The International Sustainability Standards Board (ISSB) was established in November 2021 at the COP26 climate change conference in Glasgow to develop a global and consistent sustainability reporting framework. In March 2022, it launched a consultation on its first two proposed IFRS Sustainability Disclosure Standards.
These much-anticipated Exposure Drafts (EDs) build on prototype standards issued last year and draw upon existing sustainability-related disclosure frameworks, including the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the industry-specific requirements of the Sustainability Accounting Standards Board (SASB) standards.
General requirements
The general requirements ED was developed in response to calls from primary users of general-purpose financial reporting for more consistent, complete, comparable and verifiable sustainability-related financial information to enable them to assess the total value of a company.
To comply with the proposed requirements, a company would disclose material information about all significant sustainability-related risks and opportunities to which it is exposed. In this context, something is considered material if its disclosure is necessary for investors to assess the total value (or enterprise value, as it’s referred to in the ED) of a company.
The ED proposes that disclosure of sustainability-related financial information is centred on four core topics – governance, strategy, risk management, and metrics and targets (see below). This structure will seem familiar to many as it is consistent with the core elements of the TCFD’s recommendations, with which mandatory reporting for certain UK companies is already aligned. The proposals do, however, extend the TCFD requirements to sustainability-related risks and opportunities beyond those related to climate.
Core content
| Governance | information to enable investors to understand the governance processes, controls and procedures used to monitor and manage significant sustainability-related risks and opportunities. |
| Strategy | information to enable investors to assess a company’s strategy for addressing significant sustainability-related risks and opportunities, whether these risks and opportunities are core to its strategy and whether they are incorporated into its strategic planning. |
| Risk management | information to enable investors to understand the process by which a company identifies, assesses and manages current and anticipated sustainability-related risks and opportunities and whether that process is integrated into its overall risk management processes. |
| Metrics and targets | information to enable investors to understand how a company measures, monitors and manages significant sustainability-related risks and opportunities and assesses its performance, including progress towards the targets it has set. |
The proposed standard would also require disclosure of material information about sustainability-related risks and opportunities across a company’s value chain, meaning companies would need to disclose information about resources and relationships related to their business model and the external environment in which it operates. This would include details of supply, marketing and distribution channels and the financing, geographical, geopolitical and regulatory environments in which the company operates. Such disclosures would be specific to each company, with the information required limited to that necessary to enable investors to assess the company’s total value.
The ED also sets out general requirements about matters such as comparative information, the location of information, the use of assumptions, sources of estimation uncertainty and errors. These general features will be somewhat familiar to IFRS users as they have been adapted from equivalent requirements of IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
A company applying the proposals in the general requirements ED would then apply the climate-related disclosures ED to provide material information about its significant climate-related risks and opportunities.
Climate-related disclosures
A company’s relationship with the environment has become increasingly important in recent years. The climate crisis presents significant risks for all companies, their activities and their economic sectors. It also creates opportunities for companies focused on climate-change mitigation and adaptation. Companies may be exposed to these risks and opportunities directly, or through third parties such as suppliers and customers.
Increasingly, users of general-purpose financial reporting are seeking consistent, comparable information to help them better understand how companies are managing climate-related risks and opportunities, how they intend to achieve their climate-related performance targets, what progress they have made against those targets and how resilient their business models and strategies are in the face of a global transition towards a lower-carbon economy.
The ISSB has therefore prioritised developing a standard on climate-related disclosures. The climate-related disclosures ED applies the general requirements discussed above to climate-related matters. It would therefore require disclosures about a company’s governance, strategy and risk management, together with information on the metrics and targets it uses to measure, monitor and manage its significant climate-related risks and opportunities. The ED also includes a requirement for companies to disclose information about climate-related physical and transition risks.
The proposed standard would require a company to disclose its absolute gross Scope 1, Scope 2 and Scope 3 (see below) greenhouse gas emissions, in metric tonnes of CO2 equivalent, together with the intensity of those emissions. The requirement to disclose Scope 3 emissions reflects the importance of providing information related to a company’s value chain.
Greenhouse gas emissions
| Scope 1 | covers direct emissions from owned or controlled sources. |
| Scope 2 | covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. |
| Scope 3 | includes all other indirect emissions that occur in a company’s value chain. |
The ED is accompanied by an appendix of industry-based disclosure requirements, which is based on the disclosure requirements of the SASB standards and provides extensive guidance on applying the proposals to different sectors. Disclosure topics included in the requirements relate to climate-related risks or opportunities for each industry group. A set of metrics is then associated with each disclosure topic.
The ISSB staff have also prepared a document comparing the climate-related disclosures ED with the TCFD’s recommendations. This comparison document is aimed at helping smooth the transition to the proposed new standard by highlighting the differences between the two sets of requirements to stakeholders.
Applying the standards
The ISSB does not have the right to mandate the application of its standards. Instead, each jurisdiction must decide whether to require the application of IFRS Sustainability Disclosure Standards. It is worth noting that these new standards will not apply automatically in jurisdictions where IFRS are required – a separate decision must be made on their application. Nor will it be necessary for a jurisdiction to be applying IFRS in order for it to apply the ISSB’s standards.
At this stage, it is unclear when the new standards would become applicable. One of the questions in the EDs is how long companies think they would need to prepare to apply the proposals. Once the standards are issued, however, they would be available for immediate voluntary adoption.
Feedback
The ISSB is seeking feedback on the proposals over a 120-day consultation period, which closes on 29 July 2022. This will allow the Board time during the second half of this year to consider feedback received, with the intention of finalising the standards by the end of 2022. ICAEW will be responding to both consultations.