ISSB Sustainability Disclosure Standards: final versions of IFRS S1 and IFRS S2 issued

Keywords: Mazars, Thailand, Sustainability, ISSB, Sustainability Reporting, Climate Disclosures, Financial Disclosures, IFRS Framework, Interoperability 

On 26 June 2023, the International Sustainability Standards Board (ISSB) issued its first two Sustainability Disclosure Standards, IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2 – Climate-related Disclosures. 

The two standards (available here) lay the foundation of the ISSB’s global baseline of sustainability-related disclosures. A guide has been prepared by Mazars on these new standards.  

Further IFRS Sustainability Disclosure Standards are to be issued over the coming years, expanding the framework to include other ESG (Environment, Social and Governance) topics.   

The publication of IFRS S1 and IFRS S2 marks the end of a due process that lasted several months, even though the standard-setting process has progressed quickly, thanks to the ISSB’s decision to build on existing globally recognised frameworks and standards. In the most recent phase of the work, the ISSB made final amendments to the standards in light of the many comment letters it received in response to the two exposure drafts published in March 2022.  

Today’s special feature includes (i) background information relating to the creation of the ISSB and the development of IFRS S1 and IFRS S2; (ii) key points of the content of the two standards; (iii) the timetable for application and the issues relating to interoperability with other frameworks; and lastly (iv) next steps. 

Background  

Creation and objectives of the ISSB 

Readers will remember that the creation of the ISSB was announced by the IFRS Foundation in November 2021 at COP26 in Glasgow, in order to address the increasing and urgent needs for transparency in sustainability reporting.  

The ISSB’s objective was to provide a globally recognised framework on which jurisdictions could build to ensure high-quality, comparable and relevant sustainability information that would meet investors’ needs. With this in mind, the ISSB’s remit was to work alongside the International Accounting Standards Board (IASB) to publish IFRS Sustainability Disclosure Standards, ensuring connectivity and compatibility with IFRS Accounting Standards.  

The scope of the ISSB’s responsibilities and available resources was expanded through the consolidation of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation1 (VRF) into the IFRS Foundation, in January 2022 and August 2022 respectively.  

This means that the ISSB now governs the SASB standards, and intends to improve their international applicability.   

The ISSB also signed an agreement with the Global Reporting Initiative (GRI) in March 2022, with a view to ensuring that IFRS Sustainability Disclosure Standards, which are focused on investors’ information needs, are complementary to and compatible with GRI standards, which are intended to meet the needs of a wider range of stakeholders.  

Furthermore, the Financial Stability Board (FSB) recently gave the ISSB responsibility for monitoring companies’ climate-related disclosures under the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), as these recommendations have been incorporated into IFRS S1 and IFRS S2.  

Finally, it should be noted that the ISSB does not have responsibility for deciding on (i) whether an assurance should be provided on sustainability information or (ii) the appropriate assurance standards to apply in that case. This is the remit of local jurisdictions and regulators.   

Other frameworks and standards used in the development of IFRS S1 and IFRS S2  

The ISSB built on several widely used and globally accepted frameworks when developing its first two IFRS Sustainability Disclosure standards. These included:  

The ISSB built on several widely used and globally accepted frameworks when developing its first two IFRS Sustainability Disclosure standards. These included:  

• the Integrated Reporting Framework, to define the objectives and underlying concepts of IFRS S1;  
• the TCFD’s recommendations, with the standards structured around the following four reporting areas: (1) Governance; (2) Strategy; (3) Risk management; and (4) Metrics and targets;  
• the topics and metrics included in the SASB standards, to develop the approach used for identifying (i) sustainability-related risks and opportunities and (ii) the related information that should be reported. IFRS S2 includes industry-specific guidance that preparers shall consider, derived from the SASB standards;  
• some of the IASB’s concepts, notably materiality, which is defined as follows for both sustainability reporting and financial reporting: “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence investors’ decisions.” 

Key points of IFRS S1  

The needs of primary users (notably investors) are paramount

IFRS S1 requires preparers to disclose material information on sustainability-related risks and opportunities to meet the needs of primary users (i.e. investors, lenders and other creditors) of general purpose financial reports (which include both financial statements and sustainability-related financial disclosures).  

