Ongoing discussions within the ISSB on the draft IFRS on sustainability disclosures

Keywords: Mazars, Thailand, Sustainability, IFRS, ISSB, SASB, Greenhouse gas, GHG.

10 February 2023

General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2 – Climate-related Disclosures, following on from the significant decisions taken over the previous two months.

The ISSB Update for the December meeting is available here.

Draft IFRS S1 on general sustainability disclosure requirements

Discussions within the Board have resulted in the following main decisions (which remain tentative at this stage):

• clarification of the objective of draft IFRS S1 by describing:
  • how the value that an entity creates for its investors and creditors is inextricably linked to the value the entity creates for other stakeholders, the society and the environment;
  • an entity’s reliance on its resources and relationships and the negative or positive effects an entity may have on these;
  • the sustainability-related risks and opportunities that can follow from these effects, and how they can affect an entity’s performance, prospects, business model, strategy, and the value the entity creates over the short, medium and long term;

• improvement of the standard’s Illustrative Guidance in order to clarify the two-step process, namely: (1) the identification of sustainability-related risks and opportunities and (2) the identification of material information about those risks and opportunities. The guidance should therefore include:
  • a description of factors the entity could consider in achieving step 1, and of the process an entity might follow to do so;
  • details, for step 2, of the main users of this information and the decisions they will have to make, but also of the conditions under which the entity will exercise its judgement (circumstances specific to the entity, existing uncertainties);
  • an illustrative example of the method to be followed in the case of an enterprise with a complex business model (such as conglomerate that spans multiple industries), in applying the SASB’s sectoral standards.

Draft IFRS S2 on climate disclosure requirements

For greenhouse gas (GHG) emissions reporting requirements, the December re-deliberations resulted in the following (still tentative) key decisions:

• removal of the original requirement in the exposure draft to disclose the entity's GHG emissions intensity for each of the three Scopes;
• confirmation that IFRS S2 does not include any requirement for an entity to disaggregate its GHG emissions by constituent gases;
• addition of a requirement for an entity to use the global warming potential values in the latest assessment from the Intergovernmental Panel on Climate Change, based on a 100-year time horizon;
• addition of an obligation to disclose (i) information that would enable users of sustainability reporting to understand how and why the entity has used specific inputs, assumptions and estimation techniques to measure its GHG emissions, and (ii) information about any changes in the estimation techniques it uses and in the significant assumptions it makes during the reporting period, where applicable;
• specifically for Scope 2 GHG emissions, introduction of a requirement for the entity to use a location-based method (reflecting the average emissions intensity of its local grid) along with relevant information about contractual instruments related to managing energy it has purchased.

Specific measures have also been (tentatively) adopted for Scope 3 GHG emissions:

• introduction of reliefs for an entity disclosing its Scope 3 GHG emissions, in particular:
  • a temporary exemption from the requirement to disclose Scope 3 GHG emissions for a minimum of one year after the effective date of IFRS S2;
  • a conditional relief allowing an entity to measure its Scope 3 GHG emissions using information from entities in its value chain with reporting periods that are not aligned with the one of the entity;
• the introduction of a framework to help the entity measure Scope 3 GHG emissions (see paragraphs 48 and 50 of the Agenda Paper 4B);
• in conjunction with this framework, the addition of a requirement to provide the information necessary to understand how the entity measures its Scope 3 emissions, in particular:
  • to what extent the Scope 3 emissions published depend on (i) inputs from specific activities in the entity’s value chain (‘primary data’) and (ii) inputs that are verified;
  • how the entity is managing (‘thinking about’) its Scope 3 GHG emissions if it determines it is impracticable to estimate Scope 3 GHG emissions;
• the introduction of reliefs for an entity making disclosures about its value chain:
  • provision of implementation guidance to help the entity identify the sustainability-related risks and opportunities in its value chain that are relevant to users of sustainability reporting, using Scope 3 GHG emissions as an example;
  • limiting the requirement for the entity to reassess the scope of its sustainability-related risks and opportunities to cases where a significant event or a significant change of circumstances occurs;
• confirmation of the requirement to give information about which of the 15 Scope 3 GHG emissions categories, described in the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard, are included in the entity’s measurement of its Scope 3 emissions (whether or not the measurement was conducted in accordance with this protocol).

Finally, in addition to the topics related to GHG emissions, other (tentative) decisions were adopted in respect of:

• sectoral requirements based on the SASB standards:
  • the draft IFRS S2 will be amended so that these sectoral reporting requirements, presented in Appendix B of the exposure draft as mandatory in the same way as the body of the standard, become part of the standard’s Illustrative Guidance, i.e. not mandatory;
  • Appendix B as presented in the exposure draft will be improved and corrected, in particular to reflect the feedback received during the public consultation on the international applicability of certain provisions;
• financed and facilitated emissions.

Re-deliberations on IFRS S1 and IFRS S2 will continue in January 2023. The ISSB hopes to publish both standards in 2023 as early as possible.