On June 26, 2023, the International Sustainability Standards Board (ISSB) published its first two sustainability disclosure standards, International Financial Reporting Standards (IFRS S1) – General Requirement for Disclosure of Sustainability-related Financial Information, and (IFRS S2) – Climate-related Disclosures. Access to the two new standards is free, although users are required to create an account to download them. These standards create a global baseline for sustainability-related financial reporting and climate-related disclosures.1
On July 10, 2023, the IFRS Foundation announced that it would monitor the progress of companies’ climate-related disclosures, taking over for the Task Force on Climate-Related Financial Disclosures (TCFD).2 IFRS S1 and IFRS S2 will be effective on January 1, 2024, at which point the IFRS Foundation will begin its monitoring duties.3
Countries need to adopt the IFRS standards into national law before companies have binding obligations to adhere to these standards. Still, the ISSB’s work is supported by organizations like the International Organization of Securities Commissions and the Financial Stability Board, and certain countries, including Australia and Japan, have established or begun establishing sustainability boards to facilitate cooperation with the ISSB.4 There is also substantial overlap between these IFRS standards and the climate risk disclosure recommendations of the TCFD, which were used by the U.S. Securities and Exchange Commission (SEC) to inform its proposed climate-related disclosure rules, which you can read more about in our client alert on the subject. Therefore, we expect that these IFRS standards will be important in shaping the future of sustainability reporting worldwide.
IFRS S1: General Requirements for Disclosure of Sustainability-Related Financial Information
The goal of IFRS S1 is to ensure that reporting entities (companies) disclose sustainability-related risks and opportunities (SRROs).5 The IFRS S1 standard asks that companies “disclose information about all [SRROs] that could reasonably be expected to affect [their] cash flows, [their] access to finance, or cost of capital over the short, medium or long term.”6
IFRS S1 sets out a few general disclosure guidelines. First, presentation of sustainability-related financial disclosures must be “fair,” meaning that companies must present disclosure in a neutral and accurate manner.7 This includes ensuring that the information disclosed by companies is “comparable, verifiable, timely, and understandable.”8 Second, companies must disclose material information about such risks and opportunities.9 “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….”10 Disclosure must also be complete, so companies may need to disclose additional information beyond what is strictly required in IFRS S1 if simply complying with the standard alone results in insufficient information to understand companies’ SRROs.11 Finally, sustainability-related financial disclosures must be connected to other disclosures, so companies reporting sustainability-related financial disclosures must identify the financial statements relating to such disclosures; the currency of sustainability-related financial disclosure must align with the currency used in companies’ financial statements; and companies should explain how sustainability-related financial disclosures relate to other general purpose financial disclosures.12
The core content of IFRS S1 focuses on four areas: governance, strategy, risk management, and metrics and targets.13
Governance
The goal of governance-related disclosure is to outline the governance processes and procedures companies use to monitor and manage SRROs.14 IFRS S1 asks that companies disclose:
- The governance body or individuals that oversee SRROs at the company level.15 Specifically:
- how responsibilities for SRROs are reflected in companies’ policies;
- how the body or individuals that oversee SRROs determine if the required skills and competencies are available or will be developed to oversee strategies to respond to SRROs;
- how and how often the body or individuals that oversee SRROs are informed of SRROs;
- how the body or individuals that oversee SRROs take SRROs into account when overseeing companies’ strategies, their decisions on major transactions, and their risk management processes and related policies; and
- the oversight process for target-setting related to SRROs and how progress towards those targets is monitored, including how and if SRRO-related performance metrics are included in renumeration policies.16
- The role of management in the governance processes and procedures used to monitor, manage, and oversee SRROs, including:
- whether a specific management-level position or committee is involved and how oversight is exercised over that position or committee; and
- whether management uses controls and procedures to support its oversight and, if so, how such controls and procedures are integrated with other internal functions.17
Strategy
