By many accounts, 2023 is expected to be a transformative year in the evolution of climate-related disclosure and mitigation requirements in the United States. In this webinar, we cut through the jargon to provide clarity about what climate-related requirements may be coming for US companies by unpacking the two proposed federal rules that are currently pending and one EU regulation that affects some US companies.
Companies following the TCFD’s climate-related recommendations will inherently meet the requirements of IFRS S1 + S2.
In June 2023, the International Sustainability Standards Board (ISSB) announced the release of its groundbreaking standards, the International Financial Reporting Standards (IFRS), IFRS S1 and IFRS S2, marking a significant advancement in sustainability-related disclosures in global capital markets. These standards were designed to enhance trust and assurance in corporate sustainability disclosures, influencing investment decisions. For the first time, these standards introduce a unified language for companies to disclose the impact of climate-related risks and opportunities on their future prospects. ISSB Chair Emmanuel Faber spearheaded the official launch of the standards at the IFRS Foundation’s annual conference. In addition, stock exchanges worldwide, from cities like Frankfurt to Santiago de Chile, hosted a series of events to celebrate this milestone.
About the Standards
IFRS S1 focuses on the disclosure of sustainability-related risks and opportunities that are relevant to investors as they make decisions about allocating resources to companies over the short, medium, and long term. While IFRS S1 aligns with the views of the US Securities and Exchange Commission (SEC), it does have notable differences from the European Sustainability Reporting Standards (ESRS). Notably, ESRS integrates the concept of double materiality and has a broader scope compared to the US’s emphasis on information material to investor decisions. The definition of “material” in IFRS S1 is aligned with that used in IFRS Accounting Standards, where information is considered material if its omission, misstatement, or obscurity could reasonably influence the decisions of primary users of general-purpose financial reports. Sustainability-related financial disclosures are required to align with financial statements in terms of timing and be included in the same reporting package. However, S1 doesn’t require a specific disclosure format or location, allowing for potential inclusion in multiple reports. To address the potential challenges companies may face—such as undue cost or effort—when applying requirements that involve a high level of judgment or uncertainty, including identifying sustainability‑related risks and opportunities, the ISSB allows companies to rely on “reasonable and supportable information that is available to the entity” at the reporting date.
IFRS S2 details specific climate-related disclosures and is intended to be used in tandem with IFRS S1. Both standards fully integrate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The required disclosures pertain to material information regarding climate-related risks and opportunities that may impact a company’s value chain and influence its performance. Absolute Scope 1, 2, and 3 emissions disclosures are required in S2 along with how and why specific inputs, assumptions, and estimation techniques were used.
Alignment with TCFD Recommendations
In July 2023, after the Financial Stability Board (FSB) announced the conclusion of the Task Force on Climate-related Financial Disclosures (TCFD)’s work, the IFRS Foundation published a comparison of the requirements in IFRS S2 Climate-related Disclosures with the TCFD recommendations. The IFRS S2 requirements align with the four core TCFD recommendations and its eleven recommended disclosures. Companies that adhere to the ISSB Standards will inherently meet the TCFD recommendations, eliminating the need to apply both separately. IFRS S2 also introduces additional requirements, such as industry-based metrics, disclosure on the use of carbon credits for net emissions targets, and further details on financed emissions.
“The global economy needs common reporting standards to reduce fragmentation and drive comparability in climate-related financial data. Built upon the foundation of the TCFD framework, the ISSB Standards provide a global baseline for companies to disclose decision-useful, climate-related financial information—information that is critical for creating more transparent markets, helping achieve a smooth low-carbon transition, and building a more resilient and sustainable global economy.”Mary Schapiro, Head of the TCFD & Vice Chair for Global Public Policy at Bloomberg L.P.
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A Global Standard
The development of IFRS S1 S2 was influenced by comprehensive market feedback and was a response to calls from global entities such as the G20, the FSB, and the International Organization of Securities Commissions (IOSCO). The widespread demand for a consistent understanding of how sustainability factors impact companies’ prospects is evident through the support for these standards.
The ISSB Standards ensure that companies present sustainability-related information alongside financial statements. They are also grounded in the principles that form the basis of the IFRS Accounting Standards, which are mandated by over 140 jurisdictions. These standards are apt for global application, which could enable a genuine global baseline.
Adoption and Implementation
With the issuance of IFRS S1 and S2, the ISSB is gearing up to collaborate with jurisdictions and corporations to facilitate adoption. Initial steps include the formation of a Transition Implementation Group to assist companies in applying the standards and initiating capacity-building measures to ensure effective implementation.
Emmanuel Faber, ISSB Chair, highlighted the culmination of over 18 months of rigorous work to produce the first set of sustainability disclosure standards for global capital markets. He emphasized the importance of these standards in aiding companies to present their sustainability narratives in a robust, comparable, and verifiable manner.
The introduction of these standards is a significant stride towards establishing a global standard for sustainability reporting. It ensures that investors and stakeholders have access to consistent and comparable sustainability information, paired with financial data, enabling them to understand a company’s performance and commitment to sustainable value creation. Whether you need help navigating the ISSB or other standards, we can help. Contact us today today to get started.
The primary goal of the ISSB in introducing these standards is to provide a unified framework for companies to disclose sustainability-related risks and opportunities, ensuring transparency and consistency in global capital markets.
The IFRS S1 and S2 standards are unique in their comprehensive approach to sustainability disclosures, emphasizing both climate-related risks and broader sustainability metrics. They also offer flexibility in disclosure format and location.
With more transparent and consistent sustainability disclosures, investors will have a clearer understanding of a company’s sustainability practices and risks, potentially influencing investment decisions and strategies.
About the Author
Dominic Sung is Director of Business Development for CarbonBetter. He joined the company in 2022 with a focus on growing the Climate Services business by partnering with clients on their sustainability journey to measure, report, and reduce their emissions in a transparent, traceable, and pragmatic way.
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