The latest announcements by the International Sustainability Standards Board (ISSB) lay out proposals for climate-related disclosure standards as well as a proposed general standard for sustainability-related financial Information.
The ISSB Is an independent, private-sector body that develops and approves International Financial Reporting Standards (IFRS) which oversees the setting of accounting standards globally through the International Accounting Standards Board (IASB).
Founded In 2021, the ISSB has four key objectives:
1) To develop standards for a global baseline of sustainability disclosures.
2) To meet the Information needs of Investors.
3) To enable companies to provide comprehensive sustainability Information to global capital markets.
4) To facilitate Interoperability with disclosures that are jurisdiction-specific and/or aimed at broader stakeholder groups.
The ISSB uses market-led reporting initiatives like TCFD, and SASB to create global reporting standards. These standards help investors make informed decisions and allow companies to meet jurisdictional requirements without duplicating reports (1).
Summary of recommendations
From a supplementary meeting held on April 4th, 2023, the ISSB decided that it will prioritize climate-related information reporting by companies in their first reporting year. The decision also includes a transition relief for companies applying IFRS S1 and S2 General Requirements for Disclosure of Sustainability-related Financial Information. Instead of having to publish climate-related disclosures, companies will instead be required to provide full reporting on sustainability-related risks and opportunities in the second year of reporting. This transition relief would not change the effective date of IFRS S1, which would still be effective for annual reporting periods beginning on or after January 1st, 2024.
Additionally, the new standards will not require companies to:
1) Provide annual sustainability-related disclosures at the same time as the related financial statements.
2) Provide comparative information.
3) Disclose Scope 3 greenhouse gas emissions.
4) Use the Green House Gas Protocol to measure emissions, if they are currently using a different approach (2).
However, companies will still be required to use S1 standards when disclosing climate-related information. S1 standards set out the requirements for reporting which will help ensure the materiality and connectivity of information with that in financial statements, which is crucial when it comes to revealing climate-related information (3).
The International Accounting Standards Board has also recently launched a new project aimed at exploring changes to requirements for firms to disclose climate related risks in financial statements, signaling the growing importance of sustainability in the business world.
Chairman of the ISSB, Emmanuel Faber stated the upcoming introduction of the new standards “is being welcomed by companies urgently looking for tools to meet the information needs of their investors”. Faber went on to state “the transitional relief ensures companies can phase in their approach, initially focusing on the quality of the climate-related information they provide. That said, companies around the world are not all starting from the same place. We expect many of the companies that already disclose information beyond climate to continue to do so, including the 2,500 plus companies already applying the Sustainability Accounting Standards Board (SASB)” (4).
Additionally, the new exposure draft for climate-related disclosures which builds on the Technical Readiness Working Group (TRWG) prototype is structured around four key pillars of governance, strategy, risk management, and metrics and targets established by the Task Force on Climate-related Financial Disclosures (TCFD) of the Financial Stability Board. The proposals include the following:
The proposed ‘objective’ standard requires companies to disclose information about their exposure to climate-related risks and opportunities. This information would help investors understand the impact of these factors on a company’s overall value, how the company uses its resources to respond to climate risks and opportunities, and how well it can adapt to future changes. In short, the standard aims to provide investors with crucial information to assess a company’s resilience to climate-related risks and its potential for future success.
The proposed standard ‘scope’ requires companies to disclose information about the risks and opportunities related to climate that they face. This includes both physical risks and risks related to transitioning to a low-carbon economy. Additionally, companies must provide information about their governance processes and procedures for managing these risks and opportunities. This includes details about the governing body responsible for overseeing climate-related issues, as well as information about how management is involved in managing these risks and opportunities. Overall, the goal is to give financial reporting users a clear understanding of how a business is addressing climate-related issues.
For the public to better understand how a business is addressing climate change risks and opportunities, the business must disclose certain information. This information includes: (i) identifying climate-related risks and opportunities that are likely to impact the business model and strategy, (ii) detailing how these risks and opportunities affect the value chain and decision-making, and (iii) assessing the resilience of the business strategy to major physical and transitional risks posed by climate change. By disclosing this information, businesses can show their commitment to addressing climate change and create transparency for their investors and the public.
To help people understand how climate-related risks are managed, a business must share information about how they identify and assess these risks, as well as how they monitor and manage them. This includes explaining the methods used to identify both risks and opportunities related to climate change, and how these risks are prioritized for risk management purposes.
Furthermore, the business should clarify how they integrate their climate-related risk management process into their overall risk and management processes. By disclosing this information, organizations can provide greater transparency and accountability regarding their efforts to address climate-related risks, and help stakeholders make informed decisions.
Metrics and targets
To help the users of financial reports understand how well a business is managing climate risks and opportunities, the business should provide information about various metrics and targets. These could include cross-industry categories, industry-specific metrics, as well as any other metrics the board or management uses to measure progress. By doing so, stakeholders can gain insight into the businesses performance and how it is progressing towards its goals and targets set (5).
The ISSB’s new climate-related disclosures seek to encourage businesses to take a more strategic approach to managing the risks and opportunities associated with climate change, however, the task that lays ahead is ensuring transparent and consistent reporting on progress made.