The goal of strategy-related disclosure is to help readers understand companies’ strategies for managing SRROs.18 IFRS S1 categorizes strategy disclosures into five elements:
- SRROs: Companies must disclose SRROs that could reasonably impact their prospects.19 Companies must specify the short-, medium-, and long-term horizons over which the effects of each SRRO are expected to occur.20 IFRS S1 asks that companies define the term lengths and how such definitions are linked to strategic planning time horizons.21
- Business model and value chain: Companies must disclose the “current and anticipated effects” of SRROs on companies’ business models and value chains, including where in a company’s business model and value chain these risks and opportunities are concentrated.22
- Strategy and decision making: Companies must disclose how SRROs affect their strategy and decision-making, including past and planned responses to SRROs, the progress of plans previously disclosed using both qualitative and quantitative information, and trade-offs considered by companies when considering SRROs.23
- Financial position, financial performance, and cash flows: Companies must disclose the impact of SRROs on their financial position, financial performance, and cash flows during reporting periods, the anticipated effects of such risks and opportunities on their financial position, financial performance, and cash flows, and how companies expect their financial positions to change given their strategies to manage SRROs.24 IFRS S1 asks companies to disclose how they factored SRROs into their financial planning and anticipated effects of risks and opportunities where there is a “significant risk of a material adjustment within the next reporting period” to the asset and liability carrying amounts reported.25
- Resilience: Companies must disclose their abilities to adjust to the uncertainties related to SRROs.26
Risk Management
The goal of risk management disclosure is to describe how companies identify, assess, prioritize, and monitor SRROs, including whether and how those processes are integrated into and inform their overall risk management processes.27
IFRS S1 calls for companies to disclose their processes and related policies used to identify, assess, prioritize, and monitor SRROs including, but not limited to, inputs and parameters used, if scenario analyses are used to identify risks, and whether and how sustainability-related risks are prioritized relative to other types of risks.28
Metrics and Targets
The goal of metric and target reporting is to help readers evaluate companies’ progress towards SRRO-related targets.29
For each disclosed target, IFRS asks companies to outline the metrics used to set and track progress towards achieving the target, the applicable period covered by the target, the period from which progress is measured, milestones and interim targets, a company’s performance against such target, how its performance has changed, and revisions to the target and explanations for such revisions.30
If companies use metrics that were developed in-house, IFRS S1 asks the companies to disclose how they define such metrics, the method used to calculate the metrics and, if applicable, the sources the metrics are derived from and how the metrics differ from that source.31 Additionally, companies must disclose if their metrics are validated and, if so, by whom.32
IFRS S2: Climate-Related Disclosures
The goal of IFRS S2 is to enable readers to make decisions related to providing resources to companies by giving readers information about companies’ climate-related risks and opportunities (CRROs).33 The IFRS S2 standard asks that companies “disclose information about [CRROs] that could reasonably be expected to affect [their] cash flows, [their] access to finance or cost of capital over the short-, medium-, and long-term.”34
Climate-related risks include both climate-related physical risks and climate-related transition risks.35 Climate-related physical risks are those that are event-driven (acute risks), such as heatwaves, or risks that are due to longer-term climate pattern shifts (chronic risks) such as precipitation changes.36 Climate-related transition risks are risks that stem from efforts to “transition to a lower-carbon economy” including policy, legal, technological, and reputational risks.37
The core content of IFRS S2 focuses on four areas: governance, strategy, risk management, and metrics and targets.38
Governance
The goal of governance focused climate-related disclosures is to help readers understand the governance processes, controls and procedures used by companies in the monitoring, management, and oversight of CRROs.39 IFRS S2 asks that companies disclose:
- The governance body or individuals responsible for overseeing CRROs. Specifically:
- how responsibilities for CRROs are reflected in companies’ policies;
- how the body or individuals that oversee CRROs determine if the required skills and competencies are available or will be developed to oversee strategies to respond to CRROs;
