The International Sustainability Standards Board (ISSB) recently launched two new standards, IFRS S1 and IFRS S2, to improve sustainability reporting. S1 focuses on general sustainability disclosures, while S2 focuses on climate-related disclosures. But what’s it mean for businesses? Are S1 and S2 poised to be the new disclosure standard? Read on to find out.
Consolidating sustainability disclosure standards
Given the sheer amount of reporting frameworks and standards, business groups and the G20 have been calling for a global ESG standard. The IFRS has a history of consolidating sustainability reporting tools. After COP26 in Glasgow created the ISSB, under the stewardship of IFRS, the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) merged with IFRS. With the launch of S1 and S2, the IFRS will add a new metric to their alphabet soup of standards, the Taskforce on Climate-related Financial Disclosures (TCFD). The main objective? The ISSB will set disclosure requirements to help companies deal with duplicative reporting.
Currently, there are whole swathes of different reporting mechanisms that are voluntary, like CDP and GRI; and mandated, like the suite of recent financial and non-financial sustainability reporting requirements, including the CSRD and SFDR in the EU, the United Kingdom’s Shareholder Rights Directive (SRD), and the proposed Securities and Exchange Commission (SEC) guidelines in the United States. This is all in addition to the myriad of jurisdictions requiring TCFD reporting.
In the future, the ISSB will work in concert with the Global Reporting Initiative (GRI) to create internationally coordinated sustainability reporting standards.
How’d the ISSB come about?
The ISSB was founded under the International Financial Reporting Standards Foundation (IFRS) umbrella to establish a set of global baseline sustainability-related disclosures. Think of IFRS as the governing body and ISSB as the specific set of sustainability reporting standards. IFRS began to foster better ways to share information that could yield better financial statements and inform investment decisions. Roughly 20 years ago, the IFRS created its Accounting Standards—they are now a standard part (and requirement) of doing business in over 140 jurisdictions.
Given its influence, S1 and S2 could be the start of something very big—a uniform climate and sustainability reporting standard. It could dramatically change the reporting landscape and help increase ambition on efforts to cut emissions and consider core ESG aims in supply chains.
How do the ISSB’s S1 and S2 disclosure requirements work together?
The ISSB’s S1 and S2 disclosure standards work together to form a new global baseline of sustainability and climate reporting across all material-oriented climate and sustainability disclosures that could impact a company’s cash flows and capital over the short, medium, and long term. It forces companies to consider the role of climate and sustainability in risk and adaptability. However, there are exceptions to the rule—the ISSB has an exemption that allows a firm to “omit commercially sensitive” information from disclosure. Those opting for these exemptions must disclose and explain the exemption. However, this exemption is not accepted as an overarching reason for non-disclosure.
Through consolidation, the ISSB’s S1 and S2 will provide investors, companies, and governments with a more straightforward reporting path, with the first annual reporting period commencing January 1, 2024.
Mandated disclosures and the IFRS
Currently, the IFRS is working closely with governments, jurisdictions, and companies to make the ISSB standards a uniform part of doing business.
Some countries are considering aligning their mandatory reporting indicators with the ISSB. However, EU-specific priorities for reporting are an interesting case. While the ISSB is primarily focused on what kinds of sustainability or climate disclosures investors have, the suite of EU disclosure laws casts a much wider and transparent net, including topic areas across different ESG-specific indicators.
That said, there are large areas of overlap between the ISSB’s S1 and S2 standards and the broader EU sustainability reporting policies, like the Corporate Sustainability Reporting Directive (CSRD). EFRAG and the European Council are planning to expand and align standards relating to value chains, financial materiality, and other disclosures under S2.
Considerations around S1 & S2
The IFRS has always focused on increasing understanding and shareable information about finances. As we move towards a global economy where climate awareness and ESG considerations and reporting transition from option to necessity, the IFRS’s new S1 and S2 standards could dramatically change how companies consider general financial flows, specifically climate and sustainability considerations, risks, and strategies.
At the heart, S1 and S2 focus on similar disclosure topics, but have different thematic aims.
S1 focuses on financially relevant general sustainability disclosures, like sustainability risk, metrics, opportunities, strategy, and governance.
