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ICAEW’s first impressions of IFRS S1 and IFRS S2

Author: Laura Woods

Published: 06 Oct 2023

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Laura Woods examines the ISSB’s first two sustainability standards and considers how they have developed since the exposure drafts were issued for consultation.

Published at the end of June 2023, the International Sustainability Standards Board’s (ISSB) first IFRS Sustainability Disclosure Standards, IFRS S1 General Requirements for Disclosure of Sustainability-Related Financial Information and IFRS S2 Climate-Related Disclosures are now final. The drafts of these two standards were issued for public comment in 2022. Since then, the ISSB has been considering the feedback received, deliberating changes and refining the standards.

ICAEW was one of many respondents at the exposure draft stage. We published an article, Mission critical matters for the ISSB, highlighting key areas that ICAEW identified for the ISSB to focus on when finalising the standards. In this article, we revisit some of those “mission critical matters” to see how the ISSB has responded.

A lot to like

Overall, the final versions of IFRS S1 and IFRS S2 represent a clear and marked improvement from the exposure drafts. As well as maintaining elements considered to be a positive in the initial drafts, feedback identifying areas where there was room for improvement has been taken on board and addressed. 

Both standards have preserved the Task Force on Climate-Related Financial Disclosures (TCFD) structure from the draft stage, requiring entities to report information against the four content areas of governance, risk management, strategy, and metrics and targets. Being familiar with the TCFD framework, many stakeholders including businesses, investors and regulators highly value maintaining this consistent structure.

The ISSB has also maintained a definition of materiality that is consistent with the International Accounting Standards Board’s (IASB) Conceptual Framework, focusing on information that could reasonably be expected to influence decisions of existing and potential investors, lenders and other creditors. ICAEW supported the investor-focused approach at the exposure draft stage and is pleased that this has been preserved.

Many stakeholders including businesses, investors and regulators highly value maintaining this consistent structure

There has clearly been a concerted effort to ensure the final standards are scalable and that reliefs are available to give entities time to develop and implement any new internal systems and processes required to report under the standards.

Logistically, the standards are easy to access on the IFRS Foundation’s website. Different sections are straightforward to navigate and all of the related documents (such as accompanying guidance) are in an obvious place. 

Clearer definitions

In its response ICAEW recommended that, as part of finalising the standards, the ISSB should make some substantial improvements to clarity, particularly around defined terms. We are pleased therefore to see that some clear improvements have been made in this regard. 

For example, the term “significant”, which was originally undefined, has been removed entirely from the final standards. By removing the term, potential confusion about how matters that are “significant” differ from matters that are “material” has been eliminated. As all of the ISSB’s disclosure requirements are subject to a materiality filter, we believe this change represents a clear improvement. 

The term “sustainability-related”, understandably, features quite heavily in IFRS S1; however, it remains undefined. ICAEW argued that it is critically important that the intended meaning of the term is clearly explained and understood. The lack of a definition makes it challenging to understand what activities are captured by the standard and to therefore envisage how wide-reaching its implications will be. This could be an issue for reporting entities, assurance providers and regulators, and is an issue we think the ISSB should consider addressing as part of its ongoing implementation activities.

Industry-based requirements

Both IFRS S1 and IFRS S2 include requirements to consider the applicability of industry-based disclosures, but in slightly different ways. 

For climate-related disclosures, IFRS S2 requires entities to consider a separate industry-based guidance document that contains a list of industry-based disclosure topics and metrics. This guidance document originated from the Sustainability Accounting Standards Board (SASB) Standards, but has been further developed by the ISSB to encompass only matters relevant to climate.

Investors and other primary users of accounts believe industry-specific disclosures are essential to help them to understand and assess an entity

IFRS S1, however, mandates entities to refer to and consider the SASB Standards themselves. 

It is widely accepted that investors and other primary users of accounts believe industry-specific disclosures are essential to help them to understand and assess an entity. ICAEW therefore firmly supports the inclusion of industry-specific requirements in IFRS S1 and IFRS S2. However, there are a number of outstanding issues related to these requirements:

  1. The SASB Standards were produced on the basis of research and development with a US focus and therefore do not necessarily address disclosure topics that might be more pertinent outside of the US environment.
  2. The SASB standards are structured by industry rather than by sustainability topic, which may make it difficult for users to understand how the requirements fit with the ISSB’s Standards as they are structured by topic.
  3. The IFRS S1 requirement is that entities “shall” refer to and consider the SASB standards rather than “may”. ICAEW thinks this could make legislating the requirement challenging in individual jurisdictions as the volume of SASB material is vast and contains external references outside of legislative control. 

ICAEW raised these issues as part of another recent response to the ISSB on its SASB Standards and we continue to ask for a clear strategy from the ISSB on industry-specific requirements.

A compliance ‘journey’

At the exposure draft stage of the IFRS Sustainability Disclosure Standards, ICAEW commented extensively about the importance of a phased implementation and producing standards that are scalable. Since it is up to individual jurisdictions to adopt the ISSB’s Standards, it is not yet clear which jurisdictions or company types will be required to follow them. Nevertheless, in order to facilitate widespread global adoption, ICAEW believes that allowing flexibility for those that are at different stages of their sustainability reporting journey is critical.

The ISSB should be commended for the way in which it has responded to this concern. There are various ways in which the standards have been modified to allow for scalability and proportionality. For example, in identifying the sustainability risks and opportunities affecting an entity as required by IFRS S1, an entity shall “use all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort”. Another example can be found in IFRS S2; as part of the strategy disclosure requirements, the standard requires entities to “use an approach that is commensurate with the skills, capabilities and resources that are available to the entity”. 

ICAEW believes that these phrases will be of significant benefit to entities that are at various stages of their sustainability reporting journey and will help facilitate wider adoption and application.

Other important steps have been taken to ease the initial challenges of implementation, such as certain disclosure exemptions in the first year of application including comparatives and Scope 3 greenhouse gas emissions. Entities are also allowed to disclose only information on their climate-related risks and opportunities in the first year of application, with other sustainability-related information following in year two.

In summary

ICAEW is a strong supporter of the development of a global baseline of high-quality sustainability disclosure standards that meet the information needs of investors, and we are keen to see the ISSB’s Standards be a success. It is now up to jurisdictions around the world to decide whether to adopt and implement their requirements. While there are still concerns about some aspects of the standards, it is evident that the ISSB has listened to comments received on its draft proposals and taken steps to refine and improve the final standards. 

We now encourage the ISSB to prioritise activities that support the adoption, endorsement and implementation of IFRS S1 and S2 in the short term. Demonstrating the value of the global baseline that the ISSB is seeking to establish is vital for its ongoing success as a standard-setter.

Laura Woods, Technical Manager, Corporate Reporting Faculty, ICAEW

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