IFRS Sustainability Reporting & Disclosure Standards - Last Updated: July 14, 2023

What are the IFRS Sustainability Disclosure Standards?

The International Sustainability Reporting Standards were created in 2022 by the International Sustainability Standards Board (ISSB), a new working group formed by the International Financial Reporting Standards (IFRS) Foundation. IFRS ISSB Sustainability Disclosure Standards are intended to serve as a global format for sustainability and climate reporting and disclosure that meets the needs of CFOs, investors, and regulators. The standards aim to put sustainability reporting on equal footing with financial reporting, while helping to connect sustainability-related financial information and a company's financial statements

A transition to structured, internationally standardized sustainability reporting should help CFOs, ESG leaders, and sustainability teams better understand the carbon accounting process an organization needs to follow alongside their financial reporting to regulators and investors.

At a time when leaders and reporting companies are being asked to comply with an increasing number of mandatory sustainability reporting obligations set to take effect between 2023 and 2025 across the European Union (EU), United States, Canada, Australia, and other countries, IFRS Sustainability Disclosure Standards will enable companies to provide material sustainability-related information about their business that's clear, relevant, and comparable.

IFRS Sustainability Disclosure Standards Overview

The IFRS Sustainability Disclosure Standards use the word 'standards' in plural because their intent is to create and represent multiple sets of standards. So far, the first two standards proposed are:

  • General [ED IFRS S1] - Universal IFRS sustainability reporting and disclosure requirements
  • Climate-Related Disclosures [ED IFRS S2] - Specific guidance on how companies should report climate-related risks, management practices, and targets
IFRS Sustainability Disclosure Standards ISSB Reporting

While there are already plenty of sustainability reporting standards, the IFRS luckily does not completely reinvent the wheel. Initial ISSB standards and guideance synthesize existing sustainability reporting recommendations from the already-popular TCFD (Task Force for Climate-Related Financial Disclosure), SASB (which the ISSB is incorporating and integrating), and Greenhouse Gas Protocol. Anyone already familiar with TCFD reporting will immediately notice the similarities.

In fact, rather than presenting a new method of sustainability reporting, IFRS is more focused on structure and standardization - how do we get every company reporting the same metrics so investors can compare apples-to-apples? How do we standardize the assessment and audit of sustainability and ESG data?

The initial ISSB Sustainability Reporting Standards are relevant for all companies, regardless of the framework applied in preparing their financial statements, and sustainability disclosures should be made by the same reporting entity issuing financial statements. The definition of 'materiality' in sustainability is the same as the one used in IFRS Accounting Standards.

Ultimately, a topic is material if it influence's investors' perception of the company's enterprise value.

ISSB S1: General Requirements for Disclosure of Sustainability-related Financial Information

The S1 Standards place an emphasis on an organization’s sustainability-related risks and opportunities over the short, medium, and long term. Organizations should assess materiality and focus on all material disclosures that impact the company or entity's finances and business model. They’re also required to examine their sustainability risks and opportunities in accordance to the Sustainability Accounting Standards Board (SASB) industry-specific standards.

ISSB S2: Climate-related Disclosures

The S2 Standards require organizations to share information on climate-related risks and opportunities that are relevant to stakeholders. Companies will be required to report on Scope 1, 2, and 3 emissions (aligned with GHG Protocol). ISSB understands that measuring Scope 3 emissions is a major challenge for most companies as it requires a fully value chain analysis, so it’s providing additional guidance and an extra year to include these emissions in reports. Companies must also explain their physical and transition climate risks and what resilience strategies they have in place to address these risks.

