#DeloitteESGNow — Global ESG Disclosure Standards Converge: ISSB Finalizes IFRS S1 and IFRS S2 (June 30, 2023)

In March 2022, the ISSB released EDs on general requirements for sustainability disclosures (IFRS S1) and climate-related disclosures (IFRS S2). After a consultation period of 120 days, the ISSB redeliberated and finalized the proposals, which were published on June 26, 2023.

IFRS S1 and IFRS S2 require an entity to disclose information about all material sustainability-related and climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, access to financing, or cost of capital over the short, medium, or long term. However, in a June 2023 feedback statement, the ISSB provides an exemption that allows an entity “to omit commercially sensitive information about a sustainability-related opportunity from its sustainability-related financial disclosures under specific conditions.” An entity applying the exemption must disclose that fact. The ISSB also notes that an entity “would not be permitted to use commercial sensitivity as a broad justification for non-disclosure nor to omit information about sustainability-related risks.”

In the context of sustainability-related financial disclosures, IFRS S1 defines material information in alignment with the International Accounting Standards Board’s (IASB®’s) definition, which states that information is considered material if omitting, misstating, or obscuring it could be reasonably expected to influence decisions that primary users make on the basis of that reporting. As summarized in the graphic below, the core content of the disclosures should include information on an entity’s governance processes and controls, strategy, risk management practices, and metrics and targets used to monitor, manage, and report performance in relation to the identified risks and opportunities.

IFRS S1 sets out general requirements for the content and presentation of an entity’s sustainability-related financial disclosures. Such disclosures must pertain to the same reporting entity as the related financial statements, and the entity is required to identify the financial statements to which the sustainability-related financial disclosures are related. In addition, the financial data and assumptions included in the disclosures must be consistent with the corresponding financial data and assumptions applied in the preparation of the entity’s financial statements, to the extent possible, including consideration of the requirements of IFRS® Accounting Standards or other applicable generally accepted accounting principles (GAAP) or practices. Any judgments made by the entity in preparing its disclosures, including the sources of guidance it used, must be identified.

IFRS S2 requires specific metric category disclosures, including Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions generated during the reporting period. When disclosing GHG emissions in accordance with the Greenhouse Gas Protocol — A Corporate Accounting and Reporting Standard (“GHGP Standard”) under IFRS S2, an entity must disclose the approach used (i.e., the equity share or control approach) and the consolidated accounting group to which the emissions pertain (e.g., for an entity applying IFRS Accounting Standards, this group would comprise the parent and its consolidated subsidiaries).

The ISSB introduced several relief measures aimed at reducing the burden of reporting GHG emissions,3 which include:

• Temporary relief from using the GHGP Standard in the first annual reporting period an entity applies IFRS S2 if it has previously used another GHG measurement method.
• Relief that allows an entity to use an alternative GHG measurement method if it is required, in its jurisdiction, to do so.
• Temporary relief from disclosing Scope 3 emissions in the first annual reporting period an entity applies IFRS S2.

In addition to GHGs, IFRS S2 requires an entity to provide disclosures related to its climate-related physical and transition risks and opportunities, internal carbon prices, capital deployment (including the amount of capital expenditure, financing, or investment deployed toward climate-related risks and opportunities), and remuneration (including whether and how climate-related considerations are factored into executive remuneration). The standard is also accompanied by industry-based guidance on implementation,4 which suggests ways to identify, measure, and disclose this information associated with particular business models, activities, or other common features that characterize participation in an industry. This industry-based guidance was derived from SASB standards, which are maintained by the ISSB. While IFRS S1 requires an entity to consider the applicability of SASB disclosure topics, the entity is not required to apply them if it determines that such topics do not result in disclosures that meet the requirements of IFRS S1. Similarly, under IFRS S2, entities are required to consider the applicability of the industry-based guidance but are not required to apply the particular metrics included in the guidance.

Note that assurance requirements applied to IFRS S1 and IFRS S2 are subject to jurisdictional regulation. By contrast, other proposed global ESG reporting standards such as the European Sustainability Reporting Standards (ESRS) and the U.S. Securities and Exchange Commission’s (SEC’s) proposed rule on climate-related disclosures would both require limited assurance followed by reasonable assurance on certain mandated disclosures. See Deloitte’s January 9, 2023, and March 29, 2022, Heads Up newsletters.

The ISSB provides entities with transition relief to give them more time to prepare as they align their reporting of sustainability-related financial disclosures with their financial statements. As a part of that relief, an entity is not required to provide the disclosures specified in IFRS S1 or IFRS S2 for any period before the date of initial application. Accordingly, comparative information is not required to be disclosed in the first annual reporting period in which an entity applies the standards.