S2 focuses on climate-related financial disclosures, like climate risks and opportunities, metrics, governance, and strategy. While S1 focuses on fiduciary concerns primarily, S2 also focuses on scope 1, scope 2, and scope 3 emissions metrics; calling on companies to follow the Global Greenhouse Gas Protocol. For context, 92% of Fortune 500 companies reporting to CDP use the GHG Protocol.
While reporting on all emissions metrics is the ultimate goal, the ISSB’s S2 provides some opportunities for entities to delay disclosure on value chains and the like if:
- They are using other emissions reporting metrics
- The choice to use an alternative GHG reporting metric if their relevant jurisdiction requires it
- A delay in reporting on scope 3 for the first annual reporting period, commencing January 1, 2024.
Considerations and indicators for both S1 and S2
Governance
- Qualitative – Identify who is responsible for oversight, board mandates, or other company policies
- Qualitative – Identify how oversight is determined, how targets are set, and how progress is monitored when responding to climate and sustainability risks
Strategy
- Qualitative – Identify how specific risks listed would impact business model and strategies over the short, medium, and long term
- Qualitative – Share company plan for responding to risks and opportunities
- Qualitative – Identify how your company would respond to physical climate-related risks and transition risks
- Qualitative and Quantitative – Utilize scenario analysis to measure and assess resilience and explain results
Risk management
- Qualitative – Identify the processes your company uses to assess, manage, and identify sustainability and climate risks and opportunities
- Qualitative and Quantitative – Share inputs considered when assessing risks and how it impacts management processes around risk
Metrics and targets
- Qualitative and Quantitative – Share how you measure, track, and monitor risks and opportunities and perform assessments
- Quantitative – Track scope 1, scope 2, and scope 3 emissions in line with the GHG Protocol
- Quantitative – Asset management and financial flows aligned to climate and sustainability risks and opportunities
- Qualitative – Identify company climate and sustainability targets, details on how these will be tracked, and how progress will be assessed
Other reporting tools may take time to allow companies to report uniformly. CDP and GRI have stated they will try to conform their reporting metrics to the ISSB’s S1 and S2 requirements. More technically, the “phase in” under S2 on emissions reporting could yield situations where only scope 1 or both scope 1 and 2 are considered, leaving out the lion’s share of all emissions—scope 3. Under both S1 and S2, some companies may opt into commercially sensitive “omissions” from their reporting.
While it’s still early days, many aspects of S1 and S2 feed into existing reporting tools and, in some cases, expand on them to include value chains and scope 3, climate and sustainability-related risks, and adaptation opportunities and considerations for businesses.
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Who will be impacted by ISSB’s S1 & S2?
Any size company can opt into ISSB’s S1 and S2 reporting, but reporting requirements under the ISSB are proportional to a company’s size and scope. The ISSB aims to aid smaller companies and those in emerging capital markets. Companies already utilizing voluntary or involuntary sustainability and climate disclosures will easily conform to ISSB.
Reporting timeline
| 2023 | 2024 | 2025 | 2026 | |
|---|---|---|---|---|
| ISSB launches S1 and S2 standards | January 1, 2024 begins the first financial year for S1 and S2 reporting | Companies can begin to report on their S2 indicators for FY2024 | Companies can provide sustainability or S1 reporting with their Scope 3 reporting for FY 2025 |
While the UK, EU, Japan, and others are setting up dialogues to potentially align their reporting requirements to the ISSB, existing voluntary and involuntary tools will remain. For now, the TCFD will still be a specific reporting tool—countries that mandate TCFD disclosures for listed and large companies will continue to require TCFD reporting. Presently, the UK, Japan, Switzerland, Brazil, USA, and Singapore all require or align their national sustainability reporting requirements to the TCFD. From 2024–2025, Hong Kong, the EU, Canada, and New Zealand will phase in new TCFD-aligned regulations.
As the ISSB’s S1 and S2 roll out, many of these countries may start to amend their reporting requirements to include aspects of S1 and S2 and TCFD considerations into their national reporting requirements. After all, many of these governments called for uniform sustainability standards in the first place. Countries could opt for S1- and S2-aligned reporting for small and medium enterprises (SMEs) that could be excluded from their current TCFD-aligned national reporting criteria. On the whole though, companies reporting under TCFD or the ISSB’s S1 and S2 standards will likely conform to both reporting criteria.
