March 21, 2023

Five-Minute Brief: Towards Standardized Sustainability Reporting

ISSB set to change the reporting landscape for both companies and investors

On February 16, the International Sustainability Standards Board (ISSB) finalized the technical content of its two initial Sustainability Disclosure Standards, IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) (“the Standards”). The ISSB was established by the International Financial Reporting Standard (IFRS) Foundation, which is responsible for developing high-quality, comparable and globally accepted accounting and now, sustainability standards.

The Standards were informed by more than 1,400 responses to its exposure drafts. For an overview of ISSB’s draft sustainability standards, please see our blog post from August 2022.

Key developments

  • The IFRS S1 and S2 Standards are currently undergoing final reviews and are scheduled to be published in June 2023
  • The Standards will be effective for annual reporting periods beginning on or after January 1, 2024; therefore the first reports prepared under the new Standards will be published in 2025 for the 2024 fiscal year 
  • For the first reporting period, companies will not be required to:
    • Report sustainability information at the same time as financial statements  
    • Use the GHG Protocol to measure greenhouse gas emissions  
    • Disclose Scope 3 emissions  

Who the Standards will apply to

Individual jurisdictions will decide whether to adopt the Standards and when they become effective, however companies can apply the Standards as soon as they are published. In Canada, this refers to the Canadian Securities Association in coordination with the provincial and territorial securities regulators. Notably, Canada has already started to lay the groundwork for standardized sustainability reporting. In late 2022, the Canadian Sustainability Standards Board (CSSB) was formed to develop and support the adoption of international sustainability standards in Canada. If adopted, the Standards will apply to public companies in Canada, as well as private companies that use IFRS to prepare their financial statements.

Canadian securities regulators, with input from Canada’s Standard-setting Boards and Oversight Councils such as the CSSB, will determine any future assurance requirements relating to the IFRS Standards.

Changes to sustainability reporting

The ISSB was established to deliver a simplified and common language for global sustainability disclosures. By doing this, the Standards help companies identify and disclose significant sustainability risks and opportunities, and provide investors with comprehensive and decision-useful information.

For companies, the Standards will mean greater disclosure on significant sustainability risks and opportunities and how they are being addressed and incorporated into the company’s strategic planning process. For example, IFRS S1 asks companies to describe how sustainability-related risks and opportunities will positively or negatively affect the company over the short, medium and long term. These impacts could be on the business model, strategy, cash flow, access to finance or cost of capital.

For many companies, this will require enhancing both the content and quality of their disclosures. To do so, companies will need to supplement and improve their existing processes, measurement tools and internal controls, ensuring sustainability and climate information is as rigorous and robust as financial information. This will require additional education, resources, communication and coordination across various teams.

For investors, the Standards will provide more reliable, comparable and consistent sustainability and climate disclosures. This will enable investors to better understand the company’s sustainability and climate risks and opportunities, how they create or erode value for the company and how the company is addressing them. Sustainability and climate disclosures in financial reporting will provide investors with a richer understanding of the company’s value creation model and its exposure to emergent risks and opportunities, enabling better and more informed decision-making.

The Standards come at a critical time. Connecting sustainability and climate risks and opportunities to material financial information will enable investors to direct capital to those companies who are best prepared to create and protect value in the transition to the low-carbon economy.

How You Can Prepare

The Standards are useful for examining risks and capturing opportunities by connecting sustainability and climate to your company’s business model, strategy, financial performance and future prospects. To get started, we suggest:

  • Start having conversations with internal teams such as sustainability, finance and investor relations to build knowledge and awareness of the Standards. This will lay the foundation for future collaboration when new processes, measurement tools and roles are required.
  • Hold sustainability and climate education sessions with your company’s senior management, leadership team and Board of Directors. Using the Standards will require accountability and oversight at the most senior levels of the company.
  • Conduct an assessment to identify the gaps in your existing management practices, processes and disclosures once the final Standards are published in June. The Standards use the Sustainability Accounting Standards Board (SASB) standards and Task Force for Climate-related Financial Disclosures (TCFD) recommendations. Incorporating SASB and TCFD disclosures into your existing external reporting (e.g., Sustainability Report, Annual Report and Management Discussion & Analysis) is a great place to start.
  • Develop a roadmap to ensure you are ISSB-ready. A roadmap will identify specific actions to close identified gaps and align your future reporting with the ISSB Standards.

Update:

On April 3rd, 2023, the ISSB announced they will be providing companies transitional relief in their first year of ISSB adoption by prioritizing climate-related disclosures (S2). Sustainability-related disclosures (S1) will be required in the company’s second year of ISSB adoption.

Adopting the IFRS S1 and S2 Standards into your corporate reporting will be a journey with many opportunities to learn and grow. The Quinn+Partners team can support you to implement this new development in your company. To learn more, contact us today.