Introduction
On June 26, 2023, the International Sustainability Standards Board (ISSB) issued the following two inaugural standards for environmental, social, and governance (ESG) related disclosure. The ISSB was formed by the International Financial Reporting Standards (IFRS).
- IFRS S1 – General Requirement for Disclosure of Sustainability-related Financial Information (IFRS S1).
- IFRS S2 – Climate-related Disclosures (IFRS S2 and together with IFRS S1, the ISSB Standards).
These two distinct standards are the much-anticipated updates
following the ISSB's consultation on its previously proposed
international standards (Exposure Drafts), published on March 31,
2022.
The ISSB Standards are built upon, and comprehensively incorporate,
the recommendations of the Task Force on Climate-Related Financial
Disclosures (TCFD Framework), highlighting the importance of
adhering to the TCFD Framework once again. The ISSB Standards aim
to act as a global baseline for sustainability reporting that is
comparable and consistent among proposed ESG-related disclosure
frameworks internationally. The ISSB Standards also aim to provide
a platform to help companies communicate their sustainability
efforts "in a robust, comparable, and verifiable manner"
and, as a result, enable stakeholders to gain a comprehensive
understanding of how sustainability-related and climate-related
factors are integrated into the company's performance.
In response to the ISSB Standards, the Canadian Securities
Administrators (CSA) issued a press release on July 5, 2023 (CSA
July 2023 Update) and lauded the ISSB for "developing a global
framework for investor-focused disclosure that is responsive to
market demand for more consistent and comparable disclosures."
The CSA noted that a further update will follow in the coming
months.
This bulletin provides a summary of certain salient features of the
ISSB Standards.
Summary of the ISSB Standards
Application
As we canvassed in our October 24, 2022 bulletin, Blakes Bulletin: CSA Provides Update on
Proposed Climate-Related Disclosure Rules (Blakes October
2022 Bulletin), the ISSB Standards are not intended to be directly
binding on Canadian public companies at this stage. Instead, the
ISSB Standards aim to enhance consistency and comparability among
various ESG-related disclosure frameworks, including the CSA's
proposed National Instrument 51-107 – Disclosure of
Climate-related Matters (Proposed Instrument).
However, in its October 12, 2022 update (CSA October 2022 Update),
the CSA emphasized the importance of the cooperation between the
ISSB and securities regulators across jurisdictions. Further, in
the CSA July 2023 Update, the CSA indicated its intention to
conduct further consultation to adopt the ISSB Standards "with
modifications considered necessary and appropriate in the Canadian
context." As such, the ISSB Standards are anticipated to
significantly influence the CSA's analysis about the Proposed
Instrument, which is currently a working draft. We will continue to
monitor developments in this area and provide an updated bulletin
with any material developments on the proposed CSA process.
Location of Disclosures
Pursuant to the ISSB Standards, companies would be required to provide disclosures (ISSB Disclosures) as part of their general-purpose financial reports. Subject to any local jurisdictional requirements, there are several locations in which companies may provide the ISSB Disclosures, indicating a degree of flexibility in this regard. For example, the ISSB Disclosures could be included in the company's management discussion and analysis (MD&A). Alternatively, it could be included in the company's sustainability-related financial disclosures, such as a stand-alone sustainability report, with cross-reference to these other disclosure documents the company issued in its financial report documents (such as MD&A).
Reporting Period
The ISSB Disclosures should cover the same reporting period as the related financial statements and provide comparative information in respect of the preceding period for all corresponding disclosures, if practicable.
Disclosure Requirements – IFRS S1
IFRS S1 requires companies to disclose material
information about "all sustainability-related risks and
opportunities that could reasonably be expected to affect the
entity's cash flows, its access to finance, or cost of capital
over the short, medium, or long term." In turn, information is
material if "omitting, misstating, or obscuring that
information could reasonably be expected to influence decisions
that primary users of general purpose financial reports make on the
basis of those reports." Materiality is a company-specific
evaluation and, accordingly, there is no universally predetermined
threshold.
