ISSB Issues Global Sustainability Disclosure Standards – What Companies Need To Know

The Standards are designed to be a baseline of sustainability-related corporate disclosures and provide investors and other stakeholders with a common framework to make more informed decisions about a company's environmental and social performance.

AUGUST 2023 – On June 26, 2023, the International Sustainability Standards Board (ISSB) published the final versions of General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and Climate-related Disclosures (IFRS S2) (together, "the Standards"). The Standards provide a new baseline for sustainability-related corporate disclosures, helping investors and stakeholders better assess a company's environmental and social performance when considering investments, partnerships, and other financial transactions.

Importantly, the Standards hold that companies cannot narrow the scope of their sustainability disclosures to only assets that they own and operate. Companies must now report all material sustainability-related risk exposures – including from unconsolidated subsidiaries and joint ventures ("JVs").

This article will provide an overview of the Standards, their requirements, and suggestions on what companies should do now to prepare.

Overview of the Standards

IFRS S1 and S2 are the inaugural standards released by ISSB and aim to harmonize the sustainability reporting landscape at an international level. IFRS S1 covers the core general disclosure requirements for sustainability-related risks and opportunities and is structured around the four thematic areas of governance, strategy, risk management, and metrics and targets. IFRS S2 adds additional details on climate-related disclosures and is designed to supplement the general disclosure requirements included in IFRS S1.¹ The scope of required disclosure under the Standards is information that could "reasonably be expected to affect the company's cash flows, its access to finance, or [the] cost of capital over the short, medium or long term." This information is meant to support investors, lenders, creditors, and other users of financial reports with their decision-making.

Required Disclosure

Disclosure requirements in each of the four thematic areas include:

GOVERNANCE:

• Governance body (e.g., a board or committee) oversight of sustainability-related risks and opportunities
• Management's role in sustainability-related oversight

STRATEGY:

• Sustainability-related risks and opportunities that could impact the company's prospects, business model, and value chain, and in what time horizon
• The impact that sustainability-related risks and opportunities have had, and are anticipated to have, on the company's financial position, financial performance, cash flows, and capital investment and disposal plans

RISK MANAGEMENT:

• Processes used to identify, assess, prioritize, and monitor sustainability-related risks and opportunities
• Whether and how such processes are integrated into the company's overall risk management process

METRICS AND TARGETS:

• Metrics and targets used by the company to measure and monitor sustainability-related risks and opportunities
• For climate-related risks under IFRS S2, gross Scope 1, 2, and 3 greenhouse gas emissions, with Scope 1 and 2 greenhouse gas emissions separated into emissions from the consolidated accounting group and emissions from unconsolidated JVs and other subsidiaries²

What Companies Should Do Now

Companies should start by determining whether they expect their financial regulators to adopt, or draw from, the Standards for their sustainability disclosure requirements. Though voluntary in nature, the Standards have received strong worldwide support, and governments and regulators from several jurisdictions, including the European Union, the United Kingdom, Canada, Nigeria, Australia, and Japan, have signaled that they intend to endorse and adopt the Standards for regulatory purposes.

While the required reporting following the Standards will be gradually phased in over the next few years, companies should take steps to prepare now. Here are a few steps to consider:

1. Determine which disclosure rules apply and when, as different jurisdictions may phase in sustainability disclosure rules at different times. In July 2023, the European Commission issued the European Sustainability Reporting Standards, which will come into effect in 2024 and have a high degree of alignment with the Standards. In the U.S., companies are still waiting for the Securities and Exchange Commission to issue its final climate disclosure rules.
2. Review data availability to determine if there are any gaps or obstacles that would prohibit reporting at the level expected by the Standards or any other applicable disclosure rules, particularly Scope 3 emissions.
3. Assess material sustainability risks that may impact the entire company, as well as risks that are specific to business units, joint ventures, and geographies; the involvement of a broad range of stakeholders will help capture all material risks.
4. Develop a sustainability action plan to build out the systems and processes and develop the capabilities needed to capture the data and perform the reporting required by the Standards; in some cases, companies may need to incorporate data and reporting from JVs and independently operated subsidiaries.

In addition, companies with JVs that are materially important to business operations should consider whether they need to strengthen their organizational capacity to identify, track, govern, and manage JV-related sustainability risks and associated disclosures. Too often, corporate boards and senior management teams have little visibility into how JVs are performing – especially around operational and climate-related matters. Sustainability data, as well as information on sustainability risks and opportunities, will need to flow from JVs to the parent companies and into management and board reporting. This may be easier said than done, as the ability to implement appropriate measures to collect data and manage risks may vary based on the level of control and partner alignment.

As the international regulatory landscape reshapes to address the increasing focus on sustainability issues, companies must do their part by offering greater transparency into the sustainability risks they face.

Footnotes

1. ISSB has announced that it is evaluating future topic-specific disclosure standards (similar to IFRS S2) that would cover non-climate related sustainability topics such as biodiversity, ecosystems, human capital, and human rights.

2. IFRS S2 is accompanied by industry-based guidance for 68 industries within 11 sectors. The industry-based guidance is designed to assist a company in identifying the climate-related risks and opportunities that apply to its business model and associated activities. While it does not create additional requirements, a company should refer to and consider the applicability of the information set out in the industry-based guidance. For example, for the metals and mining industry, the industry-based guidance includes quantitative metrics for greenhouse gas emissions, energy management, and water management that should be considered for disclosure.

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.