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.
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 S2ISSB has made some new contributions as a global sustainability entity:
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
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.
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.
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.
Alternatively, entities that will provide disclosures can also add sustainability-related information of impact importance, which is needed by other stakeholders, to the ISDS.
(IFRS, ISSB: Frequently Asked Questions, 2023)
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Written by Irene