On June 26, 2023, the International Sustainability Standards Board (“ISSB”) issued its long-awaited standards, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (“IFRS S1”) and IFRS S2 Climate-related Disclosures (“IFRS S2”), together, the “ISSB Standards.”
IFRS S1 sets out the core requirements for sustainability-related disclosures, covering all sustainability-related risks and opportunities that may impact an entity’s prospects. The disclosures focus on an entity’s dependencies on resources and relationships along the “value chain,” which directly influence an entity’s ability to generate cash flow. The information is meant to support users of general purpose financial reports (namely investors, lenders and creditors) and their decision-making. The disclosures follow the structure laid out by the Task Force on Climate-related Financial Disclosures:
- Governance, requiring disclosure around how governance bodies—whether boards, committees or individuals—monitor, manage and oversee sustainability-related risks and opportunities.
- Strategy, requiring the entity to identify how the business model and decision-making address specific risks and opportunities, as well as disclose the effects on the entity’s financial position.
- Risk Management, covering processes and policies to identify, assess, prioritize and monitor sustainability-related risks.
- Metrics and Targets, requiring disclosures of metrics the entity uses to measure and monitor sustainability-related risk or opportunity and its performance in relation to that risk or opportunity.
IFRS S2 takes a deeper dive into specific climate-related disclosures, divided across two familiar categories—risks (both physical and transition) and opportunities—that are “reasonably expected” to affect an entity’s cash flows, access to finance, or cost of capital over the short, medium, and long term. IFRS S2 follows the same structure as IFRS S1 —requiring disclosures on governance, strategy, risk management, and metrics and targets—in a manner that avoids duplication. For instance, if the oversight of climate risks is integrated into the broader sustainability risks structure, no separate disclosures are necessary. Notably, the disclosures on metrics and targets also cover Scope 3 greenhouse gas emissions (resulting from assets not owned or controlled by the reporting organization, but that the organization indirectly effects in its value chain). ISSB recommends that Scope 3 emissions are measured in accordance with the established Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011).
The ISSB Standards are expected to apply for annual reporting periods beginning on or after January 1, 2024. Entities may choose to adopt the standards earlier but will be required to disclose the fact and apply both standards at the same time. A transition period is envisaged for the first annual reporting period. Many of the conceptual foundations and general requirements of IFRS S1 are adapted from the IFRS Accounting Standards, but have been developed to be used in conjunction with any accounting requirements. Conversely, entities applying the IFRS Accounting Standards are not expected to apply the ISSB Standards.
A number of governments and regulators have indicated their intention to formally endorse and adopt the standards, including the United Kingdom, Canada, Japan, Singapore and Nigeria. The form in which each jurisdiction will choose to implement the ISSB Standards remains to be determined. Provisions tailoring the standards to local requirements are a likely addition.
The ISSB Standards address several areas of sustainability and climate governance, underscoring an increasingly tight connection between sustainability and financial materiality. Overall, the ISSB Standards mark an important development, filling a regulatory gap related to the lack of standardized reporting in this area.
Our In Depth report summarizes the main features of the ISSB Standards and implications for companies.