How ISSB standards redefine sustainability disclosures

How ISSB standards redefine sustainability disclosures

Authors

  • Praveen Tekchandani

    Climate Change and Sustainability Services Leader and Partner, Assurance, Ernst & Young LLP

  • Nhan Quang

    Partner, Climate Change and Sustainability Services, Ernst & Young LLP

5 minute read 01 Aug 2023
Related topics
Assurance
IFRS
Sustainability
CEO agenda
Nonfinancial reporting

Companies can now integrate sustainability and financial outcomes better with the new IFRS S1 and S2 standards.

In brief
  • The new IFRS S1 and S2 standards improve coherence between sustainability disclosures and financial reporting.
  • This makes it easier for investors and other stakeholders to assess the sustainability practices of companies.
  • Regulators need to provide clear guidance on the requirements of such standards, defining materiality and implementing a phased approach to adoption.

In June, the International Sustainability Standards Board (ISSB) announced its inaugural standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2). ISSB noted that these ushered in a new era of sustainability-related disclosures in capital markets worldwide.

The ISSB’s work has received support from governments and central banks in over 40 jurisdictions, including Singapore. Hot on the heels of the announcement, the Accounting and Corporate Regulatory Authority and Singapore Exchange Regulation launched a public consultation on recommendations that require listed issuers to report ISSB-aligned climate-related disclosures starting from financial year (FY) 2025, with large non-listed companies to follow suit in FY 2027.

The IFRS S1 and S2 standards have significant potential to unify the fragmented landscape of sustainability-related standards. They can help enhance the transparency, comparability and consistency of sustainability reporting around the world, making it easier for investors and other stakeholders to assess the sustainability practices of different companies.

Bridging sustainability and financial outcomes

Under IFRS S1, companies must disclose their sustainability-related risks and opportunities to investors, lenders and other creditors. As recommended by the Task Force on Climate-Related Financial Disclosures, many companies operating in industries or geographical locations that are considered highly exposed to climate-related risks may have already been disclosing not only their boards’ oversight of climate-related risks and opportunities but also the management’s role in assessing and dealing with the risks.

However, IFRS S1 covers a broader spectrum of sustainability elements besides climate change. Disclosure requirements are also heightened. These include how the board oversees target setting and monitors progress, whether dedicated controls and procedures are applied to the management of sustainability-related risks and opportunities, and how these controls and procedures are integrated with other internal functions. To realize the full potential of IFRS S1, companies need to rethink processes and procedures, redesign controls and strengthen their governance.

To be implemented for annual reporting periods beginning on or after 1 January 2024, IFRS S2 requires companies to disclose information about their climate-related risks and opportunities that is useful to investors. Like IFRS S1, the requirements of IFRS S2 are structured around four core elements: governance, strategy, risk management, and metrics and targets. In particular, IFRS S2 mandates the disclosure of Scope 1, Scope 2 and, if material, Scope 3 emissions, offering a broader view of a company’s climate impact.

Both standards provide a structured framework for companies to assess and disclose their resilience to sustainability-related risks, allowing investors to better understand the company’s long-term prospects. Companies have to elaborate how sustainability-related risks and opportunities affect their financial statements, enhancing the coherence between sustainability disclosures and financial reporting.

How EY can Help

Impetus for change

The efforts to deliver sustainability-related financial disclosures required by the standards will vary. It depends on whether companies have already embedded sustainability measures within their business and operating model, with the necessary measurements in place. 

The ISSB standards require companies to disclose their approach in managing sustainability-related risks and opportunities as well as the resilience of their strategy and business model to the risks. Therefore, those in sectors with heavy reliance on fossil fuels and high carbon footprints may be required to conduct a significant strategic review exercise and adapt their practices. This can involve optimizing energy usage, switching to energy-efficient devices, adopting renewable technologies and finding new uses for by-products in their manufacturing process. Companies will also need to respond to consumers’ growing demand for eco-friendly alternatives.

Regardless of the sector, companies will need to match their commitments with the necessary expertise and experience of leadership teams as well as sustainability professionals. There will be increased expectations and responsibilities for audit and sustainability committees; CEOs, CFOs and chief sustainability officers; and compliance, internal audit and sustainability teams.

Companies should set aside a budget to implement the ISSB standards, engage with regulators, conduct a maturity assessment and gap analysis, and develop competencies in sustainability-related financial reporting.

 

Companies in sectors with heavy reliance on fossil fuels and high carbon footprints may need to do a significant strategic review exercise and adapt their practices to meet certain requirements of the IFRS S1 and S2 standards.

How EY can Help

Challenges to regional adoption

According to the Climate Reporting in ASEAN: State of Corporate Practices 2022 report by the Global Reporting Initiative, 70% of the top 600 companies in Southeast Asian countries had sustainability reports. However, only 34% of these reports included information on climate-related risks and opportunities, just 31% disclosed Scope 1 and 2 emissions, and a mere 15% disclosed Scope 3 emissions. 

A separate EY-CPA Australia study, Transparency in focus: State of climate reporting in Singapore, found that Singapore-listed companies have made notable progress in disclosing climate-related information on their business activities since the Singapore Exchange mandated such disclosures on a “comply or explain” basis. However, most provided only high-level observations on the potential impact of climate risks and opportunities. Few quantified and disclosed the range of financial impacts.

These findings highlight opportunities to improve current sustainability reporting practices in the region and underscore the need for adoption of ISSB standards. Implementing ISSB standards in the diverse regulatory landscape of Southeast Asia presents unique challenges. Regulatory autonomy — where each Southeast Asian country has its own sustainability reporting requirements — means the decision to adopt the standards lies with each regulator. Regulators will then need to grapple with integrating these standards into existing frameworks.

While it may bring short-term challenges, the implementation process can deliver long-term benefits for companies and users of their financial reports. These benefits include a better understanding of companies’ rights, obligations, risks and opportunities, especially for those that operate in an inherently vulnerable region such as Southeast Asia.

Ultimately, it is essential that regulators provide clear guidance on the requirements of ISSB standards, defining materiality and implementing a phased approach. Governments can also consider providing incentives to help companies build capability in sustainability-related financial reporting.

The adoption of ISSB standards represents a significant step forward in enhancing the transparency and comparability of sustainability reporting. However, some challenges must be addressed and overcome, with the commitment of the entire business ecosystem. With the right strategies and support, businesses can enhance sustainability practices, improve sustainability-related financial disclosures and contribute to a more sustainable future.

This article is co-authored by Praveen Tekchandani and Nhan Quang who are both Climate Change and Sustainability Services partners at Ernst & Young LLP. It was first published in The Business Times on 20 July 2023.

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    Summary

    The IFRS S1 and S2 standards help investors and other stakeholders to better assess companies’ sustainability practices. They require companies to elaborate how sustainability-related risks and opportunities impact their financial statements. Leadership teams and sustainability professionals with the right skills and experience will play a crucial role in driving efforts to implement these standards. While there may be short-term challenges in implementation, the process can result in long-term benefits, including a better understanding of the company’s rights, obligations, risks and opportunities.

    About this article

    Authors

    • Praveen Tekchandani
      Climate Change and Sustainability Services Leader and Partner, Assurance, Ernst & Young LLP
    • Nhan Quang
      Partner, Climate Change and Sustainability Services, Ernst & Young LLP
    Related topics
    Assurance
    IFRS
    Sustainability
    CEO agenda
    Nonfinancial reporting

    EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.