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by
Seneca ESG
- June 5, 2023
The International Sustainability Standards Board (ISSB) has announced its intention to release two new non-financial related disclosure standards for the end of Q2 2023, making the end of June the likely issuance date. IFRS S1 will cover general reporting requirements, while IFRS S2 will require the disclosure of material information about climate-related risks and opportunities. Both IFRS S1 and S2 are expected to be effective from January 2024 (1).
Given the ongoing debate surrounding sustainability disclosure reporting and the lack of mandatory ESG reporting in several countries, the ISSB is set to introduce temporary relief measures that will assist new companies or existing companies that may face challenges in complying with ESG reporting and adoption of ISSB Standards (2).
The ISSB’s decision to speed up the introduction of these new standards is in response to the strong demand from global investors of different reporting entities. Investors are in search of consistent and comparable sustainability-related information. With several important players such as the Organization of Securities Commissions (IOSCO) emphasizing the need for the implementation of sustainability standards, the ISSB’s upcoming disclosure release has been collectively described as “necessary”, to safeguard investors and support long-term financial stability (3).
Leading up to the release in June 2023, the ISSB will concentrate on developing additional guidance and training materials to support investors and corporates. In markets where ESG reporting is mandatory and not so new, the ISSB has acknowledged its intention to align with and streamline existing standards. On the contrary, countries which are still exploring ESG reporting these resources will help facilitate the proper application of IFRS S1 and S2 (3).
IFRS S1 and S2
IFRS S1 is designed to apply globally to corporates across all sectors taking specific aim at unifying disclosures on factors such as waste and emissions. Additionally, IFRS S1 also seeks to set out how companies can better integrate reporting, assessment, and link sustainability-related and financial information together while applying ESG-best practices. Meanwhile, IFRS S2 aims to be more detailed regarding specific topics such as climate mitigation and climate adaptation. Both IFRS S1 and S2 will build upon the SASB standards, the Integrated Reporting Framework and Climate Disclosure Standards Board (CDSB) in addition to, climate-specific areas such as the Taskforce on Climate-Related Financial Disclosures (TCFD) (4).
ISSB’s proposal of its two new standards has raised concerns, however, from several parties for failing to adopt a ‘double materiality’ standard. Included in the TCFD, double materiality refers to how corporate information can be important for a firm’s financial value while considering its impact on people, climate, and the environment, plus the risks and opportunities that external changes could bring. However, the ISSB seeks to do things differently. The core focus of the ISSB’s disclosure releases is to help identify enterprise value and better understand the link between sustainability and company valuation.
In support of this move, Mark Carney, former Bank of England Governor spoke about how private finance is increasingly aligned with the collective goal of achieving net-zero greenhouse gas emissions and how the ISSB work to create a common standard with IFRS S1 and S2 is a step in the right direction to promote resilience within companies to climate change. Looking further ahead, Carney also added that many companies were currently aligning rather than aligned with international climate policy goals and that a key element of the ISSB’s guidance would be transition disclosure guidance (5).
In addition to its collaboration with various partner bodies, ISSB has developed a strong alliance with the International Accounting Standards Board (IASB) to ensure coordination between the IASB’s IFRS and the ISSB’s standards. This commitment highlights ISSB’s dedication to promoting and integrating with other global financial reporting standards.
With ISSB looking to establish a regulatory global baseline, the focus once the standards are effective from January 2024 will be cooperation with governments and the incorporation of the standards into law. According to Emmanuel Faber, chair of the ISSB, with over 18,700 companies worth half of the global market capitalization currently disclosing environmental information through the CDP in 2022, the rapid acceleration and movement by companies globally to adopt ISSB climate data disclosure is a positive sign that swift changes towards greater adoption and incorporation of mandatory ESG reporting are likely to be implemented by global jurisdictions.
Changing attitudes towards sustainability.
Moreover, with major changes in attitudes towards sustainability reporting standards particularly in regions like Southeast Asia, it is likely these jurisdictions will mandate and align their mandatory climate disclosure requirements with the ISSB’s upcoming standards and other major global markets like the United Kingdom and European Union. While an IFRS S1 and S2 are expected, because sustainability is so broad it is a high probability in the foreseeable future that ISSB proceeds to follow up with an S3 and S4 release catering towards nature-based solutions expanding the scope beyond climate-related issues which may be of further relevance and interest to the Asia-Pacific region (6).
The upcoming release of the ISSB’s IFRS S1 and S2 sustainability disclosure standards is a significant and ambitious milestone in ESG reporting. Despite criticism over the fast-tracked release of the disclosure standards, the decision reflects the urgency for climate and sustainability information. The disclosures will provide a pivotal framework for reporting material sustainability-related issues. Companies will be required to disclose the risks and opportunities they face in relation to climate, including the impact on their financial position, performance, prospects, business model, and strategy. Such transparency will enable stakeholders to make informed decisions and foster better sustainable practices (7).
Sources
https://www.businesstimes.com.sg/esg/future-international-sustainability-standards-south-east-asia
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