ISSB Publishes First Exposure Drafts on Climate and General Sustainability-Related Financial Disclosures

Original content provided by BDO Global.

The International Sustainability Standards Board (ISSB), established to develop a comprehensive global baseline of sustainability disclosures for the capital markets, today launched a consultation on its first two proposed IFRS Sustainability Disclosure Standards:

  1. IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information 
  2. IFRS S2 Climate-related Disclosures

The proposals have been developed in response to requests from G20 leaders, the International Organization of Securities Commissions (IOSCO) and others for enhanced information from companies on sustainability-related risks and opportunities. The proposals set out requirements for the disclosure of material information about a company’s significant sustainability-related risks and opportunities that are necessary for investors to assess a company’s enterprise value and are not limited only to climate-related matters.

The Chair of the ISSB, Emmanuel Faber noted:

“Rarely do governments, policymakers and the private sector align behind a common cause. However, all agree on the importance of high-quality, globally comparable sustainability information for the capital markets. These proposals define what information to disclose, and where and how to disclose it. Now is the time to get involved and comment on the proposals.”

When the ISSB issues the final requirements, they will form a comprehensive global baseline of sustainability disclosures designed to meet the information needs of investors in assessing enterprise value. Multiple jurisdictions have already expressed their intention to endorse IFRS Sustainability Disclosure Standards for use in their own jurisdictions.

The deadline for comments on both proposals is 29 July 2022. BDO will respond to the exposure draft.

The ISSB is aiming to finalise the first two IFRS Sustainability Disclosure Standards by the end of 2022.

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

The Exposure Draft (ED) includes proposals for definitions and requirements that are consistent with the IASB’s Conceptual Framework for Financial Reporting, IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

The proposals would require an entity to explain the connections between different pieces of information, including between various sustainability-related risks and opportunities and information in the entity’s financial statements.

IFRS S1 proposes to require entities to disclose information about all material sustainability-related risks and opportunities to which an entity is exposed, regardless of whether a specific IFRS Sustainability Disclosure Standard has been issued addressing that topic (e.g. fair labour practices, water usage, etc.). The proposals direct companies to sources that would help them to identify relevant sustainability-related risk and opportunities and to develop disclosures to enable investors to assess enterprise value.

The exposure draft proposes that disclosure of sustainability-related financial information be centred on four primary topics, which are aligned with those in the TCFD recommendations:

  1. Governance
  2. Strategy
  3. Risk Management
  4. Metrics and Targets

The proposals do not specify where an entity would provide these disclosures, however, they would be required to be part of the company’s general purpose financial reporting, which might include an annual report, MD&A, strategic report, etc.

IFRS S2 Climate-related Disclosures

The objective of the Exposure Draft is to require an entity to provide information about its exposure to climate-related risks and opportunities.

An entity’s relationship with the environment has become increasingly important. Climate change presents significant risks for all entities, their activities and their economic sectors. The Exposure Draft was developed in response to calls from users of general purpose financial reporting for more consistent, complete, comparable and verifiable information, including consistent metrics and standardised qualitative disclosures, to help them assess how climate related matters and the associated risks and opportunities affect:

  • an entity’s financial position and financial performance;
  • an amount, timing and certainty of the entity’s future cash flows over the short, medium and long term and, therefore, the assessment of enterprise value by users of general purpose financial reporting; and
  • an entity’s strategy and business model.

The proposals would require disclosure based around the four pillars noted in the summary of IFRS S1 above: governance, strategy, risk management and metric and targets, which is consistent with the approach taken in the TCFD recommendations. The proposals also require disclosure of information about climate-related physical and transaction risks and opportunities.

Included in the metrics and targets pillar, an entity would be required to disclose absolute gross scope 1, 2 and 3 greenhouse gas emissions in metric tonnes of CO2 equivalent and the intensity of those emissions (e.g. emissions per millions of dollars USD revenue).

IFRS S2 is accompanied by Appendix B – Industry-based disclosure requirements, which propose 77 industry classifications across 11 sectors. For example, the Infrastructure Sector comprising 8 industry classifications including real estate, waste management, etc. Appendix B is based on the disclosure requirements of the SASB standards and provides extensive technical guidance on applying IFRS S2.

Useful links:

  1. Exposure Draft Snapshot: high-level summary of the requirements
  2. Exposure Draft page: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information 
  3. Exposure Draft page: IFRS S2 Climate-related Disclosures
  4. Comparison of TCFD recommendations with IFRS S2 exposure draft
  5. Comparison of the Technical Readiness Working Group prototype standards with the exposure drafts

For further information and guidance on sustainability, please refer to BDO’s Global IFRS Micro-site.

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