The International Sustainability Standards Board (ISSB) has now published its inaugural standards. With its two standards IFRS S1 ‘General Requirements for Disclosure of Sustainability-related Financial Information’ and IFRS S2 ‘Climate-related Disclosure’, the ISSB aims to create a globally common language for companies’ disclosure of climate-related risks and opportunities and claims to kickstart “[…] a new era of sustainability-related disclosures in capital markets worldwide.” 

IFRS S1 establishes a set of disclosure standards designed to enable entities to provide investors with reliable information about their short-, medium- and long-term sustainability-related risks and opportunities. IFRS S2 is to be used in conjunction with IFRS S1 and specifies particular climate-related disclosures. It refers to the climate-related risks which an entity is exposed to, including physical and transition risks, and to the climate-related opportunities to which the entity has access. 

As the standards build on the work of the Climate Disclosure Standards Board (CDSB), the Task Force on Climate-related Financial Disclosures (TCFD), the Value Reporting Foundation's Integrated Reporting Framework, industry-based recommendations from the Sustainability Accounting Standards Board (SASB), as well as the Corporate Sustainability Reporting Directive (CSRD), it emphasizes how ISSB prioritizes the alignment with other standards providers and jurisdictions rather than adding new ingredients to the alphabet soup of existing sustainability disclosure standards.

In a recent publication, we investigated important remarks that emerged from stakeholder feedback within the consultation phase of the latest drafts of the ISSB Standards. Since IFRS S1 and IFRS S2 are now ultimately published, we provide a brief overview of whether and how this feedback was adopted in the final standards.

In general, the integration of this feedback resulted in certain structural restatements rather than substantial revisions of the standards´ content. For instance, some terminology was changed (e.g. enterprise value as part of materiality definition was removed), and other concepts were clarified (e.g. definition of value chain). In order to improve links between accounting and sustainability disclosures, it was also agreed to utilize the same concept of "materiality" as in the IFRS accounting standards. 

According to this concept, information is considered material if omitting, misstating, or obscuring it could influence decisions made by primary users of financial statements about a reporting entity. In addition, it was emphasized that consistent and effective application of the unified reporting language cannot be achieved without a very inclusive strategy from all capital market participants, including a variety of firm sizes and different levels of company growth.   

Consequently, the ISSB offered scalability and proportionality, as well as structural and transitional reliefs, to ensure that every company can implement the standards. Specific proportionality procedures were endorsed by the ISSB since it became apparent that large international companies and small and medium-sized enterprises are not projected to exhibit a comparable level of completeness. Further noteworthy updates from the 2022 drafts include:

• Greenhouse gas (GHG) emissions – The ISSB confirmed the proposed requirements for Scope 3 emissions and introduced guidance to address challenges regarding data availability and quality. It temporarily eased disclosure requirements for IFRS S2 reporting and introduced a framework for measuring emissions, acknowledging the role of estimation  . 
• Exemption for Commercially Sensitive Information – The Standards have been updated to allow corporations to withhold information on sustainability-related opportunities, but not sustainability-related risks  , if the information is thought to be economically sensitive. To be eligible for this exemption, a corporation must conclude that the opportunity cannot be reported in an aggregated manner to reduce commercial sensitivity, and it must declare that it has made an omission and will reassess the omission throughout each reporting cycle.
• Relief for First-Year Reporting – Companies are not required in their first year: (i) to provide sustainability reporting simultaneously with financial reporting; (ii) disclose Scope 3 emissions; (iii) calculate emissions using the Greenhouse Gas Protocol; and (iv) provide comparative information on previous reporting cycles.
• Current and anticipated financial effects and connected information – The ISSB mandates companies to disclose both quantitative and qualitative information about financial effects, with specific criteria for non-quantitative disclosures. Companies may not provide quantitative information if they lack the skills, capabilities, or resources. If unable to provide quantitative information, they must provide qualitative and other information, including an explanation.
• Financed and facilitated emissions – The ISSB renounces requirements for Investment Banking & Brokerage companies to disclose facilitated emissions due to the lack of widely accepted calculation methodology and additional work.

The final versions of both standards show that the ISSB prioritizes alignment with existing standards and emphasizes scalability and proportionality, offering reliefs and procedures to ensure implementation by companies of all sizes. 

Creating a Transition Implementation Group – to help businesses who use the standards – and starting capacity-building efforts will be the first actions taken to encourage adoption of the standards. When the ISSB standards are used in conjunction with other reporting standards, the ISSB will continue to collaborate with authorities that wish to mandate incremental disclosures beyond the global baseline, as well as with the Global Reporting Initiative (GRI), to facilitate efficient and effective reporting. 

Furthermore, the ISSB intends to finalize the digital taxonomy standards, that ensure cost-effectiveness and compatibility by making it easier for investors to digitally access, preserve and analyze the information they are interested in. 

Capco's experts stay up to date on the most recent changes in the financial industry affecting ESG concerns and, as a result, have kept track of the progress that led to the final ISSB standards. Being faced with new requirements, we can assist your firm in completing crucial transformation activities in an effective and efficient manner, ensuring full compliance while delivering extra value.


References

• IFRS - ISSB issues inaugural global sustainability disclosure standards
• IFRS - ISSB Chair Emmanuel Faber at the IFRS Foundation Conference: A new common language to build more resilient economics
• IFRS - Feedback Statement IFRS Sustainability Disclosure Standards