Aligned with the TCFD Framework, IFRS S1 is organized around the
following four core pillars (each, a Pillar and collectively, the
Core Pillars):
- Governance
- Strategy
- Risk Management
- Metrics and Targets
When addressing the Core Pillars, companies are expected to
provide a "complete, neutral, and accurate depiction of
sustainability-related risks and opportunities" to achieve a
fair representation of how sustainability-related factors affect
the company's overall business.
For each Pillar, companies would be required to disclose specific
information, including the following:
Governance
Disclosure about the governance body(s) or individual(s) responsible for oversight of sustainability-related risks and opportunities, including, but not limited to:
- how such responsibilities are reflected in the company's mandates, policies, or role descriptions;
- how the company manages appropriate skills and competencies to respond to sustainability-related risks and opportunities;
- how the company takes into account sustainability-related risks and opportunities in major transactions; and
- how the company sets sustainability-related targets and monitors such targets.
Strategy
Disclosure about:
- the current and anticipated effects of sustainability-related risks and opportunities on the company's business model and value chain;
- the effects of such risks and opportunities on the company's strategy and decision-making process;
- the effects of such risks and opportunities on the company's overall financial position; and
- the resiliency of the company's business model to such risks.
Specifically, IFRS S1 requires companies to provide quantitative
and qualitative information about the various effects of
sustainability-related risks and opportunities on the company's
financial position. With respect to quantitative information,
however, the ISSB carved out a narrow comply-or-explain
approach.
Companies are further required to specify over which time horizons
— short, medium, or long term — the effects of
identified sustainability-related risks and opportunities could
materialize and affect the company's financial performance.
Risk Management
Disclosure about any processes and related policies utilized by the company to identify, assess, and monitor sustainability-related risks and opportunities.
Metrics and Targets
Disclosure about any metrics or standards used by the company to measure and monitor sustainability-related risks and opportunities and the company's performance against such risks and opportunities.
Disclosure Requirements – IFRS S2
Similar to IFRS S1, IFRS S2 requires companies to disclose "climate-related risks and opportunities that could reasonably be expected to affect the entity's cash flows, its access to finance, or cost of capital over the short, medium or long term." The same materiality qualifier from IFRS S1 also applies to IFRS S2. IFRS S2 is, however, more granular than IFRS S1, as it requires companies to categorize climate-related risks into the following two subcategories, which are defined terms in IFRS S2:
- Climate-related physical risks: Event-driven risks (acute physical risk) or risks that develop over a longer period due to changes in climate patterns (chronic physical risk).
- Climate-related transition risks: Risks associated with the transition to a lower-carbon economy.
IFRS S2 is also organized around the Core Pillars and, in general, requires a level of disclosure that is comparable to IFRS S1, with certain modifications and/or additions as highlighted below:
Governance
Disclosure is required to the extent that there is no unnecessary duplication with IFRS S1. If disclosure pursuant to IFRS S1 and IFRS S2 would overlap, then disclosing the information under IFRS S1 would suffice.
Strategy
Most notably, IFRS S2 requires companies to present a detailed scenario analysis to illustrate how they assess the company's resilience against climate-related risks. Such disclosure entails, among other things:
- the company's assessment of its climate resilience, including proposed reconciliation efforts to address any identified climate-related risks and significant areas of uncertainty in its assessment; and
- the method used to conduct the scenario analysis, including any assumptions made with respect thereto.
The ISSB, however, indicated it is mindful that companies have varying levels of expertise and sophistication and, as such, some companies may provide a more advanced scenario analysis compared to others.
Risk Management
Disclosure is required to enable users to understand a company's processes to identify, assess, prioritize and monitor climate-related risk and opportunities, including how such processes are integrated into and inform a company's overall risk management process.
