Interpreting the ISSB: How Companies Should Respond to the Ambitious New Baseline for Sustainability Disclosure
In late June, the International Sustainability Standards Board (ISSB) released its first two standards: the IFRS S1 and S2.
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In late June, the International Sustainability Standards Board (ISSB) released its first two standards: the IFRS S1 and S2.
Companies globally welcomed these standards because they consolidate many existing reporting frameworks in which they are already participating — both voluntarily and, increasingly, as mandated by governments and stock exchanges. Investors were also appreciative of the standards as they prioritise financial materiality instead of requiring double (i.e. social and environmental impact) materiality.
What you need to know about the ISSB
The first standard, IFRS S1, defines the requirements for companies to communicate their sustainability-related risks and opportunities. The second, the IFRS S2, sets out specific climate-related disclosure requirements covering a holistic climate strategy such as greenhouse gas (GHG) emissions, transition plans, the impacts of climate risks using scenario analysis, and mitigation/ adaptation plans.
It is anticipated that these standards will gradually be adopted by regulators. Australia, Canada, the UK, Singapore and Hong Kong have already announced intentions to align their mandatory sustainability reporting requirements with the ISSB. The standards will apply to annual reporting periods starting from January 2024, with companies issuing disclosures against the standards in 2025. However, as the ISSB is a voluntary standard, applicability depends largely on adoption timeframes in specific jurisdictions.
Building on the TCFD
The standard draws heavily upon the Task Force for Climate-related Financial Disclosure (TCFD) which has to date been considered the gold standard for sustainability disclosure and has been adopted in multiple jurisdictions globally. From 2024, the ISSB will also take over the monitoring of progress on companies reporting against the TCFD.
The climate-specific standard IFRS S2 adopts an identical structure to that of the TCFD, following the same four pillars of governance, strategy, risk management, and metrics and targets. Yet in some areas, it also goes further than the TCFD.
Some key examples include the following:
Risk management now integrates climate opportunities |
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Scope 3 emissions must be disclosed |
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Disclosed scope 2 emissions must be location-based |
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Clearer requirements for key disclosure areas
In other areas, the ISSB makes existing expectations under the TCFD framework more explicit. Examples include the following:
- Quantified financial impact of climate risks and opportunities
- The ISSB standards specifically require companies to disclose information on their financial position, performance and cash flows in the reporting period, whether as a range or single amount. This reinforces the TCFD's expectation that companies provide information about their sustainability impacts and their efforts in their financial statements in order to reflect the financial impacts that climate issues can have on companies.
- In assessing climate risks and opportunities, entities must also disclose the amount and percentage of assets or business activities that are vulnerable to climate-related transition and physical risks, and which are aligned with climate-related opportunities.
- Greater focus on transition plans
- Reporting entities must outline how they plan to transition to a low-carbon economy and achieve set climate targets. This should also include current and anticipated changes to a company's business model, strategy, resource allocation and capital as a result of its exposure or vulnerability to climate change risks and opportunities.
- Climate-related skills and competencies on your Board and within your management teams
- Entities must disclose how the governance body(s) or individual(s) determine whether the appropriate skills and competencies are available or will be developed to oversee strategies designed to respond to climate-related risks and opportunities
While this may seem overwhelming for some, the standards include a proportionality principle which clarifies that the ISSB only expects companies to use reasonable and supportable information that is available without undue cost or effort and within consideration of its skills, capabilities and resources to fulfill the disclosure requirements.
Where to from here?
No matter where your company is on its climate disclosure and action journey, you should take the ISSB into account before you take your next steps. We recommend that you prepare ahead of potential mandatory ISSB disclosure requirements in your jurisdiction/s. Each jurisdiction will define the specific scope of companies that may need to comply with its disclosure requirements. However, it is good practice for companies to start aligning with ISSB voluntarily, especially if you're looking to be an industry leader.
For companies who are at the beginning of their climate journey or not yet reporting against the TCFD, the best way to start is to review your readiness using the ISSB standards. This can help locate your alignment gaps and the results can be used as inputs for the development of a roadmap or holistic climate strategy.
For more advanced companies who are already familiar and aligned with the TCFD, you should focus on the key areas where the ISSB requires more extensive disclosure compared to the TCFD and update your sustainability planning accordingly.
Not sure how the ISSB disclosure requirements will impact your business? It's always better to be proactive with new best practice standards and prepare ahead of possible incoming mandatory requirements. Reach out to your South Pole representative to discuss.