In addition, in the first annual reporting period in which an entity applies IFRS S1, it is permitted to report its sustainability-related financial disclosures after it publishes its related general purpose financial statement. In accordance with IFRS S1, an entity applying this relief should report its sustainability-related financial disclosures at one of the following times:

• Concurrently with “its next second-quarter or half-year interim general purpose financial report, if the entity is required to provide such an interim report.”
• Concurrently with “its next second-quarter or half-year interim general purpose financial report, but within nine months of the end of the annual reporting period in which the entity first applies this Standard, if the entity voluntarily provides such an interim report.”
• “[W]ithin nine months of the end of the annual reporting period in which the entity first applies this Standard, if the entity is not required to and does not voluntarily provide an interim general purpose financial report.”

Moreover, in the first annual reporting period in which an entity applies IFRS S1 and IFRS S2, the entity is permitted to disclose information on only climate-related risks and opportunities (in accordance with IFRS S2) and to apply the requirements in IFRS S1 (on sustainability-related information) only to the extent that they are related to the disclosure of information on climate-related risks and opportunities. In accordance with IFRS S1, if an entity uses this transition relief, it must disclose that fact, and it is “not required to disclose comparative information about its climate-related risks and opportunities” (emphasis added) in the first annual reporting period in which it applies the standard. In the second annual reporting period, the entity is “not required to disclose comparative information about its sustainability-related risks and opportunities, other than its climate-related risks and opportunities” (emphasis added). IFRS S2 includes additional transition-relief provisions regarding GHG emissions. For additional details, see Deloitte’s June 2023 iGAAP in Focus.

 

Connecting the Dots

With the effective date for application set for annual reporting periods beginning on or after January 1, 2024, the time to act is now. The transition relief is not an extension of the effective date; while preparers are not required to disclose comparative information for the first annual reporting period, they will still be required to report information on climate-related risks and opportunities.

If an entity applies the transition relief, it should not delay taking the next steps to prepare. This may include performing or refreshing a materiality analysis to identify sustainability-related risks and opportunities, establishing or enhancing governance and controls related to ESG data and disclosures, performing an assessment to understand risks and impacts across the value chain, and establishing a plan to integrate assurance into the reporting process.

A recent Wall Street Journal article on the launch of the ISSB standards notes that “[s]o far, major countries that have indicated they are setting up mechanisms to consider using the ISSB standards are Australia, Canada, Japan, Hong Kong, Malaysia, New Zealand, Nigeria, Singapore and the U.K.” In addition, the ISSB is awaiting some form of endorsement from the International Organization of Securities Commissions (IOSCO), of which the SEC is a member. Certain jurisdictional members of IOSCO have already expressed support for the mandate of ISSB standards. Japan, for example, announced that it will issue final disclosures based on the ISSB standards by March 31, 2025. The European Union, through its Corporate Sustainability Reporting Directive (CSRD), has also demonstrated a commitment to consider, to “the greatest extent possible,” global standard-setting initiatives, like the ISSB, in its own standards.5 Beyond local jurisdictions, the business community has demonstrated its support for the ISSB standards through the Memorandum of Understanding, released on June 6, 2023, between the World Economic Forum and the ISSB.6 The collaboration is designed to help build capacity among entities to issue high-quality disclosures that align with the ISSB standards.

These endorsements could further solidify the ISSB’s standards as a common baseline for sustainability reporting standards, which will help drive convergence with other reporting requirements and promote efficiency for companies in navigating the overall ESG reporting landscape.

 

Connecting the Dots

The finalization of the ISSB’s standards has been the culmination of a global effort accompanied by growing regulatory engagement and jurisdictional support for a common baseline for sustainability reporting standards. Regardless of where the SEC lands on its proposed climate disclosure rule, the ISSB’s standards can act as a natural and efficient extension of current sustainability reporting and help establish the roadmap for regulatory compliance. This extension is supported by the ISSB’s convergence of a number of leading ESG standards already applied by U.S. companies, as well as its stated commitments to ensuring compatibility with and producing technical mappings between other standards such as the Global Reporting Initiative (GRI).7,8

Broadly speaking, IFRS S2 is highly aligned to the SEC’s proposed climate-related disclosure rule, in part because of the shared starting point, namely the recommendations for disclosure requirements from the Task Force on Climate-Related Financial Disclosures (TCFD). The ISSB has also stated its commitment to work closely with the GRI to ensure greater compatibility between the standards. The two entities are collaborating to provide a technical mapping between the two sets of standards to provide reporting entities with examples of how to use the standards together and streamline reporting.11

In addition, U.S.-based entities reporting under SASB standards should be aware that the ISSB has mapped its industry-based guidance to relevant SASB metric codes to assist previous SASB standards preparers in interpreting the new standards.12 The ISSB guidance is consistent with the SASB standards in terms of:

• Industry classifications.
• Disclosure topics.
• Metrics and technical protocols.
• Activity metrics.