The ISSB’s standards are based on the principle that sustainability information is useful to primary users because a company’s ability to create value is inextricably linked to its interactions with its stakeholders, society, the economy and the natural environment in which it operates, throughout its entire value chain. The company’s dependencies and impacts on these resources and relationships are likely to give rise to sustainability-related risks and opportunities.  

IFRS S1 requires preparers to disclose information on these risks and opportunities if they could reasonably be expected to affect the company’s prospects, i.e. its cash flows, access to finance, or the cost of capital over the short, medium or long term.  

IFRS Sustainability Disclosure Standards thus have a different conceptual approach to materiality from that followed by the European Sustainability Reporting Standards (ESRS), which use a double materiality approach (i.e. a sustainability issue is material if it meets the criteria for impact materiality or financial materiality or both, considering the needs of users of sustainability information in a broader sense). However, the ISSB believes that its concept of materiality for investors implicitly includes some level of impact materiality, as many impacts are financially material.  

General requirements that form a “conceptual framework”  

IFRS S1 sets out the general requirements that must be met for a preparer to be compliant with IFRS Sustainability Disclosure Standards. IFRS S1 is similar to a “conceptual framework”, as it identifies the elements that are essential to a complete set of sustainability-related financial disclosures, and specifies the qualitative characteristics of this information. This standard must be applied in conjunction with the other IFRS Sustainability Disclosure Standards.   

Guidance to complement the standards   

IFRS S1 lists the sources of guidance that preparers may consult to identify (i) risks and opportunities arising from sustainability issues other than climate (as this topic is covered by IFRS S2) and (ii) the information to disclose about them.  

In both cases, preparers shall consider the applicability of the SASB standards to the industries in which they operate (as these standards are industry-based). Additional optional sources of guidance are also listed, such as the CDSB Framework Application Guidance and industry practices.  

If there is no IFRS Sustainability Disclosure Standard that specifically applies to a given risk or opportunity, IFRS S1 requires the company to apply its judgement to determine what information is relevant to disclose. In this situation, a preparer may also (provided certain conditions are met) consider the applicability of the GRI Standards and the ESRS, in addition to the guidance mentioned above.   

Proportionality provisions to support application of the standards  

The ISSB has introduced proportionality provisions to ease the reporting burden on preparers and to support application of IFRS Sustainability Disclosure Standards.

For example, the ISSB has introduced the concept of “all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort” for some requirements, e.g. when identifying sustainability-related risks and opportunities or determining the scope of the entity’s value chain.   

General principles for connectivity and presentation of information  

IFRS S1 also includes general requirements on connectivity of information, to give users of general purpose financial reports a better understanding of the connections between:  

• an entity’s sustainability-related risks and opportunities;  
• the various disclosures provided by the entity:  

• within its sustainability-related financial disclosures; and   
• between sustainability-related financial disclosures and other information disclosed by the entity, such as its financial statements.   

Although IFRS sustainability information prepared under IFRS related standards shall be included as part of an entity’s general purpose financial reports, IFRS S1 does not specify the exact location of these disclosures, which could, for example, be presented in a specific section of the management commentary. The ISSB also permits entities to use an integrated approach to sustainability reporting.  

However, preparers must report their sustainability-related financial disclosures at the same time as they publish their financial statements.   

Finally, it should be noted that IFRS S1 permits all entities to apply IFRS Sustainability Disclosure Standards, regardless of which framework they use to prepare their financial statements (i.e. IFRS Accounting Standards or other generally accepted accounting principles or practices). In practice, this means that any entity may elect to prepare its sustainability information in accordance with the ISSB’s standards. 

Key points of IFRS S2 

Climate change: the first topical standard covered by the ISSB  

IFRS S2 can be viewed as the first topical standard issued by the ISSB, with further topics to be covered in the coming years. The ISSB decided to focus first on climate change, which it believes will present risks for all entities and economic sectors.  

The climate-related risks covered by IFRS S2 include physical risks (i.e. those resulting from events or long-term trends) and transition risks (i.e. those resulting from the transition to a low-carbon economy).   

A structure aligned with TCFD recommendations and application in conjunction with IFRS S1  

IFRS S2 (like IFRS S1) fully incorporates the TCFD’s recommendations. On 24 July 2023, the IFRS Foundation published a comparison (available here) between the requirements of IFRS S2 and the TCFD’s recommendations, showing that companies which apply the ISSB standards will also comply with these recommendations.  

