On 26 June 2023, the International Sustainability Standards Board (ISSB) formally released the International Financial Reporting Standards S1 and S2. S1 relates to the disclosure of sustainability-related financial information and IFRS S2 to climate-related information.
In 2021, the International Financial Reporting Standards Foundation (IFRS Foundation) officially established the ISSB at the COP26 conference. The IFRS Foundation stated that this was due to an increasing number of international investors and stakeholders asking companies to disclose high-quality climate and ESG-related information.
Drafts of IFRS S1 and IFRS S2 were officially released in March 2022, soliciting opinions from stakeholders worldwide. By the end of July 2022, a total of 1410 (IFRS, Global sustainability disclosure standards for the financial markets, 2021) opinions were received from developed countries such as North America and Europe, as well as emerging market economies such as China. International organizations such as the European Financial Reporting Advisory Group (EFRAG), the Task Force on Climate-related Financial Disclosures (TCFD), and the Global Reporting Initiative (GRI) also provided feedback.
Based on the feedback received, the ISSB and its technical team repeatedly studied, revised, and improved the exposure drafts. After a year and three months, they were officially released, and entities are required to start implementing them from January 1, 2024. This means that investors can see the relevant information of the company applying these standards in the 2024 reporting cycle, in 2025.
Disclosure requirements stipulated by IFRS S1 enable companies to report the sustainability-related risks and opportunities they face in the short and long term. Both standards have absorbed the content in the recommendation document of the Task Force on Climate-related Financial Disclosures (TCFD).
The ISSB stated that its purpose is to ensure that companies provide sustainability-related information and financial statements in the same report. These standards have adopted the same basic concepts as the IFRS accounting standards, which are mandatory in more than 140 countries and regions worldwide (IFRS, Global sustainability disclosure standards for the financial markets, 2021).
The ISSB based the standards on the existing frameworks of the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). The ISSB is also committed to working with the Global Reporting Initiative (GRI) to ensure compatibility between the investor-centric new standards and the existing GRI standards. The GRI standards have different objectives; they aim to meet the needs of a broader range of stakeholders.
The ISSB also works to integrate its standards with the mandatory reporting frameworks soon to be released by other standard-setting bodies. These include the European Commission and the European Financial Reporting Advisory Group (EFRAG) in the EU, and the Securities and Exchange Commission (SEC) in the US.
Although all listed and private companies can apply for IFRS S1 and IFRS S2, the ISSB does not have the authority to mandate their application. Companies can voluntarily apply these standards, but whether they are compulsory is ultimately determined by local regulators. The ISSB has expressed its intention to collaborate with countries, regions, and corporations to support the adoption of these standards. It will also continue to work with countries, regions, and the Global Reporting Initiative (GRI) that employ additional disclosures beyond the global baseline.
In the first year of the standards’ implementation, the ISSB relaxed the disclosure conditions for companies. For example, in the first year when a company uses the two standards, the company can choose to only disclose climate-related information.
The New Contributions of IFRS S1 and S2
ISSB has made some new contributions as a global sustainability entity:To make the disclosure of information more substantial
The reporting entity is required to disclose more detailed information that is useful for investment decisions. Compared to TCFD recommendations, there are three requirements for ISSB standards:
● More detailed information on climate risks/opportunities
Under ‘governance’, the reporting entity is required to disclose the responsibilities of the governance bodies or individuals for climate-related risks and opportunities. The entity should also consider how these duties are reflected in the scope of authority, tasks, role descriptions, and other related policies.
Under ‘strategy’, the reporting entity must disclose the locations of risks and opportunities in its business model and value chain, including geographical areas, facilities, and types of assets.
● Transition plans to address risks/opportunities, as well we the entity’s adaptability to climate-related risks
Under ‘strategy’, the reporting entity is required to disclose any transition plans it has and how the company plans to achieve climate targets. This includes the reporting entity’s ability to adjust its strategy and business model to adapt to climate change (such as the ability to redeploy, reuse, upgrade, or retire existing assets).
● Supplementary disclosure of climate-related opportunities by the reporting entity
Under ‘risk management’, the reporting entity is required to disclose the processes of identification, assessment, and management of climate-related opportunities. It is worth noting that IFRS S2 also outlines the circumstances for disclosing information about climate-related financial impacts. For example, if the reporting entity believes that quantitative information is not useful, they can choose to explain and provide information.
