ISSB continues discussions on draft IFRS Sustainability Standards

Keywords: Mazars, Thailand, Sustainability Standards Board, ISSB, IFRS S2, Sustainability

14 March 2023 

In this issue, we present the major decisions made by the ISSB, which will remain tentative until the final vote on the two standards.

The ISSB Update for the January 2023 meeting is available here.

Decisions affecting both draft standards

Following discussions on cross-cutting issues affecting both standards, the Board tentatively reached the following decisions:

• to clarify that disclosures on metrics and targets must enable users to understand how the entity measures, monitors and manages sustainability-related risks and opportunities (R&Os), regardless of whether these metrics and targets are required by IFRS or implemented voluntarily by the entity;
• to introduce the concept of “reasonable and supportable information that is available at the reporting date without undue cost or effort” to help entities to apply requirements that involve a lot of measurements or uncertainty, particularly as regards:
  • identifying climate-related R&Os;
  • complying with value chain requirements (notably the scope and measurement of Scope 3 greenhouse gas (GHG) emissions);
  • determining anticipated financial effects on the entity’s financial performance, financial position and cash flows;
  • carrying out climate-related scenario analysis;
  • calculating particular metrics, such as the amount and percentage of assets or business activities that are (i) vulnerable to physical or transition risks, and/or (ii) aligned with the climate-related opportunities identified by the entity.

As regards the connections between sustainability reporting and financial reporting, the ISSB members (tentatively) agreed to add a requirement:

• to explain any connections between sustainability-related R&Os and their current or anticipated financial effects (information from the financial statements may be incorporated by reference, provided certain conditions are met); and
• to provide quantitative and qualitative information on these effects, with entities required to consider certain criteria to assess their capacity to provide quantitative data on a given risk or opportunity.

If they are unable to provide this, they must instead present qualitative information on the financial effects of the sustainability-related risk or opportunity, including the line items in the financial statements that are likely to be affected. Quantitative information on R&Os (including on that particular risk or opportunity) must still be provided at the lowest possible level of aggregation at which the entity is able to do so.

On this topic, the ISSB tentatively decided to amend the draft IFRS S1 and S2 to (i) ensure consistency of terminology between sustainability disclosures and financial statements (e.g. when referring to the reporting period) and (ii) clarify the relationship between the requirement to provide information on sustainability-related R&Os and the requirement to assess the entity’s climate resilience (which can shed light on current and anticipated financial effects).

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):

• regarding the disclosures required on judgements, assumptions and estimates made by the entity when preparing and publishing sustainability information:
  • to add a requirement to disclose (i) significant judgements made, in addition to the disclosures already required in the draft standard on sources of uncertainty related to estimates; and (ii) sources of guidance used in the absence of IFRS Sustainability Standards, particularly any industry-based framework used (i.e. either the guidance provided in IFRS S2, or standards published by the Sustainability Accounting Standards Board (SASB), or another source);
  • to clarify that the disclosure requirements on estimation uncertainties relating to metrics also cover the current and anticipated financial effects of sustainability-related R&Os (including uncertainty that has a high risk of resulting in a material adjustment in the next financial year to the carrying amount of an asset and/or a liability recognised over the period);
  • to clarify that an entity is required to disclose information about significant differences between the financial data and assumptions used to prepare sustainability disclosures and the financial statements. The entity’s sustainability reporting and financial reporting must be consistent “to the extent possible” considering the requirements of IFRS accounting standards (or any other relevant framework).

The ISSB has also decided to provide guidance on the disclosures required on judgements, assumptions and estimates made by the entity (initially through illustrative examples, and subsequently by publishing educational materials);

• to introduce an exemption that, in specific and limited circumstances, would permit an entity to exclude information on sustainability-related opportunities if it is commercially sensitive (subject to conditions). The entity would have to disclose that it had applied this exemption and reassess whether it still applies at each reporting date.

Draft IFRS S2 on climate disclosure requirements

January’s redeliberations resulted in the following (tentative) decisions on an entity’s assessment of its resilience to climate-related changes and uncertainties:

• to add a requirement for entities to use a method of climate-related scenario analysis that is appropriate for its specific circumstances and that takes account of all current and forward-looking information that is reasonably available at the reporting date, without incurring undue cost or effort (cf. the new concept mentioned earlier);
• to require entities to consider, when selecting this method, (i) their degree of exposure to climate-related risks and opportunities; and (ii) the means available to them (skills, capabilities and resources) to carry out the scenario analysis;

The ISSB will provide guidance on this, building on the work of the Task Force on Climate-related Financial Disclosures (TCFD).

Regarding the disclosure requirements on GHG emissions, the ISSB members (tentatively) agreed to permit entities to measure GHG emissions using information from entities in the value chain whose reporting periods are different from an entity’s own (subject to certain conditions). The ISSB will look at whether this relief could be extended to non-climate-related disclosures.

Finally, the Board (tentatively) decided to supplement the requirement for entities to disclose the extent to which their climate-related targets have been informed by the latest international agreement on climate change, by adding any jurisdictional commitments arising from it.

Redeliberations will continue at the ISSB’s next meeting in February, with a view to reaching final decisions on the content of the two standards (including their effective date) and preparing to start the Board’s balloting process.

The final versions of the two standards are now scheduled for publication by the end of the second quarter of 2023.