Understanding the ISSB standards

On 26 June 2023, the International Sustainability Standards Board (ISSB) (part of the International Financial Reporting Standards [IFRS] Foundation) published its first sustainability standards:

• IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information
• IFRS S2 Climate-related Disclosures

But what do these sustainability disclosure standards address, and what do they mean for the future of financial reporting?

Understanding the ISSB standards

IFRS S1 covers the general requirements for disclosure of sustainability-related financial information, while IFRS S2 applies to climate-related risks.

Both standards will apply to annual reporting periods beginning from 1 January 2024. In 2025, companies’ sustainability-related financial disclosures should be based on the ISSB standards.

International Sustainability Standards Board

The ISSB was created in 2021 by the IFRS Foundation. Its aim was to provide a high-quality, comprehensive global baseline of sustainability disclosure standards focused on the needs of investors and the financial markets. And that — as Mary Foley pointed out for Forbes — is key.

The ISSB standards therefore use the same definition of ‘material’ as that used in IFRS Accounting Standards:

ISSB disclosure requirements

For both IFRS S1 and IFRS S2, companies must disclose information about the following, based on the Recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD):

Governance

This includes the governance processes, controls, and procedures used to monitor and manage sustainability-related risks and opportunities. The reporting entity must disclose, for example, governance bodies such as boards or committees, or individuals responsible for oversight of sustainability-related risks and opportunities.

Strategy

This refers to the approach used to manage sustainability-related risks and opportunities.

Reporting entities must disclose, among others, descriptions of sustainability-related risks and opportunities that could reasonably affect the company’s prospects over short, medium, or long-term time horizons, and how the company has responded. Here, IFRS S2 adds a specific disclosure about climate resilience.

Risk management

The processes used to identify, assess, prioritize, and monitor sustainability-related risks and opportunities, as well as to assess the company’s risk profile and risk management process.

Metrics and targets

Quantifiable performance on sustainability-related risks and opportunities, including progress towards any targets set or required by law or regulation.

You would expect to see a metric for all sustainability-related risks and opportunities, especially if they’re required by other ISSB standards, such as IFRS S2. For example, IFRS S2 mandates disclosing greenhouse gas (GHG) emissions in absolute gross emissions expressed as metric tons of CO2 equivalent; Scope 1, 2, and 3 emissions; internal carbon prices; measurement; among others.

IFRS S1 also sets requirements for reporting. These include where to disclose — such as in general purpose financial reports — and when to disclose (at the same time as related financial information). Companies that comply with all disclosure requirements under IFRS standards (meaning IFRS S1 and IFRS S2) have to make an explicit and unreserved statement of compliance.

Transitional reliefs

There are some transitional reliefs specifically applicable to IFRS S2. For example, in the first annual period that IFRS S2 applies, companies are not required to:

• Disclose comparative information
• Use a measuring method for GHG emissions other than the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004)
• Disclose Scope 3 GHG emissions

Are the ISSB standards mandatory?

IFRS S1 and IFRS S2 sustainability reporting standards aren’t in themselves mandatory. However, they may become mandatory if their use is required by national regulations. This is the case for the Accounting Standards covered by the IFRS, which have been made mandatory in several jurisdictions, including the EU.

It seems likely that several countries may mandate the use of IFRS S1 and IFRS S2 in the future, not least because the work of the ISSB is backed by the G7, the G20, International Organization of Securities Commissions (IOSCO), the Financial Stability Board, African Finance Ministers, and by Finance Ministers and Central Bank Governors from over 40 jurisdictions.

Jurisdictions such as Australia, Canada, Japan, and South Korea are also establishing — or have established — sustainability standards boards that enable them to cooperate with the ISSB. The ISSB standards can be mandated or combined with jurisdiction-specific requirements to meet the information needs of broader stakeholder groups beyond investors.

On 20 October 2023, for example, the Brazilian Securities Commission (Comissão de Valores Mobiliários – CVM) inaugurated the adoption of the ISSB standards. It adopted Resolution 193 on the incorporation of the ISSB standards into the Brazilian regulatory framework, setting a voluntary use starting in 2024 and future mandatory use on 1 January 2026 for listed companies.

ISSB standards and the Task Force on Climate-Related Financial Disclosure (TCFD)

On 6 July 2023, the Financial Stability Board, which oversees the TCFD, announced it had passed the responsibility for monitoring companies’ progress on climate-related disclosures to the IFRS Foundation — and more particularly to the ISSB. The transfer of responsibilities will formally take place in 2024, to align with the start date of the use of the ISSB standards. This avoids duplications between standards, responsibilities, and bodies, because IFRS S1 and IFRS S2 integrate the TCFD’s recommendations.

ISSB standards: A common-sense approach focused on investors’ needs

The outstanding takeaway from the ISSB standards is the clear and forensic focus on investors’ needs. Other stakeholders may find the sustainability information and financial disclosure reports interesting, but investors are the clear target audience. This is shown in both the content and the alignment with general financial reporting. This gives companies a strong incentive to use the standards — and a good starting point for their implementation. It’s very likely that several jurisdictions will mandate the use of IFRS S1 and IFRS S2, especially if they already require the use of IFRS accounting standards.