IFRS S2 requires entities to publish industry-specific information, but does not impose particular metrics. The standard provides industry-based guidance which is derived from the SASB standards. Preparers must consider the applicability of this guidance, but are not required to publish the specific metrics included in this guidance. 

Climate-related disclosures published in accordance with IFRS S2 must take account of the general requirements set out in IFRS S1, even if the entity applies the transition provision permitted by IFRS S1, which allows entities to only publish climate-related disclosures in the first year of IFRS sustainability reporting.  

Key disclosures required on an entity’s response to climate-related risks and opportunities   

The disclosures required under IFRS S2 cover the key elements of: 

• the company’s strategy for managing climate-related risks and opportunities;  
• the company’s performance in relation to these climate-related risks and opportunities, including progress made towards targets that it has set itself or that it is required to meet.  

As regards strategy, IFRS S2 specifically requires entities to publish disclosures on:  

• their climate-related transition plan;   
• the current and anticipated financial effects of climate-related risks and opportunities on the company’s performance, financial position and cash flows. These disclosures are subject to specific proportionality measures, in accordance with IFRS S1;  
• their resilience to climate change, i.e. their ability to adapt to climate-related impacts or events (such as pervasive wildfires), changes (such as regulatory limits on the use of particular fossil fuels) and uncertainties (such as assumptions about the pervasiveness of wildfires or the stringency of regulation), using climate-related scenario analysis. Appendix B of IFRS S2 provides application guidance based on the TCFD’s framework to help companies tackle this complex issue and implement a suitable approach that fits their specific circumstances. 

As regards performance, IFRS S2 specifies various groups of metrics that entities shall disclose:  

• greenhouse gas (GHG) emissions for Scopes 1, 2 and 3, measured in accordance with the GHG Protocol guidance unless local regulations require the use of a different method. Companies that have Scope 3 emissions associated with investments or other forms of financing (i.e. companies with activities in asset management, commercial banking or insurance) shall also disclose information on financed emissions;  
• financial metrics related to climate-related risks and opportunities, such as the amount of investment or financing devoted to these risks and opportunities;  
• internal carbon prices, i.e. whether and to what extent these prices are taken into account by the entity when making decisions, and the price used to measure the cost of GHG emissions;  
• disclosures on executive remuneration policies, i.e. whether and to what extent these policies include climate-related considerations, and the portion of remuneration affected over the financial period.   

An entity shall also disclose any climate-related targets it has set itself, including the base period used for reference, any interim targets or milestones, and whether and how the targets take account of the most recent international climate change agreements (currently the 2015 Paris Agreement), including any jurisdictional commitments. For each GHG emissions reduction target, the entity shall also disclose whether the target is calculated on a gross or net basis. If the latter, it is also required to disclose (i) the associated gross emissions reduction target and (ii) the carbon credits that it plans to use to offset its GHG emissions in order to meet each of the net targets. 

Timetable for application and interoperability with other frameworks  

Effective date and transition provisions 

IFRS S1 and IFRS S2 come into effect for financial periods commencing on or after 1 January 2024 (early application is permitted if both standards are adopted simultaneously). In practice, the effective date will depend on either the endorsement by local jurisdictions or the company’s decision to voluntarily apply the standards.   

The ISSB has provided transition reliefs in order to facilitate application of the two standards. Thus, in the first year of application of IFRS S1, an entity is permitted: 

• not to disclose comparative information (i.e. sustainability-related financial information in accordance with the ISSB’s standards for a period prior to the date of initial application);  
• to report sustainability-related financial disclosures after the publication of its financial statements (subject to certain conditions);  
• to only report on climate-related risks and opportunities in accordance with IFRS S2, therefore only applying the requirements of IFRS S1 that relate to this topic. In this case, the entity is not required to disclose the associated comparative information in the first year. Moreover, it is not required to disclose comparative information on risks and opportunities arising from sustainability-related issues other than climate in the second year. 

In the first year of application of IFRS S2, an entity may apply one or both of the following provisions: 

• it may continue to use a method other than the GHG Protocol to measure its GHG emissions, if that method was used in the year immediately preceding initial application of IFRS S2;  
• it is not required to disclose its Scope 3 GHG emissions, including, where relevant, the additional information on its financed emissions. 

