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What ISSB Sustainability Standards mean for Reporters and Corporates

What ISSB Sustainability Standards mean for Reporters and Corporates

The world of sustainability and Environmental, Social and Governance (ESG) reporting is on the verge of unifying around one common language for disclosing associated ESG risks and opportunities. That language is contained in the Sustainability Disclosure Standards (IFRS S1 and IFRS(S2) issued this week by the International Finance Reporting Standard’s (IFRS) International Sustainability Standards Board (ISSB), ushering in a new era of sustainability-related disclosures worldwide.

IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face that could reasonably be expected to affect the entity’s cash flows,  access to finance or cost of capital over the short, medium and long term; while IFRS S2 sets out climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows,  access to finance or cost of capital over the short, medium or long term and applies to physical and transition risks that the company is exposed to, and climate related opportunities available to the company.   

The standards prescribe how companies are to prepare and report their sustainability-related financial disclosures, setting out general requirements for the content and presentation of those disclosures so that the information disclosed is useful to users making capital allocation decisions. Both standards are designed to be used together and fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and build from several existing reporting frameworks, including the Sustainability Accounting Standards Board (SASB) Standards.

Below are some salient features of the ISSB standards that corporates should be aware of:

  1. Investor and financial markets focused

The ISSB standards are focused on the information needs of investors and other providers of capital, like lenders and creditors. Consequently, the standards definition of materiality refers to information could reasonably be expected to influence decisions that primary users (investors, lenders, and creditors) of financial reports make based on disclosures in those reports, which include financial statements and sustainability-related financial disclosures.  This is a similar definition of materiality as in IFRS accounting standards, intended to facilitate connections between accounting and sustainability disclosures.

Notably, the investor focused approach is different from that of the Global Reporting Initiative (GRI) and the European (EU) Sustainability Reporting Standards, that seek to meet the broader information needs of multiple stakeholders. The ISSB noting this departure provides that companies looking to provide a holistic suite of information for investors as well as other stakeholders can combine the use of ISSB standards and GRI or EU standards in a multi-stakeholder reporting approach, to the extent that such reference does not conflict with ISSB standards.

2. Timing of Reporting

Reporting of sustainability-related financial disclosures will be expected to be at the same time as the related financial statements and covering the same reporting period. The principle underlying this requirement is that sustainability performance is fundamentally linked to financial performance, necessitating that this information be reported simultaneously.

3. Mandatory disclosures of Scope 3 emissions

The ISSB standards require mandatory Scope 3 disclosures, marking a significant shift in historical disclosure requirements, where Scope 3 emissions have traditionally been a voluntary reporting criterion. Scope 3 emissions relate to those indirect emissions, that is, those not produced by the company itself but by customers using the company’s products or those produced by suppliers making products that the company uses. Scope 3 emissions are usually harder to measure and tackle.

This requirement means that companies must track activities across the entire business model and value chain, from suppliers to end users of their products and influence their suppliers to adopt sustainable business practices that reduce own emissions or choose which vendors to contract with based on their ESG practices.

4. Standards to form the backbone of mandatory ESG disclosures by regulators

While variations in how different jurisdictions apply the standards are inevitable and necessary to maintain the standards’ relevance, the ISSB standards are supported by among others, the G7, the G20, International Organization of Securities Commissioners (IOSCO) and the Financial Stability Board. This means the proposed standards have the legitimacy needed to achieve the goal of establishing a global baseline on sustainability reporting. Once mandated by regulators in various jurisdictions, the requirements will have a real consequence on companies’ ESG and sustainability strategies, policies, and disclosure.

5. Statement of compliance

Only those entities whose sustainability-related financial disclosures will be in compliance with all the requirements of ISSB standards can make an explicit and unreserved statement of compliance. This means that a company that cherry picks certain requirements for compliance will be in non-compliance of the standards.

6. Effective date

Although earlier application is permitted, the ISSB standards shall come into effect on 1st January 2024.

The intent of the ISSB standards is to increase the effectiveness, efficiency, comparability, and decision-usefulness of corporate sustainability and ESG reporting and improve the quality of sustainability information available to investors. It is hoped that the ISSB standards will help address most of the investor concerns on sustainability reporting, including greenwashing.

Written by Loise Wangui – Managing Partner & ESG Lead, Protos Capital LLP