The ISSB global sustainability disclosure standards: a common language for disclosing climate-related risks and opportunities
July 4, 2023
On June 26, 2023, the International Sustainability Standards Board (ISSB) issued two standards for sustainability disclosures, which are aimed to simplify and harmonize the disclosure of sustainability-related information.
The two standards, covering general sustainability-related information (IFRS S1) and climate-related information (IFRS S2), are intended to provide the beginning of a comprehensive global standard for sustainability disclosures for investors and other stakeholders.
By way of background, the work of the ISSB began after its formation by the IFRS Foundation at the 2021 UN Conference of the Parties to the Paris Agreement. IFRS standards are currently used by companies to report financial information in over 125 countries around the world.
The objective of IFRS S1 and IFRS S2 is to require companies to disclose information about their sustainability-related risks and opportunities and climate-related risks and opportunities, respectively, in financial reports. The reasoning behind the standards is simple: information about sustainability- and climate-related risks and opportunities helps understand a company’s ability to generate cash flows, as well as the interaction between the company and its stakeholders and broader value chain.
Focusing on more general information, the IFRS S1 standard requires a company to provide information on its:
governance, including governance processes, controls and procedures the company uses to monitor and manage sustainability-related risks and opportunities;
strategy, including the approach the company uses to manage sustainability-related risks and opportunities;
risk management, including the processes the company uses to identify, assess, prioritize and monitor sustainability-related risks and opportunities; and
metrics and targets, including the company’s performance in relation to sustainability-related risks and opportunities, including progress towards any targets the company has set or is required to meet by law or regulation.
A more specific standard, the IFRS S2 standard provides detail on how companies can disclose climate-related physical risks and climate-related transition risks, in addition to climate-related opportunities. For example, in assessing climate strategy, the standard requires input on climate-related transition plans as well as climate resilience plans.
Additional disclosure is also required on climate-related impacts on the company’s business model and value chain, in each case according to geographic area, facility and type of asset, as well as quantitative and qualitative information on how climate-related risks may affect its financial position, financial performance and cash flow generation. With respect to climate resilience, companies should disclose the results of climate-related scenario analyses, as well as the ability to adjust or adapt its strategy and redeploy, repurpose, upgrade or decommission existing assets.
IFRS S2 also provides information on cross-industry climate metrics such as greenhouse gases (including Scope 1, 2 and 3). Other metrics include the amount and percentage of assets or business activities that are vulnerable to climate-related physical risks and/or aligned with climate-related opportunities, as well as the amount of capital expenditure that is deployed towards climate-related risks and opportunities.
Additional data points include internal carbon prices (i.e., whether the company is applying a carbon price in decision-making and the price for each metric tonne of greenhouse gas emissions) and remuneration (i.e., how climate-related considerations are factored into executive compensation). Any climate targets, moreover, that the company has set for itself should also be disclosed, including objectives, period and milestones. Gross and net greenhouse gas emissions targets should be specified, as well as the company’s planned use of carbon credits to offset emissions to achieve such targets or meet the requirements of law or regulation.
Companies reporting under IFRS will be required to begin using IFRS S1 and S2 for annual reporting periods beginning on or after January 1, 2024 (therefore, for companies with a December 31 year-end, reporting will be issued for the first time in the spring of 2025).
While they may be ahead of the curve, companies are encouraged to start implementing these standards as soon as possible in order to better prepare for full reporting compliance. Additionally, the ISSB will continue to update and refine their sustainability reporting standards going forward.
As more companies disclose sustainability-related and climate-related information, the need for enhanced disclosure will become increasingly important. With a common framework in place, stakeholders can have confidence that such disclosures bring meaningful and reliable information as to sustainability performance.
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