As expected, the International Sustainability Standards Board (ISSB) on June 26, 2023, issued two new disclosure standards that aim to interweave the climate and sustainability footprint of businesses into financial reporting.
The standards are the first round of environmental, social and governance (ESG)-related disclosure rules to be developed by the board and are being pushed for global use. Both standards are effective for annual reporting periods beginning on or after Jan. 1, 2024. Earlier application is permitted if both are applied at the same time.
“Our language is an accounting language; it is sustainability translated into an accounting language,” ISSB Chair Emmanuel Faber said in a speech at an IFRS Foundation conference that same day. “So you will find in S1, in particular the general requirements, a huge amount of notions that you’re very familiar with on purpose because we want as much as possible that connection within the general purpose financial reporting with the financial statements and with the valuation,” he said. “We are here to support the needs of the primary users of general purpose financial reports in the amount and the decision that they take on providing resources to entities, companies, bankers investors and others. That’s the reason why we exist and for that we know which language they need to be using and we’re focusing on that.”
Under IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2, Climate-Related Disclosures, businesses must disclose all sustainability-related risks and opportunities that could reasonably be expected to affect their cash flows, access to finance or cost of capital over the short, medium or long term that could reasonably be expected to affect prospects.
S2 is specific to climate-related risks to which the entity is exposed, i.e., climate-related physical risks; climate-related transition risks; and climate-related opportunities available to the entity.
The ISSB’s trustees have stressed that the rules are to be viewed as a global baseline for use worldwide.
“The global baseline approach, supported by the G20 and others, will provide investors with globally comparable sustainability-related disclosures that have the potential to move market prices, without constraining jurisdictions from requiring additional disclosures,” IFRS Foundation Trustee Chair Erkki Liikanen said in a statement. “This will help companies and investors by tackling duplicative reporting.”
Upon issuance, the standards pulled strong support from regulatory and other bodies including the AICPA-CIMA, the Financial Stability Board, and International Organization of Securities Commission (IOSCO).
“IOSCO has been actively involved in the IFRS Foundation’s consideration of whether and how to apply its trusted reputation and internationally renowned global standard-setting process to the topic of sustainability disclosures,” IOSCO Chair Jean-Paul Servais said in a statement. “We commend the leadership of the ISSB for the pace and quality of their work. IOSCO is conducting an independent assessment of the ISSB Standards, with a view to completing this review promptly.”
According to the main tenets of the guidance, both S1 and S2 require business entities to disclose information that will enable investors to understand:
- the governance processes, controls and procedures a business entity uses to monitor, manage and oversee sustainability (S1) and climate-related (S2) risks and opportunities;
- the entity’s strategy for managing sustainability (S1) and climate-related (S2) risks and opportunities;
- the processes the entity uses to identify, assess, prioritize and monitor sustainability (S1) and climate-related (S2) risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process; and
- the entity’s performance in relation to its sustainability (S1) and climate-related (S2) risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation.
This article originally appeared in the June 27, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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