- how and how often the body or individuals that oversee CRROs are informed of CRROs;
- how the body or individuals that oversee CRROs take CRROs into account when overseeing companies’ strategies, decisions on major transactions, and risk management processes and related policies, including if trade-offs were considered in relation to CRROs; and
- the oversight process for target-setting related to CRROs and how progress towards those targets is monitored, including how and if performance metrics are included in renumeration policies.40
Companies should integrate governance disclosure required in this section with disclosure required by IFRS S1 to avoid duplicative disclosure.41
Strategy
The goal of strategy climate-related disclosures is to communicate companies’ strategies for managing CRROs.42 IFRS S2 categorizes strategy disclosures into five elements:
- CRROs: Companies must identify each climate-related risk as a physical or transition risk, the time horizons over which CRROs are expected to occur, and define the short-, medium-, and long-term time horizons.43
- Business model and value chain: Companies must disclose the current and anticipated effects of CRROs on companies’ business models and value chains, including where in the business models and value chains these risks and opportunities are concentrated.44
- Strategy and decision-making: Disclose plans to achieve climate-related targets, anticipated or in-progress business model changes addressing climate-related risks, anticipated or in-progress direct and indirect mitigation or adaption efforts, and climate-related transition plans.45 This disclosure must include qualitative and quantitative information.46
- Financial position, financial performance, and cash flows: The current and anticipated impact of CRROs on companies’ financial position, financial performance, and cash flows.47 IFRS S2 asks companies to disclose how they expect their financial position to evolve over the various term horizons given their CRRO management strategies, accounting for investment disposal plans and planned implementation funding sources.48 It also asks companies to report CRROs where there is a significant risk of a material adjustment to the asset and liability carrying amounts reported.49
- Climate resilience: Disclosure addressing companies’ abilities to adapt their strategies and business models to “climate-related changes, developments, and uncertainties,” in various climate-related scenarios.50 Companies should address the significant areas of uncertainty considered in the companies’ assessments of their climate resilience, their capacities to adjust or adapt their strategies and business models to climate change, inputs used when creating the scenario analysis, key assumptions made by the companies when performing the analysis, and the reporting period in which the scenario analysis was performed.51
Risk Management
The goal of risk management disclosure is to describe how companies identify, assess, prioritize, and monitor CRROs, including whether and how those processes are integrated into and inform their overall risk management processes.52
IFRS S2 calls for companies to disclose their processes and related policies used to identify, assess, prioritize, and monitor CRROs including, but not limited to, inputs and parameters used, if scenario analysis is used to identify risks, and whether and how climate-related risks are prioritized relative to other types of risks.53
Companies should integrate governance disclosure required in this section with disclosure required by IFRS S1 to avoid duplicative disclosure.54
Metrics and Targets
The goal of metric and target reporting is to help readers evaluate companies’ progress towards CRRO-related targets.55
IFRS S2 asks companies to disclose information from industry metric categories, including greenhouse gas emissions (i.e., Scope 1, Scope 2, and Scope 3 data), climate-related transition risks, climate-related physical risks, climate-related opportunities, capital deployment, internal carbon prices, and renumeration.56
Companies must disclose the quantitative and qualitative climate-related targets they set and use to monitor progress towards achieving strategic goals as well as targets required by law.57 For each target, companies should disclose the objective of the target, the period over which it applies, and how international climate change agreements have shaped the target.58 Companies should also disclose how they set and review targets, how they monitor progress against targets, information about their performance against each climate-related target as well as analyses of trends or changes in performance.59
Going Forward
As noted above, the IFRS S1 and IFRS S2 standards are not binding on companies until countries and jurisdictions that govern such companies’ disclosure obligations adopt them. Still, a number of countries and international organizations supported the development of these standards, and they represent a continuation of previous work by TCFD on climate-related disclosure.