Differences Between ISSB Sustainability Standards and IFRS Financial Accounting Standards

For readers new to sustainability reporting who are coming from traditional financial accounting roles and backgrounds, there are a few important distinctions between sustainability and financial disclosure approaches - even within the IFRS's framework:

  • Value chain boundary - Unlike traditional financial accounting, sustainability accounting and climate risk assessment requires a broader and more forward-looking lens on opportunities and risks. Climate risks may be linked to suppliers, customer preferences, or even extreme weather and natural disasters - all examples that occur externally to the reporting entity itself in different segments of its value chain
  • Management judgement of material topics, risks, and opportunities - While ISSB uses the same accounting definition of material, IFRS Sustainability Disclosure Standards give management more flexibility in evaluating disclosure topics and conducting their materiality process. Here, IFRS recommends referencing industry-specific SASB guidelines, as well as other relevant third-party standards
  • Joint ventures - There is no current guidance on how a joint venture might report its sustainability disclosures, although the general value chain principle of a carbon accounting sum could still apply in aggregate

IFRS Sustainability Disclosure Standards Timeline

The initial draft ISSB Sustainability Disclosure Standards were released for comment review on March 31, 2022. The first two ISSB standards - S1 and S2 - were formally released on June 26, 2023, with launch events hosted in New York City, London, Frankfurt, Johannesburg, Lagos, Santiago de Chile and Singapore.

ISSB now plans to develop additional future standards and guidance, including likely future topic- and industry-specific requirements.

ISSB (IFRS) Sustainability Disclosure Content Requirements

IFRS recommends that a company's board and executive leadership discuss, answer, and report annually on the company's climate risks and strategy. Like TCFD, ISSB divides its sustainability disclosure into four core sections:

  1. Governance - The organization's governance, leadership, processes, and controls around sustainability-related risks and opportunities
  2. Strategy - The actual and potential decision-making impacts of climate-related risks and opportunities on a company's business and financials, as well as the strategy to address, adapt, and/or reduce those risks. This includes any strategic forecasts and how material sustainability topics are incorporated into and addressed in the company's strategic planning. Within the climate proposal IFRS also asks for information related to any climate transition plans and scenario analysis
  3. Risk Management - The process the company uses to identify, assess, and manage climate-related risks
  4. Metrics and Targets - The metrics and targets used to assess a company's climate-related risks, opportunities, and performance

Unlike other sustainability reporting frameworks like CDP or GRI, ISSB standards do not recommend universal sustainability KPIs beyond measuring and disclosing Scope 1, 2 and 3 greenhouse gas (GHG) emissions. How your organization measures the implementation and success of its climate governance, strategy, risk management, and transition plan is oriented around an organization's understanding of materiality and material risks, as well as industry-specific, SASB-inspired metrics, at least for the time being.

One topic area the ISSB standards do require in sections ED IFRS S2.13(b)(i)(ii) and ED IFRS S2.13(b)(iii) are a company's reliance on operational decarbonization to achieve its climate targets, rather than carbon offset purchases. Companies must disclose what percent of their emissions target will be achieved through the company's direct operations, its value chains, and offsets. And, if offsets are being used, sufficient information to understand their origin, type, and integrity.

Within the outlined climate risk category - which we consider broadly representative - companies can assess risk across any of the following categories:

  • Acute Physical Risk - Climate risks that are immediate, physical, and event-driven, including severe storms, wildfires, hurricanes, floods, and droughts
  • Chronic Physical Risk - Risks from longer-term environmental and weather shifts, such as sustained higher temperates, water scarcity, or chronic heat waves
  • Economic Transition Risk - Transitioning to a lower-carbon economy will entail extensive policy, legal, technology, and market changes related to climate change. Depending on your industry and the nature, speed, and focus of that transition, different organizations and economic sectors will be exposed to varying levels of financial and reputational risk
  • Policy Risk - Policy actions around climate change continue to evolve, and differ around the world. Climate policy itself may be a source of business risk (and opportunity) for companies
  • Legal Risk - This includes legal exposure to climate-related litigation being from property owners, governments, insurers, shareholders, and public interest organizations
  • Technology Risk - Technology changes that support the transition to a lower-carbon, energy-efficient economy can have a significant impact on organizations. Renewable energy, energy efficiency, carbon capture, and sustainable supply chain shifts may have impact a company or industry's costs, financial risks, and products and services, with broad potential value chain implications
  • Market Risk - Adressing climate change requires sweeping, multi-sector economic changes. In the course of this transition new markets will be created, existing markets will adapt, and some markets (like coal power) may become obselete or unbankable in many parts of the world
  • Reputation Risk - As investor, regulatory, customer, supplier, and community perceptions about the risks of climate change and the importance of climate action develop, companies that don't align their brand, operations, and investments with a lower-carbon economy will face greater reputation risk

Note: This piece presents an executive summary overview of ISSB Sustainability Disclosure Standards. A full item-by-item content requirements breakdown of the standards is beyond the scope of this article. For more guidance, please consult the IFRS and ISSB's primary source material or please contact us to discuss IFRS reporting requirements in detail.

