The engine that powers sustainable organisations
At some point, you’ve already heard of the IFRS or ISSB. But what do these acronyms mean and how are they connected with the IASB? This article picks apart the forthcoming IFRS Sustainability Disclosure Standards within the ecosystem of the IFRS Standards.
ISSB is short for International Sustainability Standards Board, a standard-setting body that was formed to develop a global benchmark for sustainability reporting. The ISSB was founded in November 2021 by the IFRS Foundation in response to increasing capital market interest in ESG issues, and crucially, to address the lack of standardization among reporting frameworks. The IFRS Foundation, a non-profit working in the public interest to set the standard for corporate disclosures, has since 2001 operated with the mission to promote transparency and accountability through its standards. It is governed by Foundation trustees from around the world and a Monitoring Board composed of public market authorities. The ISSB and the International Accounting Standards Board (IASB) are the standard-setting bodies under the umbrella of the Foundation. The IASB is the standard setter for the IFRS Accounting Standards for traditional financial accounting, while the ISSB develops the IFRS Sustainability Disclosure Standards.
In other words, the ISSB does the same for sustainability disclosures that the IASB has done for corporate financial accounting - setting standards and best practices that companies in all sectors and industries can follow, thus facilitating quality disclosures for investment decision-making. The ISSB works closely with the IASB on making sure that both IFRS Standards complement each other.
The IFRS Standards constitute two separate but complementary standards: the IFRS Accounting Standards and the IFRS Sustainability Disclosure Standards. The Standards do several things for capital providers and receivers of capital, for which they are primarily designed:
The IFRS Sustainability Disclosure Standards are currently in development. Upon their finalization and release at the end of 2022, they will serve as a guideline on reporting sustainability-related financial information that may have an impact on the enterprise value of the reporting organization. Amidst a fragmented reporting landscape with different frameworks and guidelines, the IFRS Sustainability Disclosure Standards are an effort to cut through the confusion. They are comprehensive investor-grade standards that are also used by regulators.
To date, two sustainability-related exposure drafts have been released for public consultation: general sustainability disclosures and climate-related disclosures.
There are four elements to reporting: governance, strategy, risk management, metrics, and targets.
What is interesting to note is that the Standards require reporting impacts across the entire value chain of the company. This will present a significant challenge to organizations with complex and multi-tiered supply chains. As it stands, the IFRS definition of a value chain extends to the entire breadth of activity a business is involved in, including the external environment.
The IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information requires information about significant sustainability-related risks and opportunities that are most material to the entity. Sustainability disclosures should be reported alongside financial disclosures, in an attempt to emphasize the connection between the two.
The IFRS S2 Climate-related Disclosures target reporting climate-related risks and opportunities. This translates slightly differently through the four elements:
The ISSB uses the SASB Standards to inform the development of IFRS S1 and S2. While the latter is being developed, reporting organizations can use the SASB Standards for sustainability reporting. Having merged with the Value Reporting Foundation, ISSB is now responsible for maintaining the SASB Standards in addition to the IFRS Standards. The SASB Standards is an industry-focused reporting standard for ESG topics in 77 industries.
More than 140 jurisdictions around the world use the IFRS Accounting Standards, often to comply with local laws. Therefore, the IFRS Sustainability Disclosure Standards are expected to be highly relevant for these jurisdictions, as an additional layer that can complement their existing reporting practices. As we see the adoption of sustainability and reporting-related legislation picking up speed in numerous economies around the world, it is likely that, where the IFRS Accounting Standards are currently a requirement, the Sustainability Disclosure Standards will also be adopted into force. As it stands, the ISSB is already working with jurisdictional quarters to absorb the sustainability-related standards into their requirements.