Embracing the Future: ISSB Standards and the ESG Reporting Evolution

The emergence of the International Sustainability Standards Board (ISSB) Standards launches a transformative era in the realm of Environmental, Social, Governance (ESG) reporting. As the significance of ESG data increases, these standards aim to bridge the gap between financial and non-financial information, fostering a new level of transparency and comparability. The ISSB has introduced IFRS S1 and IFRS S2, setting a new precedent for sustainability-related financial disclosures. This article offers an overview of the ISSB Standards, the practical steps organizations can take to align with those, ensuring robust governance and strategic integration of ESG considerations into their core business processes, as well as importance of the assurance over the disclosed information. We will also discuss how the ISSB Standards interface with mandatory frameworks as EU Sustainability Reporting Standards (ESRS) under Corporate Sustainability Reporting Directive (CSRD) which first year of application is for financial year starting on or after 1 January, 2024.

Introduction

The ISSB Standards are reshaping the business world by establishing a unified framework for ESG reporting, which ensures the comparability and reliability of non-financial (NF) data with financial disclosures. These standards, notably IFRS S1 and IFRS S2, represent a significant shift towards integrated reporting, setting comprehensive guidelines for sustainability and climate-related financial information. Applicable to a wide range of entities, they aim to standardize diverse ESG practices, simplifying reporting and improving its usefulness for stakeholders. IFRS S1 covers general sustainability principles, while IFRS S2 focuses on climate-related disclosures. Both standards are set to take effect for reporting periods starting on or after 1 January 2024. The application of IFRS Sustainability Disclosure Standards is not linked to the application of IFRS Accounting Standards.

Focusing on ESG strategy, risks and targets as per IFRS S1

IFRS S1, “General Requirements for Disclosure of Sustainability-related Financial Information,” sets out the foundational principles for ESG reporting, requiring organizations to disclose how sustainability issues affect their business model, strategy, and cash flows over the short, medium, and long term. 

Central to IFRS S1 is the materiality concept, which covers financial information relevant for sustainability users, with disclosures based on four pillars: governance, strategy, risk management, and metrics and targets. 

Under IFRS S1, organizations are required to disclose their governance structures, detailing the roles and responsibilities of those in charge of overseeing sustainability issues, thus ensuring accountability and transparency in corporate governance.

The standard also mandates entities to describe their strategies for ESG risks and opportunities, including financial implications. Entities must explain how they identify, assess, and manage ESG matters material to their operations and financial outcomes. IFRS S1 further requires the disclosure of risk management processes for material sustainability risks, including mitigation and adaptation measures, and aligns these with the entity's overall risk management framework. Additionally, the standard calls for the disclosure of metrics and targets used to assess and manage relevant sustainability risks and opportunities. These metrics and targets should be clearly linked to the organization's sustainability strategy and objectives, enabling stakeholders to monitor progress and hold the entity accountable for its sustainability commitments. 

Entities are required to reassess their materiality judgments at each reporting date, considering any changes in circumstances or assumptions that might affect what is considered material.

Climate-related financial impacts as per IFRS S2

IFRS S2, “Climate-related Disclosures,” builds on the Task Force on Climate-related Disclosures (TCFD) framework and specifies the requirements for climate-related financial disclosures. It calls for a detailed assessment of how climate change impacts an entity's financial performance, position, and cash flows. Organizations are expected to report on their greenhouse gas emissions, the risks and opportunities presented by climate change, and how these are integrated into their overall risk management. 

While IFRS S2 does not specify transition plan contents, it requires entities to disclose the assumptions and dependencies that underpin their climate-related transition plans. This includes providing insights into how an entity plans to adapt to a low-carbon economy, the expected timeline for these changes, and the implications on the organization's business model and strategy. Additionally, IFRS S2 calls for entities to disclose their assessment of climate resilience, which involves evaluating the organization's preparedness and ability to adapt to various climate-related risks.

The standard also encourages scenario analysis to evaluate resilience against various climate future states and assess the potential impacts on the entity's financial health. Scenario analysis helps organizations to test the robustness of their strategies against a range of climate-related risks, including physical risks such as extreme weather events and transition risks associated with the shift to a low-carbon economy (i.e., market, reputational, regulatory and technological).

IFRS S2 is designed to be applied in conjunction with IFRS S1, ensuring that climate-related disclosures are integrated with broader sustainability-related financial information. While focusing on climate, IFRS S2 also acknowledges the importance of considering sustainability-related topics beyond climate, highlighting the interconnected nature of ESG issues. By aligning with IFRS S1, IFRS S2 contributes to a holistic approach to sustainability reporting, allowing stakeholders to gain a comprehensive understanding of an entity's sustainability performance and its strategic approach to managing climate-related issues.

Key practical implications

As organizations have to navigate the new landscape shaped by ISSB Standards, they face the challenge of integrating ESG considerations into their core operations. This journey begins with the establishment of systems and IT tools for ESG data collection and analysis, ensuring that sustainability metrics are captured accurately and reflect the performance.

Strategic planning should evolve to incorporate ESG goals and action plans, as well as adapt risk management frameworks to include various ESG factors. This evolution will likely require the development of new competencies within companies and may lead to the recruitment of specialized talent or the engagement of third-party experts.

A collaborative spirit will be essential, with finance, sustainability, and operational teams working in tandem to a align ESG and financial reporting. Governance structures may need to be revisited with new roles, and board committees will emerge to oversee the integrity of ESG disclosures.

The convergence of financial and ESG reporting is a critical aspect of this transformation, demanding that organizations present a unified narrative of their financial and ESG impacts. Ultimately, the goal is to embed sustainability into the decision-making process of the organization, ensuring that it becomes an integral part of its operations and strategy, and that it provides business opportunities rather than be considered as a peripheral concern or cost.

Non-financial disclosures are becoming an increasingly important complement to the financial statements, and obtaining a certain level of assurance on the ISSB standards might be optimal. While not (yet) required to date by the regulator, voluntary assurance on the ISSB disclosures could turn out to be a powerful way to enhance credibility towards stakeholders and investors, notably through limited or reasonable assurance.

For companies falling in the scope of the CSRD, assurance on ISSB Standards can be combined with the CSRD assurance to maximize efficiency and leverage of the synergies between IFRS S1/S2 and the ESRS.

Food for thought

Incorporating ESG elements into corporate governance is essential, and this is where we foster synergy among key roles like CFOs and CSOs. Our vision is that ESG should be fully embedded into business as usual, promoting strong governance, commitment and clear reporting.

The ISSB Standards provide a structured ESG disclosure framework, helping organizations transparently showcase their sustainability initiatives. Adopting these standards improves the usefulness of information for stakeholders and supports sustainable, value-driven business practices.

For adopters of the new ISSB standards, it is important to recognize the synergies with the ESRS under the CSRD. Both standards have a high degree of alignment. There are a limited number of specific requirements when a company starting with ESRS has to consider additional information when also complying with ISSB Standards. For example, the ESRS expand IFRS S2's environmental disclosures, demanding detailed reporting on climate, resources, pollution, and biodiversity. The ESRS, based on double materiality, requires disclosures reflecting both the financial effect of ESG factors on the company and company’s impact on society and the environment. This complements IFRS S1, with both advocating for the integrated reporting of financial and non-financial effects, thus improving ESG disclosure quality and relevance. These standards ensure a comprehensive view of sustainability reporting and show strong interoperability that increases efficiency for companies that would report under both sets of standards.