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Linking IFRS Sustainability Disclosure Standards to Financial Reporting

Within IFRS's metrics guidance, ISSB requests financial assessment and attribution related to the company's climate and sustainability materiality:

  • Transition risks [ED IFRS S2.21(b)] - The amount or percentage of assets or business activities vulnerable to climate- and sustainability-related transition risks
  • Physical risks [ED IFRS S2.21(c)] - The amount or percentage of assets or business activities vulnerable to physical climate- and sustainability-related risks
  • Climate-related opportunities [ED IFRS S2.21(d)] - The amount of percentage of revenue, assets or business activities aligned with or allocated to climate- and sustainability-related opportunities
  • Capital expenditure [ED IFRS S2.21(e)] - The amount of capital expenditure, financing, and investment allocated to climate- and sustainability-related opportunities
  • Internal carbon prices [ED IFRS S2.21(f)] - The price per metric tonne of GHG emissions the company uses to assess the cost of its emissions (in reporting currency, per MT of CO2e
  • Remuneration [ED IFRS S2.21(g)] - The amount of executive management compensation tied to climate- and sustainability-related considerations, and how those are factored into executive compensation

ISSB also requests disclosure around:

  • The impact of sustainability related risks and opportunities on recent financial performance, position, and cash flows - Any material adjustments to financial performance, assets, or liabilities reported within the next financial year
  • Expectations and forecast for future climate- and sustainability-related financial impacts and performance - This includes disclosing capital allocation and CapEx plans related to pursuing sustainability strategies or mitigating sustainability risks, and how those investments will be funded
  • Integration of sustainability and financial planning - How are significant sustainability considerations included in the company's financial plans

Fair Presentation Principles

Consistent with other IFRS standards, ISSB requires sustainability reporting and disclosure information is:

  • Relevant - topical and capable of making a difference to investor's or reviewer's decision-making
  • Faithful representation - provides a complete, neutral, and free-from-error depiction of the information it's intended to represent
  • Comparable - to disclosures from other companies, and with the company's prior reporting periods
  • Verifiable - possible to audit, validate, or corroborate
  • Timely - available and up-to-date
  • Understandable - clear and concise

A Few Helpful Recommendations

Your Next Steps With IFRS Sustainability Disclosure & Reporting

For organizations in the earlier stages of their climate risk, ESG, and sustainability reporting journey, we have a few general recommendations, additional reading, and suggested next steps:

Materiality assessment - Before preparing your first IFRS ISSB disclosures, you need to conduct a “Materiality Assessment” to clarify your what your company's climate risks, opportunities, and reporting topics are. A materiality assessment is a project which determines and ranks the most material themes for your business based on market data, stakeholder interviews, surveys, and reference standards. For example, a manufacturing company might focus on climate-related risks to its facilities and supply chain. A technology company could focus on ClimateTech innovation opportunities and risks. A bank should look at portfolio and asset risk linked to fossil fuels and climate-related severe weather. Pick and rank the most relevant climate themes depending on your organization’s industry, business model, risk exposure, and innovation capacity.

Climate and sustainability data systems, workflows, and process - While this might go without saying, in order to report your organization's climate performance, you need to know what it is - with a high degree of accuracy. Your materiality process can help guide you toward the main climate risk and strategy themes to focus, but we recommend taking that further with dedicated carbon accounting software to measure your Scope 1, 2, and 3 GHG emissions and other key metrics required for IFRS disclosure.

Many organizations start their sustainability reporting with relatively simple spreadsheets, surveys, and documents, but things can get complex fast - particularly for larger companies - and it's important to have an enterprise sustainability reporting system like Brightest that provides full audit measures, activity logging, financial systems and ERP integration capability, and secure user access permissions to help organizations stay IFRS compliant. Ongoing report archiving, version control, and governance are also important to think about, since you'll be disclosing every year.

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