The entity may continue to apply these reliefs when presenting the related information as comparative information in subsequent reporting periods.   

Interoperability of IFRS Sustainability Disclosure Standards with other standards  

When developing the IFRS Sustainability Disclosure Standards, the ISSB took account of interoperability considerations, so that entities would not need to provide multiple sets of sustainability-related disclosures.  

To achieve this, the ISSB has been working with (i) representatives of various jurisdictions through its Jurisdictional Working Group and Sustainability Standards Advisory Forum (SSAF) and (ii) national standard-setters who oversee mandatory reporting standards and frameworks, such as the European Commission (EC) and EFRAG (European Financial Reporting Advisory Group) for the EU, the FCA (Financial Conduct Authority) and FRC (Financial Reporting Council) for the UK, and the SEC (Securities and Exchange Commission) for the US.   

Interoperability between IFRS Sustainability Disclosure Standards and ESRS is a key issue for European companies with international activities that fall within the scope of the CSRD (Corporate Sustainability Reporting Directive). The EC has thus worked closely with the ISSB to maximise interoperability of the final ESRS published on 31 July 2023, revising the draft standards submitted to it by EFRAG, its technical adviser, in November 2022. The EC and ISSB believe that this work has enabled them to (i) achieve a very high degree of alignment between the two frameworks and (ii) avoid a situation where entities that are required to disclose sustainability information in accordance with the ESRS, but that also wish to comply with the ISSB’s standards, have to publish a separate set of disclosures. The EC, EFRAG and ISSB will shortly be publishing interoperability guidance that will help companies to navigate between the two sets of standards and understand the additional information that is required under ESRS on the one hand, and IFRS on the other (expected to be very limited).  

Finally, it should be noted that the CDP2 (formerly the Carbon Disclosure Project) announced in late 2022 that it would incorporate the requirements of IFRS S2 into its questionnaires in order to provide investors with a consistent framework of climate-related information and to reduce the burden on preparers by aligning the reporting frameworks.   

Next steps  

Some announcements already made by jurisdictions with regard to early application of IFRS S1 and IFRS S2  

The IFRS Sustainability Disclosure Standards have been developed to complement the IFRS Accounting Standards, which are applied by more than 140 jurisdictions worldwide. In light of this, the ISSB has established a support framework to assist with the application of the new standards across all types of economic environment.  

It is now up to individual jurisdictions to decide whether or not they will make the standards mandatory; the ISSB is not able to impose this. Individual companies can also choose to adopt IFRS S1 and IFRS S2. 

In July 2023, these standards were endorsed by IOSCO (the International Organization of Securities Commissions), which called on its 130 member jurisdictions, which between them regulate over 95% of financial markets worldwide, to consider how they might adopt, apply or otherwise take account of the ISSB’s standards in their respective jurisdictional frameworks (cf. press release dated 25 July 2023, available here).   

Some jurisdictions have already announced their intention to be early adopters, notably among emerging and developing markets (such as Mexico, Nigeria and Zimbabwe).  

In March 2023, the UK government set out a plan to adopt the ISSB’s standards. The process is under way and a decision is expected within 12 months. The SSBJ (Sustainability Standards Board of Japan) announced its plan to incorporate the standards into the new Japanese regulations at around the same time.  

Finally, the United States has indirectly supported the development of the IFRS Sustainability Disclosure Standards via the G7 and G20, and will continue to do so as a member of the IOSCO Board. In March 2022, the SEC proposed a set of rules (available here) to improve and standardise climate-related information provided to investors, which are scheduled for publication in October 2023. These rules should be aligned to the greatest extent possible with IFRS S2, as both are based on the TCFD’s recommendations. 

Further sustainability-related development of the IFRS framework  

A consultation has been launched to help the ISSB to prioritise its work plan over the next two years (from 2024), notably considering potential research and standard-setting projects on (i) biodiversity, ecosystems and ecosystem services; (ii) human capital; and (iii) human rights.  

A separate public consultation was also launched on 27 July on a digital Taxonomy project (Proposed IFRS Sustainability Disclosure Taxonomy), with a view to publishing the final version in the first half of 2024. This initiative aims to support the preparation of digital reporting of sustainability-related financial information from 1 January 2025.