The International Sustainability Standards Board (ISSB) on Feb. 16, 2023, unanimously voted to require that global climate and sustainability disclosure rules take effect next year, an ambitious date based on “the urgent” push for the information.
The standards will take effect for annual periods beginning on or after Jan. 1, 2024, but can be adopted earlier if both are adopted at the same time, the board agreed. Companies that choose to apply the standards earlier have to disclose that fact.
The ISSB also affirmed the drafting of the two standards as final rules, declining to re-expose S1, General Sustainability-related Disclosures and S2, Climate-related Disclosures, although several revisions were made. Any changes to those proposals were in line with the 1.4 thousand comment letters that were submitted, according to the discussions.
The rules will be issued by the end of June, the board has said.
The completion of the standards is a landmark moment for the ISSB as they are the board’s first two environmental, social and governance (ESG) standards – done at record pace, in less than a year.
“It is a big moment,” ISSB Chair Emmanuel Faber said during discussions. “It was a short moment, shorter than maybe we had initially planned in the agenda and I think the reason it was is because that paper described very accurately the absolutely incredible work that has been happening before [and] the immense effort and talent that was put in by our staff,” he said. “You are behind that success that moves us into this incredible place a year after we launched our EDs to move to the finalization of the standards. We know why the foundation was chosen, we know why we were told we needed to start with climate and you guys have delivered – I’m incredibly proud and happy.”
The provisions could be significant to U.S. multinational companies and other companies that utilize International Financial Reporting Standards (IFRSs) to file financial statements. But it will be up to jurisdictions or countries to decide whether the standards should be mandatory. The ISSB has said it will push for wide global use, pointing to the International Organization of Securities Commissions (IOSCO)’s remarks last year about reviewing the standards with a view to endorse them.
Overall, the disclosure rules will provide a general framework for reporting material sustainability-related issues; and specific rules for climate, including extreme weather events and greenhouse gas emissions (GHG). Among other details, companies will be required to disclose the risks and opportunities they face related to climate, including the implications for the company’s financial position, performance, prospects, business model and strategy.
Relief Rules Will be Included
In settling on the quick effective date, the ISSB said that many financial statement preparers are already familiar with the guidance as they were built on well-established standards and frameworks, recommended by the Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD recommendations are increasingly being incorporated into legal/regulatory reporting requirements by several jurisdictions, including Canada, the EU, Hong Kong, Japan, Singapore, Switzerland, the U.K and the U.S., meeting papers state.
To ease adoption efforts, the ISSB agreed to provide temporary relief for companies that are less able to comply with the disclosure requirements. These reliefs include:
- transitional relief from the requirement for companies to provide sustainability-related financial disclosures at the same time as the financial statements;
- relief from the requirement for companies to apply the GHG Protocol Corporate Standard, in specific circumstances;
- a temporary exemption allowing companies to delay disclosure of Scope 3 GHG emissions for a minimum of one year when first applying the climate standard;
- not to require the disclosure of comparative information in the first annual reporting period in which a company applies the standards.
Focus Shifts to Implementation + Future Standards
Next, the ISSB will turn its attention toward developing further guidance and training material to support use of the standards, staff members said. Groups will be established to support implementation of the rules and, at a later point, a post-implementation review (PIR) will be done. A PIR is a board process to determine whether a standard worked as intended.
Currently, the ISSB said it is engaging with a number of other jurisdictions and organizations that are active in sustainability standard-setting “in support of the interoperability of its global baseline of cost-effective, decision-useful standards, and to prepare for their effective rollout.”
The board said it is also looking ahead to future standard-setting priorities and plans to continue consulting about its future work during this year’s second quarter.
This article originally appeared in the Feb. 21, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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