ISSB global sustainability disclosure standards
What do they mean for IR and Sustainability professionals?
The International Sustainability Standards Board (ISSB) was formed in November 2021 at COP26 in Glasgow to develop standards for a high-quality, comprehensive global baseline of sustainability disclosures focused on investor and the financial market needs. ISSB issued its inaugural global sustainability disclosure standards in June 2023: the IFRS S1 and IFRS S2. These new reporting standards take effect for annual reporting periods beginning on, or after, January 1, 2024 and establish core content for a complete set of sustainability-related disclosures in general purpose financial reports.
These standards, when combined, establish a common language that responds to the capital markets’ needs prior to investing for a truly global baseline of decision-relevant, comparable information about a company’s sustainability-related risks and opportunities. IFRS S2 specifically refers climate-related risks and opportunities. Linking financial performance with sustainability-related risks and opportunities, therefore enables investors to make more informed investment decisions in the short, medium, and long term.
InspIR addresses below some key questions related to this milestone standard, particularly its relevance for issuers and, more specifically, for IR and ESG professionals.
#1. How are the IFRS S1 and IFRS S2 similar to current standards?
The new standards are not completely new; they build on well-established standards and frameworks to provide a complete, consistent and holistic understanding of how sustainability-related risks and opportunities can affect a company’s financial prospects.
Using the Task Force on Climate-Related Financial Disclosures (TCFD) core content structure, an approach currently followed by many companies around the world, IFRS S1 and S2 build on Integrated Reporting concepts to also incorporate sustainability-related risks and opportunities. When deciding which risks and opportunities to address, IFRS S1 and S2 rely on the Sustainability Accounting Standards Board (SASB) as the main source to determine material topics, together with industry practices and other complementary frameworks. When deciding what information to disclose about material topics, the new standards refer to the same frameworks as for materiality, also adding Global Reporting Initiative (GRI) standards and the European Sustainability Reporting Standard (ESRS).
Companies that follow TCFD recommendations will already be providing information about their core content areas on climate-related issues. Similarly, those reporting according to SASB and GRI standards will already have much of the methodology and systems in place to report according to IFRS S1 and S2.
#2. What are the main changes?
The transition will be easier for companies already following TCFD, SASB and GRI guidelines, or for those publishing integrated reports, than for companies which need to familiarize themselves with these well-established frameworks and standards.
Main aspects to consider with IFRS S1 and 2 include:
- Fully integrated with financial reporting: sustainability-related disclosures will now be incorporated within the financial statements, will need to be completed for the same entity and period as the financial statements and will need to be released at the same time as part of the general-purpose financial report. Also, they will include data and assumptions consistent with the corresponding data and assumptions in financial statements
- TCFD’s approach extends beyond climate: TCFD recommendations on reporting for core content areas: 1.) governance, 2.) strategy, 3.) risk management, 4.) metrics and targets; become the pillars for impact analysis and should be extended to cover all sustainability-related risks and opportunities deemed material, not just climate-related risks and opportunities. Scenarios and forward-looking considerations also become relevant for all sustainability-linked risks and opportunities.
#3. What’s the kind of information I need to report?
The four main pillars:
- Governance: information that provides investors with a deeper understanding of the company’s regulation and control methodologies, and the processes used to manage sustainability-related risks and opportunities.
- Strategy: enables investors to gain insights into the company’s approach to addressing sustainability-related risks and opportunities.
- Risk management: how a company identifies, evaluates, prioritizes, and monitors sustainability-related risks and opportunities.
- Metrics and targets: the company’s sustainability-related objectives (or which have been mandated by regulations) and related progress towards achieving these targets. IFRS S2 also includes reporting on greenhouse emissions scopes 1, 2, and 3.
#4 What are the implications for IR and ESG professionals, and how can you differentiate your company?
Adopting the new IFRS S1 and S2 standards will benefit many companies, particularly those with a diversified international shareholder base, since the standards provide a global framework. Additionally, the new standards are supported by a wide range of stakeholders, including regulators, policymakers, and members of the G7 and G20.
The standards will increase efficiency, particularly for companies that operate in various jurisdictions where sustainability reporting practices and regulations may vary. They will also increase comparability so that competition among peers will inevitably increase.
As we enter 2023 sustainability-related reporting planning period, it is important to understand what is actually material to your company beyond industry materiality as reflected by SASB. How does your materiality compare to peers? What are the gaps between your company’s current sustainability disclosure and peers, what are your reporting gaps relative to current standards and to the new IFRS S1 and S2 standards?
Establish a roadmap and action steps to reduce or remove those gaps and start differentiating your story by highlighting the unique aspects of your governance and strategy relative to sustainability-related risks and opportunities, your company’s sustainability-linked risk management expertise and the set of goals and metrics consistent with how you create value and with your financial results.
The ability to differentiate your sustainability journey and expertise relative to peers is more important than ever. Just as IROs put considerable effort into telling the story behind financial numbers, both IROs and sustainability professionals will need to provide context and a narrative around sustainability-related disclosures, as not only standards but also investors become ever more sophisticated in their sustainability analysis, to determine where to invest their capital.
InspIR will take your ESG communications to the next level. Contact our experienced team today to discover how we can support your ESG journey.
Zelmira Silva: zelmira@inspirgroup.com | +1-917-865-9799
