On 26 June, the International Sustainability Standards Board (ISSB) issued its first two IFRS Sustainability Disclosure Standards for use by companies all over the world. The standards respond to market demand for a common global language for sustainability disclosures aimed at meeting investors’ information needs. For the first time, voluntary adopters, and companies in countries that adopt these standards, will be required to consistently report how climate change affects their financial prospects, while investors will be able to benefit from high-quality, targeted information.

IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures set out requirements for companies to disclose how they identify and manage their exposure to sustainability-related risks and opportunities. These disclosures are designed to improve transparency and comparability in sustainability reporting and help investors to make better-informed decisions about providing companies with resources. 

The ISSB was created to develop IFRS Sustainability Disclosure Standards that will serve as a global baseline for sustainability-related financial disclosures for the capital markets. IFRS S1 and IFRS S2 are the first crucial steps in a building-block approach to global reporting on such risks and opportunities – enabling jurisdictions to build on the global baseline with jurisdiction-specific requirements. 

IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information

IFRS S1 sets out conceptual foundations for sustainability-related financial disclosures. It also requires a company to disclose material information about all sustainability-related risks and opportunities that could reasonably be expected to affect the company’s prospects. Many of the concepts, principles and requirements in IFRS S1 will be familiar to companies that use IFRS Accounting Standards to prepare their financial statements.

IFRS S1 explains that a company’s ability to generate cash flows is linked to how it interacts with and depends on its stakeholders, society, the economy and the environment. Those interactions and dependencies expose the company to sustainability-related risks and opportunities that ultimately reduce or increase value for its investors. 

Core content

A company that applies IFRS S1 is required to disclose material information about any sustainability-related risks and opportunities that could affect its prospects in the short, medium or long term – including its cash flows, its cost of capital or its access to finance. For example, a company whose business model depends on a natural resource such as water could be affected by changes in the quality, availability and pricing of that resource.

The standard requires companies to report information about sustainability-related risks and opportunities to help investors understand:

• governance – how the company uses governance processes and controls to monitor, manage and oversee those risks and opportunities;
• strategy – how the company considers those risks and opportunities in its strategic planning and implementation;
• risk management – how the company identifies, assesses, prioritises and monitors those risks and opportunities; and
• metrics and targets – how the company measures its progress in the context of those risks and opportunities, including specific targets it has set or is required to meet by law or regulation.

These four core areas are the same as those in the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

The scope of IFRS S1 makes clear that, while the ISSB was given a ‘climate first’ mandate, it is not a climate-only board. IFRS S1 lays the groundwork for companies to make consistent, comparable and assurable disclosures about the full range of sustainability-related risks and opportunities that investors consider. To enable those disclosures, the standard provides important sources of guidance for companies to use while the ISSB’s standard-setting work progresses.

IFRS S2 Climate-related Disclosures

IFRS S2 builds on the requirements set out in IFRS S1. It requires companies to identify and disclose information about a subset of risks and opportunities specifically related to climate.

IFRS S2 defines climate-related risks as the ‘potential negative effects of climate change on an entity’. These risks include physical risks (such as those resulting from increased severity and frequency of extreme weather) and transition risks (such as those associated with changes in government policy and evolving technology). 

Climate-related opportunities are defined as the ‘potential positive effects of climate change on an entity’. For example, a company might secure new business or develop new products because of its efforts to mitigate and adapt to climate change. 

Like IFRS S1, IFRS S2 requires companies to disclose information about such risks and opportunities using the four core content areas of governance, strategy, risk management, and metrics and targets – mirroring and expanding on the TCFD-based requirements set out in the first standard.

Governance and strategy

A company applies the governance-focused requirements by disclosing information about the governance body that oversees the company’s climate-related risks and opportunities, including the controls, procedures and processes that support it. 

IFRS S2 then requires a company to disclose how its strategy and decision-making take climate-related risks and opportunities into account, for example:

• how its business model has changed and is expected to change; 
• how its financial position, financial performance and cash flows are affected; and
• how it uses scenario analysis to assess the resilience of its strategy and business model to climate change.

Risk management and metrics and targets

Structurally reflecting IFRS S1, IFRS S2 requires a company to disclose how it assesses, prioritises and monitors climate-related risks and opportunities, and whether its processes are integrated into the company’s broader approach to risk management. 

A company is also required to disclose information that enables investors to understand its performance in relation to climate-related risks and opportunities, including:

• greenhouse gas emissions – the amount of its Scope 1, Scope 2 and Scope 3 emissions;
• cross-industry metric categories – the amounts and percentages that illustrate how the company’s assets, activities and finances are affected by climate change;
• industry-based metrics – the disclosure topics and metrics specific to the company’s industry that it considers in preparing its disclosures; and
• climate-related targets – the climate-related targets the company sets and reviews, including those it is required to meet by law or regulation.

First-year reliefs

The ISSB recognises that, although many companies are experienced in sustainability reporting, applying these standards will represent a steep learning curve for others. To this end, IFRS S1 and IFRS S2 both provide reliefs for companies in the first year they apply the standards. These first-year reliefs include relief from applying sustainability-related requirements beyond those related to climate, relief from the requirements to report climate-related disclosures at the same time as the financial statements, and relief from the requirements to disclose Scope 3 greenhouse gas emissions – ie, those that occur in the company’s wider value chain.

Interoperability and proportionality

While developing IFRS S1 and IFRS S2, ISSB has been mindful of the need for interoperability; that is, the need to make these standards compatible with, and complementary to, jurisdiction-specific requirements, and frameworks aimed at stakeholders beyond investors. 

We have also prioritised proportionality – balancing recognition of the application costs for companies with the need to provide high-quality information to investors. Companies of varying sizes and capabilities will be able to apply the standards in a way that suits their specific circumstances.

Next steps

Now that IFRS S1 and IFRS S2 have been issued, the ISSB’s focus turns to supporting jurisdictions in adopting the requirements and companies in implementing them. Capacity building will raise awareness and understanding of core concepts and general practice, helping to ensure that the benefits of these first standards are accessible to all market participants, including those in developing and emerging economies. The ISSB will work closely with regulators to support adoption, while also encouraging companies to voluntarily adopt the standards and enhance the quality of their investor communications.

The ISSB is also creating a Transition Implementation Group that will provide a public forum for discussion of implementation questions.

Finally, the ISSB is also consulting on its agenda priorities to seek feedback on the projects that it should include in its two-year work plan. This consultation is open for public comment until 1 September 2023. 

These inaugural standards are the result of 18 months of intense work in conversation with a huge number of stakeholders. The standards represent a milestone in global sustainability reporting but their publication is only the beginning. We have exciting times ahead!

Richard Barker, ISSB member