Additionally, earlier this year the World Economic Forum and IFRS Foundation announced the formation of the Forum ISSB Preparers Group. Forum ISSB Preparers Group members will be 20 “corporate leaders with diverse expertise in sustainability reporting,” tasked with sharing insights and best practices from companies that use the IFRS S1 and IFRS S2 standards.60 This group will “focus on building capacity among companies to facilitate extensive and high-quality adoption of the standards.”61
We will continue to monitor the progress and implementation of these, and other, ISSB standards. The SEC is also expected to finalize its climate-related disclosure rules, which were informed by the TCFD’s recommendations, this fall. For more information about the ISSB standards, the SEC’s proposed climate-related disclosure rules or any related matter, please contact any member of the firm’s public company representation or sustainability and environmental, social, and governance advisory practices.
[1] IFRS, ISSB Issues Inaugural Global Sustainability Disclosure Standards (June 26, 2023), https://www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2/.
[2] IFRS Foundation Welcomes Culmination of TCFD Work and Transfer of TCFD Monitoring Responsibilities to ISSB from 2024 (2023), https://www.ifrs.org/news-and-events/news/2023/07/foundation-welcomes-tcfd-responsibilities-from-2024/?utm_medium=email&utm_source=website-follows-alert&utm_campaign=daily.
[3] Id. See also, IFRS Sustainability Standards Navigator, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, IFRS, https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ifrs-s1-general-requirements/ (denoting the effective date of IFRS S1 as January 1, 2024); IFRS S2 Sustainability Standards Navigator, IFRS S2 Climate-related Disclosures, https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ifrs-s2-climate-related-disclosures/#standard (denoting the effective date of IFRS S2 as January 1, 2024).
[4] IFRS, ISSB: Frequently Asked Questions, https://www.ifrs.org/groups/international-sustainability-standards-board/issb-frequently-asked-questions/.
[5] IFRS S1, IFRS Sustainability Disclosure Standard, General Requirements for Disclosure of Sustainability-related Financial Information (June 2023), page 6, https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards-issb/english/2023/issued/part-a/issb-2023-a-ifrs-s1-general-requirements-for-disclosure-of-sustainability-related-financial-information.pdf.
[6] Id.
[7] Id. at 7.
[8] Id.
[9] Id. at 8.
[10] Id.
[11] Id. at 7-8.
[12] Id. at 8-9
[13] Id. at 9.
[14] Id.
[15] Id.
[16] Id. at 9-10
[17] Id. at 10.
[18] Id.
[19] Id. at 11.
[20] Id.
[21] Id.
[22] Id.
[23] Id. at 12.
[24] Id.
[25] Id. at 12-13.
[26] Id. at 14.
[27] Id.
[28] Id.
[29] Id. at 15.
[30] Id. at 16.
[31] Id. at 15.
[32] Id. at 16.
[33] IFRS S2, Sustainability Disclosure Standard, Climate-Related Disclosures (June 2023), page 5, https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards-issb/english/2023/issued/part-a/issb-2023-a-ifrs-s2-climate-related-disclosures.pdf.
[34] Id.
[35] Id.
[36] Id. at 19.
[37] Id. at 20.
[38] See id. at 5-18.
[39] Id. at 5.
[40] Id. 5-6
[41] Id. at 6.
[42] Id. at 7.
[43] Id.
[44] Id. at 8
[45] Id. at 8-9.
[46] Id. at 9.
[47] Id.
[48] Id. at 10.
[49] Id. at 9.
[50] Id. at 11.
[51] Id. at 11-12.
[52] Id. at 13.
[53] Id.
[54] Id.
[55] Id. at 14.
[56] Id. at 14-16.
[57] Id. at 16.
[58] Id. at 16-17.
[59] Id. at 17.
[60] Madeleine Hillyer, World Economic Forum and ISSB Partner to Compile Learnings on Early Sustainability Reporting Efforts, World Economic Forum (June 6, 2023), https://www.weforum.org/press/2023/06/world-economic-forum-and-issb-partner-to-compile-learnings-on-early-sustainability-reporting-efforts.
[61] Id.
