The International Sustainability Standards Board (ISSB) issued its inaugural standards at the IFRS conference in London in late June (colloquially known as IFRS S1 and IFRS S2). For the first time, we now have a common accounting language for disclosing the impacts of industry-specific sustainability issues and climate-related risks and opportunities in capital markets worldwide. IFRS S1 and S2 are effective for annual reporting periods beginning on or after January 1, 2024.
In his remarks introducing the new ISSB standards, ISSB Chair Emmanuel Faber underscored a disconnect that has existed between nature and economics for more than 100 years; a growing gap he ultimately cited as a need for the harmonized IFRS standards. “We are reaching planetary boundaries where uncertainty is growing and hitting the financial and systemic stability of the markets,” Faber stated. “Economics do not recognize nature. The price we pay and what we account for in the financial statements is not what it took nature to create oil … we consider that for free.”
Climate Change Impacts and the Need for Global Action
The global economic system, which has driven linear growth for the past century, has run up against the reality of life on a circular planet. Resources are finite and must be renewed to remain viable for future generations. Today’s global capital markets are inextricably intertwined and transparency in global accounting is more important now than ever.
Faber pointed to recent climate change-induced heat waves in Europe that crippled infrastructure for millions of people. This is evidence of the urgent need for global action. He also referenced the recent announcements by insurance giants State Farm and Allstate, both of which ceased issuing new property and casualty insurance policies for homeowners in California (the world’s fifth-largest economy) due to increased concern of wildfires.
A Global Baseline – IFRS S1 & S2 Defined
To be clear, the new ISSB reporting and disclosure standards are not new; they were adapted over the past 18 months from foundational ESG frameworks such as SASB, TCFD, and CDSB. Faber indicated we have “crossed the frontier” with the launch of S1 and S2, which represent a “consistent and comprehensive accounting language” that can be leveraged to measure the material ESG risks and opportunities across a company’s entire value chain. Let’s explore what that means vis-a-vis the new IFRS 1 and IFRS 2 reporting requirements.
IFRS S1 – General Requirements for Disclosure of Sustainability-Related Financial Information
IFRS S1 is the ISSB’s foundational document. It sets out general requirements for a company to disclose information about its sustainability-related risks and opportunities that are useful in making investment decisions. IFRS S1 states that the value a company creates for itself is inextricably linked to its broader business ecosystem (I.e., civil society, human capital, natural resources, climate risk, etc.).
To be able to manage for the long term, companies must consider how they are approaching those relationships and dependencies and the impacts they have. Any ESG-related risk or opportunity that is likely to be financially material should be reported. IFRS S1 is focused on driving connections to sustainability within general-purpose financial reporting and, as such, it:
- Requires disclosure of material information about sustainability-related risks and opportunities within the financial statements to meet investor information needs.
- Applies the TCFD structure whenever providing information about sustainability (I.e., Governance, Strategy, Risk Management, and Metrics & Targets).
- Requires industry-specific disclosures in alignment with SASB’s 77 industry sectors.
- Can be used in conjunction with any accounting requirements (GAAP).
- Should be prepared for the same reporting entity and reporting period and provided at the same time as the entity’s related financial statements.
IFRS S2 – Climate-Related Disclosures
IFRS S2 is designed to help investors measure potential financial risks and opportunities that climate change poses to a company’s future performance and prospects. It helps investors understand how the company is responding, including any relevant transition planning, for areas under the company’s direct control, as well as its associated value chain. As such, IFRS S2:
- Is required to be used in accordance with IFRS S1 to enhance full disclosure of material information and climate-related risks and opportunities.
- Fully incorporates the TCFD recommendations.
- Requires disclosure of material information about climate-related physical and transition risks and related opportunities.
- Requires industry-specific disclosures, in alignment with SASB’s 77 industry sectors, and provides illustrative guidance to help companies identify climate-related risks, opportunities, and disclosures.
- Provides guidance on how to assess dual financial and ESG materiality in selecting which issues to disclose.
- Requires a company to use climate scenario analysis to disclose climate-related risks.
- Requires a company to disclose absolute greenhouse gas (GHG) emissions for Scopes 1-3, measured in accordance with the GHG Protocol Corporate Standard.
How SMEs Can Navigate ISSB Standards
All of this is likely quite daunting for leaders of small-to-medium-size enterprises (SMEs), many of whom are struggling with myriad business issues during this challenging economic time. Sensiba has a number of ESG and sustainability services that can help SMEs integrate ESG reporting into their planning initiatives and move confidently in the direction of a greener future.
For companies that are just beginning their ESG journey, we offer a High-Level ESG Assessment designed to help them understand the material ESG issues, topics, and metrics specific to their organization and industry. This first-step assessment is critical for building awareness around key issues and identifying improvement opportunities and serves as a precursor to more robust ESG reporting.
For companies looking for an investor-grade ESG benchmark and assessment, we offer the industry’s most comprehensive ESG intelligence and reporting tool in Impakt IQ. The Impakt IQ framework is a systems-based process that maps seamlessly to IFRS S1 and S2 and is designed to sit alongside a company’s financial statements.
The Impakt IQ Tool Set and Impakt Score provide company executives with a customized investor grade ESG framework through a suite of ESG statements and dashboards, enabling insight into material risks, value creation opportunities, industry benchmarks, and more.
To learn more, reach out to our ESG professionals today!