s take a quick look at S1 and S2. By the way, S1 and S2 are applicable for reporting periods starting from January 1, 2024.
S1 covers the general requirements for disclosure of sustainability-related financial information. S2 is all about climate-related disclosures on risks and opportunities and is complementary to S1. The key point is that these standards are all about delineating risks and opportunities for the users of general-purpose financial reports in making decisions related to investment or lending. Essentially, the S1 and S2-driven reporting is going to be part of the general-purpose financial reports.
S1 borrows heavily from the Governance – Strategy – Risks Management and Metrics and Targets framework developed by the Task Force on Climate Financial Disclosures (TCFD). Essentially, my sense is that the ISSB has used the time-tested IFRS framework to effectively bring in a ‘reporting standards’ wrap around some of the in-vogue and mostly voluntary disclosures, using specific lingo and concepts such as materiality and connected information.
However, in a world that is unquestionably witnessing high amplitude environment and climate-related fluctuations, the question naturally arises. ‘Are we still, taking baby steps? Is this enough to arrest the slide?’
The response to S1 and S2 releases has been a bit mixed. Many green warriors feel that an opportunity has been missed to give much more comprehensive coverage of all factors that are germane to sustainability. On the other hand, many feel this is a good beginning and within a short time of eighteen months, reporting standards have come out from the IFRS Foundation which countries are free to adopt. This is an actionable step and legal jurisdictions (read countries) can get a common framework off the ground, albeit primarily for the investing and lending community. Moreover, ISSB has pointed out that S1 and S2 along with financial reporting are part of a stack that be topped up by additional reporting disclosures such as the GRI.
With the basic reporting standards out (especially that related to the all-important greenhouse gas emissions) and with S2 also mandating scope 3 emission information disclosure (with a certain grace period), the action now should shift to the country jurisdictions towards adoption. There is an expectation that the International Organization of Securities Commissions (IOSCO) will also recognize and recommend the ISSB standards for adoption. Separately, the European CSRD mandate already covers the top 50,000 companies operating in the continent which have to comply with European Sustainability Reporting standards (ESRS). ESRS has things in common with the ISSB in many areas.
S2 also explicitly mentions both gross carbon emissions and net carbon emissions as part of the reporting requirements. With COP commitments towards net zero looming on the horizon, expect the market for carbon offsets to boom as well.
Green investments are not linked to corporate sustainability disclosures alone but to the green taxonomies (essentially a list of industries and economic activities) that classify environment-friendly and other sectors. The Europe and ASEAN green taxonomies are out while the Indian list is still in the works.
As a closing note, there is also the realization that sustainability-related disclosures should be enhanced with electronic data dictionaries enabling easy discoverability and effective comparison. XBRL is the chosen format and draft dictionaries (termed taxonomies but different from the aforementioned list of industries that qualifies as green sectors which is also termed as a taxonomy) are already out for the ISSB and ESRS. GRI XBRL taxonomy is around the corner as well
Undeniably, the world is at the crossroads of pursuing unbridled economic progress or bringing a measure of calibration and forbearance in choosing the right kind of growth. Hopefully, the light has turned green. These common reporting frameworks should help as well.