In this context, we provide a brief update on the recent publication of the IFRS Sustainability Disclosure Standards by the International Sustainability Standards Board (ISSB). On 26 June, the ISSB launched its General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and its Climate-related Disclosures (IFRS S2). As the ISSB has stated, these Standards have ushered in a new era of sustainability-related financial disclosures in capital markets worldwide.
In July, the ISSB held two webinars providing an in-depth explanation of the disclosure requirements when reporting against IFRS S1 and IFRS S2. Additionally, the ISSB published two webcasts where ISSB Vice-Chair Sue Lloyd provided an overview around these Standards. If you are interested, you can watch these webcasts on their website.
From the webinars, we noted that S1 and S2 try to help investors that want to understand how the information in the sustainability reporting relates to the information in the financial statements. S1 and S2 try to improve that understanding by requiring information about the effects of climate-related risks and opportunities on a company’s current and anticipated financial performance, financial position, and cash flows.
IFRS S1 and S2 versus TCFD?
As expressed in the webinars, the IFRS Standards are TCFD + more. If you were to meet the requirements of the IFRS Standards, you do not need to worry about TCFD. To expand this idea, the ISSB published a comparison of the IFRS S2 Climate-related Disclosures with the TCFD Recommendations on 24 July, where they highlighted any areas where the IFRS S2 differs from the TCFD recommendations.
Key Points for IFRS S1 and S2
Below are our key takeaways from the overviews provided.
IFRS S1
- Why and What? In order to meet investor information needs, IFRS S1 asks for disclosure of material information about sustainability-related risks and opportunities that could be expected to affect the company’s prospects.
- Materiality? In terms of the definition of material, they state that Information is material if omitting, misstating, or obscuring it could reasonably be expected to influence investor decisions.
- Standards to consider? In applying IFRS S1, companies are required to consider the Sustainability Accounting Standards Board (SASB) Standards to identify risks and opportunities. Also, a company may consider the Carbon Disclosure Standards Board (CDSB) framework, industry practice, materials of investor-focused standard setters, GRI standards and the European Sustainability Reporting Standards.
- Timing of disclosures? The ISSB advises that the financial statements and sustainability disclosures should be published at the same time, however, there is a transitional relief in the first year of reporting.
- Location of disclosures? IFRS S1 does not specify the location for disclosure within general purpose financial reports and allows for additional information to facilitate application in different jurisdictions.
The ISSB also expects that companies reporting against IFRS S1 to provide comparative information for the preceding period for amounts disclosed. As the ISSB commented this might relate to metrics and targets or to current and anticipated financial effects. Also, it asks for comparatives on narrative and descriptive information if useful to investors.
IFRS S1 relieves companies of disclosing an opportunity which is commercially sensitive. Further, there are some transitional reliefs for the first year applying IFRS S1:
- Companies are required to disclose only climate-related risks and opportunities and not all risks and opportunities (sustainable-related ones). Thus, companies which decide to report only on climate-related information do not need to provide comparative information about their sustainability-related risks and opportunities beyond climate change in their second year.
- Companies are allowed to publish sustainability reporting after the financial statements with the following half year reporting package.
IFRS S2
- What? requires disclosure of material information about climate-related risks and opportunities, including physical and transition risks.
- Standards to consider? it requires industry-specific disclosures, which are supported by accompanying guidance built on SASB Standards. IFRS S2 fully incorporates TCFD, and it is used in accordance with IFRS S1.
- IFRS S1 or S2? Even if a company only reports on climate, they must still use IFRS S1.
There are a number of reliefs available and here we draw out a few:
- Similar to IFRS S1, companies reporting against IFRS S2 are relieved of disclosing climate-related opportunities that are commercially sensitive.
- In terms of climate resilience and climate scenarios, IFRS does not specify which scenarios a company has to use, but these need to be relevant to the company.
- Whilst GHG emissions are to be measured in accordance with the GHG Protocol Corporate Standard, a company is exempt if in their jurisdiction a different approach of measurement is required.
- Including information around Scope 3 GHG emissions obtained from companies in the value chain with a different reporting cycle is also allowed.
There are also some transitional reliefs in the first year applying IFRS S2:
- As not all the companies currently measure their emissions using the GHG Protocol Corporate Standards, if a company is using a different measurement method, it is permitted to continue to use that method in its first year applying the IFRS standards.
- Companies are exempted from disclosing Scope 3 GHG emissions.
The next steps in the UK
As we all know, the release of these Standards denotes a step forward in the consolidation of best practice guidance for sustainability reporting. At this stage, many might be wondering: are the IFRS Standards going to be mandatory as TCFD currently is? It is now time for the regulators to review the Standards and decide whether the use of the IFRS Standards, which incorporate TCFD, will come under a regulatory basis in the future.
On 2 August, the Department for Business and Trade (‘DBT’) confirmed that by July 2024 the UK government aims to create UK Sustainability Disclosure Standards (UK SDS) by assessing and endorsing the global corporate reporting baseline of IFRS Sustainability Disclosure Standards. UK SDS will set out corporate disclosures on the sustainability-related risks and opportunities, including climate-related risks and opportunities. Following endorsement, UK SDS may be referenced as the basis of any legal or regulatory requirements for UK entities. Decisions to require disclosure will be taken independently by the UK government, for UK registered companies and limited liability partnerships, and by the Financial Conduct Authority (FCA) for UK listed companies.