To enhance the consistency and comparability of the reporting entity's climate information, especially the introduction of industry-specific indicators
IFRS S2 requires the reporting entity to disclose relevant indicators when identifying climate-related risks and opportunities. Compared to the recommendations of the TCFD, ISSB has adopted the industry classification system (SICS) and industry standards of the Sustainability Accounting Standards Board (SASB). IFRS S2 provides some additional requirements and guidelines, including two types of indicators: Sustainability Disclosure Topics & Metrics based on industry characteristics, and Activity Metrics.
On 27 July 2023, ISSB discussed a proposed taxonomy, which would improve global accessibility and comparability of sustainability information. It provides industry-specific metrics across 11 sectors, comprising 68 industries, which are based on the SASB standards. Each industry has applicable climate-related indicators, as well as activity indicators related to the operation of the reporting entity. The ISSB is seeking feedback on the proposals over a 60-day consultation period closing on September 26, 2023. The ISSB will review feedback in the second half of 2023 and aims to issue the final digital taxonomy early in 2024, subject to the feedback received.
To enhance the quality and reliability of the reporting entity's climate information
Since the establishment of the ISSB, the International Auditing and Assurance Standards Board (IAASB) has been working on sustainable disclosure assurance standards that are compatible with the ISSB standards. To improve the reliability of climate-related information, IFRS S2 requires the reporting entity to disclose whether the targets and the methods used have been verified by a third party. IFRS S2 also stipulates the process of the reporting entity’s review of the targets and the indicators used to monitor the progress of achieving the targets.
On 28 June 2023, IAASB announced the ‘General Requirements for Sustainable Assurance Engagement’ (ISSA 5000), which was unanimously passed by vote and will enter the public comment phase from August to December. In the future, the implementation of auditing and assurance standards will further promote the reliability of sustainable information disclosure.
On 25 July 2023, the International Organization of Securities Commissions (IOSCO) announced that after a comprehensive review of the ISSB standards, it has determined that the ISSB standards are suitable as a global framework for capital markets to promote the use of sustainability information. IOSCO is now encouraging its 130 member jurisdictions, which collectively oversee over 95% of the world’s financial markets, to contemplate adopting, applying, or otherwise promoting information aligned with the ISSB standards within their respective markets. This provides investors with consistent, comparable climate and other sustainable information.
The ISSB positions the IFRS Sustainability Disclosure Standards (ISDS) as a Global Baseline. The Global Baseline aims to serve as a comprehensive basis for disclosure requirements, providing comparable and cost-effective sustainability-related disclosures, that also meet the needs of general-purpose financial report users. This will assist jurisdictions in developing disclosure requirements based on this common baseline.
IFRS S1 is designed to adapt to the laws and regulations of which the entity operates, which make different provisions for the documents, formats, and structures of disclosed information. Entities are free to report other necessary information that complies with the regulatory requirements and public policy objectives of their jurisdiction, as well as the information required by the ISDS.
The ISSB believes that for the sake of comparability, it is important that the Global Baseline is clearly visible in an entity’s sustainability-related financial disclosures. IFRS S1 and IFRS S2 allow additional disclosures, if these do not obscure the ISDS. The Global Baseline means that entities can add to the ISDS, but not subtract from it. That is, entities can add additional disclosure requirements from their jurisdiction to the ISDS to enhance the applicability of the ISDS in different countries and regions.
To alleviate conflict, entities that have already provided sustainability-related information disclosures according to GRI standards. Alternatively, entities that will provide disclosures can also add sustainability-related information of impact importance, which is needed by other stakeholders, to the ISDS. The strategy of positioning the ISDS as a Global Baseline will undoubtedly enhance global applicability.
The UK’s Financial Conduct Authority (FCA) established an ESG Advisory Committee in early 2022 to specifically develop ESG-related disclosure requirements. In its April 2023 announcement, the FCA also committed to adopting the ISSB Standards and pledged to work with the Financial Reporting Council (FRC) and other bodies to establish and implement appropriate supervision and enforcement mechanisms. (FCA, 2023).
In the US, the SEC’s new climate disclosure rule is based on the TCFD’s disclosure framework and is drafted based on the Greenhouse Gas Protocol developed jointly by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) (S&P, 2023). There are no significant differences with IFRS S2, and there are no major obstacles to interoperability with IFRS S2.
Countries such as Australia, Canada, Singapore, and China have announced that they will either establish sustainable disclosure standard-setting bodies or have their accounting standard-setting bodies develop national disclosure standards based on the ISSB Standards (IFRS, ISSB: Frequently Asked Questions, 2023).
On 31 July 2023, The European Commission issued the European Sustainability Reporting Standards (ESRS) which come into effect in 2024. The European Commission, the European Financial Reporting Advisory Group (EFRAG), and the ISSB will collaborate to develop guidance material to assist entities in understanding and applying both ESRS and ISSB standards. This guidance will identify where the standards require unique, incremental disclosures. To optimize interoperability between their standards, the commission, EFRAG, and ISSB will also work on the digital tagging of disclosures, further facilitating navigation between the standards.
