Introducing the new ISSB sustainability standards: part two

Last week, we began breaking down the new ISSB sustainability standards. We covered the context of where they’ve come from, whether they’ll be voluntary or mandatory, and what they’ll mean for the wider world of sustainability. In case you missed it, the main takeaway is that they’re ultimately a good thing, pushing for a simpler global baseline for sustainability reporting.

But some big question marks remain. What exactly are the new standards? How will in-scope organisations be able to meet them? How do they differ from standards that already exist? And what are the next steps for any organisation that wants or needs to adopt them in the next few years?

Let’s take a look…

What are the new standards?

The ISSB has so far introduced two standards:

  • IFRS S1 –  General Requirements for Disclosure of Sustainability-related Financial Information
  • IFRS S2 – Climate-related Disclosures

The former outlines the rules a company must follow when reporting on all their short-, medium-, and long-term sustainability-related risks and opportunities. While the latter works alongside IFRS S1 and specifically looks at how organisations should address any climate-related risks and opportunities.

IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information

The objective of IFRS S1 is to require an entity to disclose information about its sustainability-related risks and opportunities that is useful to primary users of general purpose financial reports in making decisions relating to providing resources to the entity.

A business’s sustainability information is intricately linked to its success and relationships. As such, this standard requires organisations to disclose all sustainability information that could impact their cash flow, access to finance, or cost of capital. The goal being that with better transparency, investors can make more informed decisions about which organisations to support. 

This standard also includes guidance on how a business should prepare and report its relevant sustainability information.

IFRS S2 – Climate-related Disclosures

The objective of IFRS S2 is to require an entity to disclose information about its climate-related risks and opportunities that is useful to primary users of general purpose financial reports in making decisions relating to providing resources to the entity.

While IFRS S1 is about disclosing general sustainability information, IFRS S2 hones in on climate-related risks and opportunities. Relevant disclosures include anything that could impact the organisation’s financial status, similar to IFRS S1.

The difference in this disclosure is where its focus is. This standard applies to both physical and transition (risks that come about from transitioning to a lower-carbon economy) climate risks, as well as any positive opportunities a company could experience as a result of climate change.

Four pillars of disclosure

Across both standards, disclosures will fall into one of four core categories. These are:

  • Governance – The processes, controls, and procedures a business uses to monitor and manage sustainability or climate-related risks and opportunities.
  • Strategy – The approach a business takes to manage its efforts.
  • Risk management – The processes a business uses to identify, assess, prioritise, and monitor any potential risks.
  • Metrics and targets – A business’s performance in relation to sustainability and climate-related indicators, including progress towards any targets the company has set or is required to meet by law or regulation.

Materiality

What instantly stands out about these new standards is that they’re relatively vague. Where other reporting standards such as the CSRD outline specific topics to report on, these ones encourage businesses to decide for themselves what is or isn’t relevant.

An entity shall disclose material information about the sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects.

Every business is going to have different sustainability challenges. So this open, flexible approach is a logical way to tackle reporting. It means less time wasted trying to capture irrelevant data and more time focusing on the impacts that matter most to your organisation.

What now?

Now the standards are live, the ISSB is awaiting endorsement from the International Organization of Securities Commissions (IOSCO). They will have to confirm the standards’ suitability for use in global capital markets. They’ll also be tasked with creating assurance standards to help audit and verify future reports. After this, the ISSB plans to work closely with jurisdictions and companies to support their eventual adoption.

In the meantime, it’s up to organisations whether they want to hold fire or begin preparations for implementation. As they’re going to be voluntary for the foreseeable future, there’s no pressure to hit a certain deadline. But these standards will likely create the benchmark for quality sustainability reporting moving forward. So businesses also won’t want to fall too behind.

The way we see it, using these standards as inspiration for your reporting will never be a waste of time. There’s enough overlap that doing so will help you meet other disclosure requirements. And keeping up with these developments will also help you align with the wider shift of global sustainability reporting, meaning less playing catch-up in the future.

There we go! The new ISSB standards in a nutshell. We recommend setting aside some time to read the full documents for yourself. They contain in-depth information about what’s required to comply with each of these standards. And will be the best way to understand if/how your business should respond. You can find them both here and here.

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