One umbrella, so many tools
Starting in 2024, TCFD reporting will also fall under the large scope of IFRS. The IFRS incorporated CDSB and VFR requirements and mechanisms into the ISSB with past consolidations. It has also fully incorporated the recommendations from the TCFD, which will be formally enveloped into IFRS in 2024.
The ISSB’s S1 and S2 are only the beginning. The IFRS has some big plans to release a variety of future ESG standards across topics and sectors in the coming years. So folks should look forward to S3, S4, and more in the future. Specific themes or areas of focus for future S-topics may come about at COP28 in December 2023 in Dubai or out of continued assessments between the ISSB and the GRI on creating uniformity in reporting. While S1 and S2 are based on TCFD recommendations, as the TCFD formally becomes a part of IFRS, TCFD-specific metrics and tools may become a part of future “S” releases under the ISSB.
Interoperable or “alphabet soup”?
The ISSB’s latest reporting standards bring scope 3 emissions reporting center stage. The ISSB’s S1 and S2 may also open the door for an uptick in sustainability and climate reporting overall since there is no specified window for market cap or geography. Any company can opt-in, similar to other voluntary mechanisms, like CDP. That said, the largest gap is in wider transparency. ISSB is solely focused on investor disclosure, not legislative or public disclosures. This means there’s the potential for greenwashing and weakened transparency compared to the slew of mandatory EU sustainability and climate disclosure policies.
Will the ISSB’s new standards anchor sustainability and climate reporting or be yet another reporting mechanism cast adrift? Time will be the ultimate judge.
Sources
1. IFRS, “Consolidated organisations (CDSB & VRF),” https://www.ifrs.org/about-us/consolidated-organisations/ Accessed August 16, 2023
2. EFRAG, “First Set of draft ESRS,” https://www.efrag.org/lab6?AspxAutoDetectCookieSupport=1 Accessed August 16, 2023
3. IFRS, “ISSB and GRI provide update on ongoing collaboration,” https://www.ifrs.org/news-and-events/news/2022/06/issb-and-gri-provide-update-on-ongoing-collaboration/ Accessed August 16, 2023
4. IFRS, “June 2023 – Feedback Statement
IFRS® – Sustainability Disclosure Standards (PDF),” https://www.ifrs.org/content/dam/ifrs/project/general-sustainability-related-disclosures/feedback-statement.pdf Accessed August 16, 2023
5. KPMG, “Interoperability between ISSB and EU requirements,” https://kpmg.com/xx/en/home/insights/2022/10/issb-interoperability-eu.html Accessed August 16, 2023
6. IFRS, “Who we are,” https://www.ifrs.org/about-us/who-we-are/ Accessed August 16, 2023
7. IFRS, “IFRS Sustainability Standards Navigator,” https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ Accessed August 16, 2023
8. Greenhouse Gas Protocol, “Standards,” https://ghgprotocol.org/standards Accessed August 16, 2023
9. TCFD, “Task Force on Climate-related Financial Disclosures Overview (PDF),” https://assets.bbhub.io/company/sites/60/2022/12/tcfd-2022-overview-booklet.pdf Accessed August 16, 2023
10. IFRS, “IFRS Foundation publishes comparison of IFRS S2 with the TCFD Recommendations,” https://www.ifrs.org/news-and-events/news/2023/07/ifrs-foundation-publishes-comparison-of-ifrs-s2-with-the-tcfd-recommendations/ Accessed August 16, 2023
11. Responsible Investor, “ESG round-up: IFRS to take over TCFD monitoring from next year,” https://www.responsible-investor.com/esg-round-up-ifrs-to-take-over-tcfd-monitoring-from-next-year/ Accessed August 16, 2023
12. IFRS, “IFRS Foundation completes consolidation with Value Reporting Foundation,” https://www.ifrs.org/news-and-events/news/2022/08/ifrs-foundation-completes-consolidation-with-value-reporting-foundation/ Accessed August 16, 2023