Overall, the world is getting closer to the era of unified, mandatory disclosure of sustainable information.
The Next Steps
Manufacturing leaders in the commercial furniture sector are confronted with an increasing need to deliver trustworthy and transparent carbon and circular design reporting. This is essential to demonstrate their organization’s commitment to sustainable practices and the creation of long-term, eco-friendly value.
As the industry grapples with evolving carbon reporting standards and sustainable design principles, organizations are turning to leaders to play a pivotal role. This influences eco-conscious decision-making processes. It’s imperative for businesses to comprehend and evaluate the ramifications of these shifts on their operations, performance, and overall market positioning.
Key areas of focus encompass:
● Harnessing in-depth carbon measurement expertise.
● Establishing robust and uniform carbon reporting policies.
● Innovating methodologies to integrate cutting-edge technologies and analytics.
● Cultivating team proficiencies to elevate reporting performance.
<>How We Can Help?
Strategic Carbon Reporting, Assessment, and Certification
Our CarbonEfficiency.ai and CRP Consulting teams assist commercial furniture manufacturers by addressing the increasing demand for precise and comprehensive carbon impact reporting. We innovate evaluation frameworks that measure and report the carbon footprint and circular design practices of products.
Certification & Rating
The dc Circular Design Certification demonstrates a product’s commitment to sustainable practices. It not only adheres to the Design Conformity specification but also furnishes a comprehensive report on:
● Carbon Footprint
● Carbon Efficiency
● Design Circularity
● Environmental Impact
● Energy Efficiency
We continuously innovate and hone our methodologies at Design Conformity, ensuring that our collaborators and clientele remain at the front of sustainable practices.
CarbonEfficiency.ai and CRP Consulting can help you to navigate the intricate landscape of carbon reporting and sustainable design. Our teams are equipped to support management in the following domains:
Strategic Carbon Reporting
● Crafting comprehensive carbon and circular design annual reports, encompassing both internal and external communication strategies.
● Gathering and systematizing carbon data and developing KPIs.
● Offering assurance on carbon and circular design reporting.
● Facilitating impact analysis, inclusive of carbon savings and returns on sustainable investments.
To summarise
On 26 June 2023, the International Sustainability Standards Board (ISSB) unveiled two pivotal International Financial Reporting Standards, S1 and S2, addressing sustainability-related financial information and climate-related disclosures. The standards will be implemented from 1 January 2024 and are based on the frameworks of the TCFD and SASB.
ISSB’s overarching goal is to harmonise sustainability disclosures with financial reporting, ensuring clarity and consistency for investors. The standards were introduced in response to the growing global demand for transparent ESG information. While the enforcement of these standards is subject to local regulatory decisions, numerous countries have announced their intentions to either establish sustainable disclosure standard-setting bodies or adapt their accounting standard-setting bodies to develop sustainable disclosure standards based on the ISSB Standards.
If you are interested in finding out more about our approach to carbon reporting, assessment, and certification, get in touch:
https://designconformity.com/book-a-call/
Written by Irene
Works Cited:
FCA. (2023, 06 26). FCA welcomes launch of ISSB standards. Retrieved from https://www.fca.org.uk/news/news-stories/fca-welcomes-launch-issb-standards
IFRS. (2021, 11 09). Global sustainability disclosure standards for the financial markets. Retrieved from https://www.ifrs.org/news-and-events/news/2021/11/global-sustainability-disclosure-standards-for-the-financial-markets/
IFRS. (2022, 09). IFRS General Sustainability-related Disclosures. Retrieved from https://www.ifrs.org/projects/completed-projects/2023/general-sustainability-related-disclosures/#project-history
IFRS. (2023). ISSB: Frequently Asked Questions. Retrieved from https://www.ifrs.org/groups/international-sustainability-standards-board/issb-frequently-asked-questions/
PWC. (2023, 06 13). The revised draft European Sustainability Reporting Standards have been released for feedback. Retrieved from Viewpoint – Global: https://viewpoint.pwc.com/dt/gx/en/pwc/in_briefs/in_briefs_INT/in_briefs_INT/the-revised-draft-european-sustainability-reporting-standards-have-been-released-for-feedback.html
S&P. (2023). Getting ready for the SEC Climate Disclosure Rule. Retrieved from https://www.spglobal.com/esg/solutions/getting-ready-for-the-sec-climate-disclosure-rule
