New ISSB Reporting Standards: Progress Towards a Global Baseline in Climate-Related Disclosure
In June, the International Sustainability Standards Board (ISSB) issued its inaugural set of sustainability disclosure standards for companies. The news marks significant progress toward establishing a universal language for how business entities can disclose climate-related risks and activities. Broken into two sustainability disclosure standards, IFRS S1 and S2, this update will help companies effectively and systematically evaluate – and reduce – negative environmental impact.
ISSB’s overall vision is to establish a global baseline that integrates finance and sustainability-related topics, while remaining aligned with existing accounting requirements and other sustainability reporting frameworks.
Effective Date and Adoption
The new ISSB reporting standards will come into effect on January 1, 2024, with the first reports expected to be published in 2025. Adoption of these standards is not mandatory but will largely depend on the decisions of individual jurisdictions. However, given the support from influential bodies such as the United Nations (UN), International Organization of Securities Commissions (IOSCO), and the U.S. Securities and Exchange Commission (SEC), widespread adoption is anticipated.
The UK, China, Nigeria and other countries already plan to adopt the ISSB standards, with other countries showing interest. At the moment, private and public companies have the option to voluntarily adopt these standards, but may become mandatory based on the decisions of the jurisdictions in which companies operate. In addition, other stakeholders including investors, customers, business partners, and employees may also begin to pressure companies to apply these standards.
Integration with Existing Frameworks
The ISSB climate standards are designed to integrate and build upon existing reporting frameworks, including the Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). The ISSB has also committed to working with other frameworks like the Global Reporting Initiative (GRI) to ensure compatibility.
The disclosure requirements encompass both qualitative and quantitative data requirements, including the reporting of transition plans, climate resilience, and greenhouse gas (GHG) emissions. If considered material to a company’s operations, GHG reporting will need to be disclosed based on the GHG Protocol Corporate Standard and include Scopes 1, 2, and 3. Following a similar format to the TCFD, the ISSB standards prioritize governance, strategy, risk management, metrics, and targets.
Goal of the ISSB Standards
The ISSB standards aim to create a global disclosure standard through the following mechanisms:
Utilizing and adopting principles from existing initiatives in order to reduce duplicate reporting
Assisting companies in communicating sustainability impacts while connecting these impacts with financial statements
Increasing interoperability between initiatives to reduce the disclosure burden for organizations, and
Engaging organizations in capacity building to establish resources for quality reporting.
Key Disclosure Requirements
The new standards outline several key areas that companies will need to address in their reporting:
Governance: Information regarding the policies and plans an organization may have in place to approach climate-related issues. Details such as the internal bodies responsible for implementation and policy creation should be included, as well as their individual processes for target setting, monitoring, and evaluation.
Strategy: Information pertaining to the individual strategy an organization takes to approach climate-based risks and opportunities. Expectations and foresight on the physical and transition risks should be included with information specific to the short, medium, and long-term implications of such effects. Discussion of business value chain, financial planning, as well as resilience should also be included.
Risk Management: Topics ranging from the identification, assessment, and management of risks and opportunities. Organizations are expected to define their processes and disclose the ways in which the material risks are incorporated into the management process.
Metrics and Targets: Information about the measurement and evaluation of an organization’s climate-related risks over time. Technical monitoring is specific to every organization’s salient topics and may include GHG emissions, internal carbon price, and intensity targets.
Breaking Down IFRS S1 & S2
The ISSB standards aim to address different components of an organization’s involvement with sustainability risks and opportunities.
IFRS S1, general requirements for the disclosure of sustainability-related financial information, sets out to establish general requirements on an entity’s sustainability-related risks. Under this standard, guidelines are outlined on how an organization should prepare and present its sustainability-related financial information.
These standards acknowledge that every company’s relevant sustainability topics are different depending on industry and only require companies to report on material themes. The ISSB defines materiality as: “if omitting, misstating or obscuring [it] could reasonably be expected to influence the decisions that the primary users of general purpose financial reporting make on the basis of that reporting.”
On the other hand, IFRS S2, climate-related disclosures, aim to establish requirements for the identification, assessment, and disclosure of information solely about climate-related risks. Together, the standards create a more holistic picture of the interplay between sustainability and finance.
Preparing for the ISSB Standards
The increasing demand from investors and stakeholders for standardized sustainability reporting has driven the development of these standards. It is important to note that the ISSB standards do not aim to replace other reporting frameworks. In a recent announcement, the ISSB and CDP revealed that the CDP would incorporate the second standard into its environmental disclosure platform.
Inherently complex, ESG reporting is unlikely to ever fall under a single set of standards. Existing standards will continue to serve as a valuable guide for companies to measure and report on their sustainability goals and initiatives.
In order to prepare for the ISSB standards, organizations can prioritize establishing strong internal systems and processes to meaningfully evaluate how all material sustainability topics impact value. Implementing a strong governance structure that includes both sustainability and finance teams can ensure alignment across an entity’s various departments.
If you're unsure about where to begin or need guidance on reporting, Uplift is here to help.
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