Metrics and Targets
Companies are required to provide specific climate information, including:
1.Greenhouse Gas ("GHG") Emissions: Absolute gross GHG emissions classified as:
- Scope 1 GHG emissions (all direct GHG emissions by a company).
- Scope 2 GHG emissions (all indirect GHG emissions arising from a company's consumption of purchased electricity, steam, heating or cooling).
- Scope 3 GHG emissions (all other indirect GHG emissions that occur in the value chain of a company, other than those captured in Scope 2).
2. GHG Metrics: Metrics used to measure GHG emissions and the details of any measurement approach used.
3. Internal Carbon Pricing: A description of how the company incorporates internal carbon pricing into its decision-making process, including the price per metric tonne of GHG emissions used to calculate GHG emissions costs.
4. Climate-related Targets: A description of any climate-related targets for reducing GHG emissions, if any, and an explanation of whether such target is on a gross or net basis.
5. Carbon Credits: A description of the planned use of carbon credit(s) to offset GHG emissions, including:
- the type of such carbon credit(s);
- an explanation of whether the offset will be nature-based or technology-based;
- the method used, either by reduction or removal, to achieve the offset; and
- any information substantiating the credibility and integrity of the carbon credit(s).
6. Remuneration Policies: A description of how a company considers climate-related factors in determining remuneration policies, including how such factors impact executive remuneration and the percentage of executive management whose remuneration is tied to climate-related considerations.
Timing and Transition Reliefs
The ISSB specified January 1, 2024 as the date of initial application on which the ISSB Standards would come into force, with certain transition reliefs for the first annual reporting period. These include:
- permitting companies to: 1.1 provide, within a prescribed
period, the ISSB Disclosures after publishing the related financial
statements; and
1.2 comply with IFRS S2 only; - exempting companies from:
2.1 disclosing Scope 3 GHG emissions; and
2.2 providing certain comparative information, if relying on (i)(b) above.
What This Means for Canadian Companies
In the CSA October 2022 Update, the CSA provided direct comments on the Exposure Drafts and highlighted key areas where, in its view, the Exposure Drafts could lead to certain difficulties and hinder effective implementation. As we summarized in the Blakes October 2022 Bulletin, the CSA raised the following principal concerns with respect to the Exposure Drafts:
- The term "sustainability-related" (as opposed to the more specific term "climate-related") appears to be overarching and may capture an overly broad range of activities.
- The cost and expertise required to prepare the ISSB Disclosures, as well as to consider that several industry-specified disclosure requirements developed by the Sustainability Accounting Standards Board may be cumbersome or present "significant challenges" for certain companies, given the specialist nature of such disclosures.
Pursuant to the ISSB Standards, companies are required to
disclose matters such as a climate-related scenario analysis, Scope
1, 2, and 3 GHG emissions, and detailing how climate-related
considerations impact executive remuneration. Consistent with the
second concern noted above, the ISSB Standards will dramatically
elevate climate-related disclosure requirements as well as the
time, effort and expertise required to prepare the required
disclosure information. Although it is still unclear what
requirements will eventually be adopted in Canada, it certainly
appears there will be more (as opposed to less) climate-related
disclosure requirements in the future. Companies are urged to stay
up to date on whatever requirements are eventually imposed.
The above said, the ISSB noted that it would "work with
jurisdictions and companies to support adoption" and establish
a Transition Implementation Group to support effective
implementation of the ISSB Standards in combination with other
reporting standards, which is, in principle, aligned with the
CSA's approach in the CSA October 2022 Update and the CSA July
2023 Update. The CSA is still analyzing the feedback and
considering various developments with respect to ESG-related
reporting frameworks with a focus on reducing the level of
fragmentation among different frameworks. While this analysis is
still ongoing, we will continue to monitor developments
internationally and, particularly, in regard to the implementation
of the Proposed Instrument. We will provide updated bulletins once
material developments have been announced.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
