Quick Take – Tips on the ISSB’s IFRS S1 and S2
The ISSB released its inaugural standards on June 26th, 2023 – namely the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. The release of these standards marks a huge milestone for sustainability disclosures globally, setting as it does a global standard for sustainability reporting. It also represents an enormous effort from an organization formed little over a year and a half ago. In addition to the S1 and S2 Standards, the ISSB will also publish supporting guidance, bases for conclusions, an effects analysis, a project summary, and a feedback statement. The key takeaways include:
- Development and Disclosures:
- Initially focused on climate, ISSB plans to expand coverage to other issues.
- ISSB has initiated stakeholder feedback on priorities of future topics.
- The proposed priorities include: biodiversity, ecosystems, and ecosystem services; human capital; human rights; and integration in reporting.
- Next Steps and IOSCO Endorsement:
- Companies can report voluntarily against the sustainability disclosure standards (SDS) starting from this point forward.
- The International Organization of Securities Commissions (IOSCO) has begun its process for endorsing the standards.
- Once endorsed by IOSCO, individual jurisdictions will continue to develop and adopt rules encompassing the ISSB standards.
- Member State Adoption & Press Reaction:
- Countries like Japan, Hong Kong, and Singapore plan to align mandatory reporting with SDS. The EU believes CSRD is already aligned.
S1 and S2 provide a solid foundation for sustainability reporting and disclosure practices worldwide. The IFRS S1 emphasizes the importance of financial materiality, which refers to the influence of specific information on investor decisions, where information should be included if it could reasonably be expected to impact those decisions. It also highlights the importance of taking a holistic approach including considering the sustainability of a company’s value chain.
S2 focuses specifically on climate-related risks and opportunities, aligning with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD recommendations are widely integrated into the climate-related disclosure standard of the ISSB, and the IFRS Foundation has confirmed its assumption of the TCFD’s responsibilities through the ISSB starting in 2024, thereby building upon the TCFD’s legacy.
The ISSB’s intention to expand its coverage beyond climate-related issues demonstrates its commitment to addressing a broader range of sustainability concerns. The voluntary adoption of the sustainability disclosure standards (SDS), with the IFRS S1 and S2 as the global baseline starting from January 1, 2024, is a strong step towards achieving widespread adoption. Efforts are also underway to gain endorsement from the International Organization of Securities Commissions (IOSCO), which would help facilitate the adoption of ISSB standards by member states.
Various companies in different jurisdictions have called on governments to implement these standards by 2025, meaning reporting would begin by 2026. Notably, countries such as Japan and Hong Kong, have already expressed their plans to align their mandatory reporting requirements with the SDS. Singapore has announced that it will apply ISSB climate-related reporting standards from 2025. Furthermore, the European Union (EU) believes that its proposed Corporate Sustainability Reporting Directive (CSRD) is already in line with the ISSB standards.. These positive responses from various jurisdictions indicate a growing recognition of the importance of sustainability reporting and the value it brings to stakeholders.
The release of the ISSB Standards has generated significant attention and interest in the press even if it is still high level and even if country-level adoption is likely to differ. The clarity provided by these standards will enhance transparency and comparability in sustainability reporting, enabling investors, regulators, and other stakeholders to make informed decisions. The ongoing developments in sustainability reporting and the endorsement of ISSB standards by IOSCO hold great potential for further progress towards a global harmonization of sustainability disclosure practices.
Overall, the ISSB’s inaugural Standards represent a significant milestone in advancing sustainability reporting globally. By setting clear guidelines and encouraging voluntary adoption, the ISSB is poised to drive meaningful change in corporate reporting practices, promote responsible and sustainable business conduct, and support the transition towards a more sustainable global economy.
