Group of young modern people in smart casual wear communicating

Where to focus as international sustainability standards are finalized

The ISSB’s proposed standards will form a global baseline of sustainability disclosures that aim to meet investor and public policy needs.

In brief

  • The ISSB will focus on the needs of investors in producing standards that require rigour, quality and global comparability of sustainability disclosures.
  • IFRS S1 sets out proposed sustainability-related disclosure requirements to enable investors to understand the risks and opportunities.
  • IFRS S2 focuses on identification and measurement of climate related risks.

The International Sustainability Standards Board (ISSB) was established by the IFRS Foundation in November 2021 with the aim of delivering a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities, to help them make informed decisions about the enterprise value of companies. Since then, the ISSB has released two exposure drafts, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-Related Disclosures (IFRS S2), for public comment. The comment period ended on 29 July 2022, with hundreds of comment letters received from stakeholders. The ISSB is currently finalizing the standards based on reviewing the feedback it has received on the proposals.

Overview of the exposure drafts and the overall feedback

IFRS S1 sets out the proposed requirements for companies disclosing sustainability-related financial information about all of their significant sustainability-related risks and opportunities. In turn, this provides the market with a complete set of financial disclosures that will help investors understand how companies are responding to ESG issues like climate to inform their capital allocation decisions.

Similarly, IFRS S2 sets out the proposed requirements for the identification, measurement and disclosure of climate-related financial information.

The ISSB’s response to the demand for global sustainability reporting standards by developing these requirements has been well received. It has invested extensive efforts in developing the exposure drafts. Contributions from various standard-setters and framework providers have resulted in the consolidation of a set of requirements that are ambitious and that reflect the pressing need for a global baseline for reporting on sustainability-related financial information.

The ISSB has also leveraged off the framework developed by the Task Force on Climate-Related Financial Disclosures (TFCD) recommendations under four core themes - governance, strategy, risk management and metrics and targets. In using this existing framework, the ISSB expects to see a more comprehensive and efficient uptake of the requirements among companies. Many constituents believe that the requirements in the exposure drafts meet their intention to disclose sustainability-related financial information that will assist investors’ understanding of companies’ general purpose financial reports in assessing their enterprise value and, in turn, whether to provide resources to them.

Given that international sustainability standard-setting represents one of the most significant changes to corporate reporting for decades, both board members and senior executives will need to carefully monitor this standard-setting development, with particular focus on a number of key issues that are discussed in this article.

The reporting entity concept

The proposed IFRS S1 requires a company’s sustainability-related financial disclosures to be for the same reporting entity as the related general purpose financial statements. If the reporting entity is a group, the consolidated financial statements and the sustainability-related financial disclosures will be for the parent and its subsidiaries. The definition of a reporting entity is consistent with that in IFRS accounting standards and excludes associates and joint ventures as the investor does not control these investees. However, IFRS S1 would also require a company to disclose material information about all of the significant sustainability-related risks and opportunities to which it is exposed. These risks and opportunities relate to activities, interactions and relationships and to the use of resources along its value chain, such as any investments it controls, including investments in associates and joint ventures, for example, financing a greenhouse gas-emitting activity through a joint venture. It is not entirely clear if the proposed standard would require a company to include its associates and joint ventures in its sustainability-related financial disclosures and further clarification would be necessary.

It is not entirely clear if the proposed standard would require a company to include its associates and joint ventures in its sustainability-related financial disclosures.

In certain cases, companies are already using broader boundaries allowed in the Greenhouse Gas Protocol (i.e., the financial control, the operational control, or the equity control approaches), as they are more relevant when that protocol is applied. However, a different meaning of control may confuse users about the traditional boundaries of general purpose financial reporting. Also, providing disclosures about third parties beyond subsidiaries that are controlled (e.g., associates and joint ventures) may be challenging if the information is difficult to obtain.

IFRS S1 proposes a definition of a reporting entity as any company that is required to prepare general purpose financial statements and which will also need to provide disclosures on sustainability-related financial information. Some group entities (such as financial institutions) are comprised of a large number of entities that are required to prepare financial statements at the entity level. However, sustainability-related financial information is not always monitored at entity level within the group and requiring sustainability-related financial information at every level of a group of entities could become costly for preparers, at least initially. Also, the sustainability-related information disclosed at the entity level may not be as relevant compared with that disclosed at the group level. The reporting requirements of sustainability-related financial disclosures at the entity level if any would depend on the final standard as well as the applicable rules made by the local regulator.

Restatement of comparatives

Under the proposed standards, a company will be required to disclose comparative information that reflects updated estimates when providing sustainability-related financial disclosures. When the company reports updated comparative information, it is required to disclose the difference from the prior year as well as the reasons for the amounts that have been revised.

As explained in the draft Basis for Conclusions to the proposed new standards, there are reasons for retrospective adjustment of changes in estimates. The metrics are not part of a double-entry model that affects reported equity. The nature of some sustainability-related metrics will require significant estimation. It is considered useful to reflect changes in estimates that relate to prior periods through comparatives, rather than knowingly misstating the current period information. In addition, the restatement of estimates may be necessary in the context of sustainability-related financial information because this will help reflect more reliable data that has become available in a future period (e.g., this is often the case for Scope 3 emissions1 ).

However, revising comparatives is a different approach from what companies are used to doing in providing IFRS accounting information, where the effect of a change in an accounting estimate is recognized prospectively, according to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Currently, companies may not be familiar with the practicalities that may arise when revising comparative information relating to estimates, particularly for sustainability-related matters, where it is quite possible that the information to be disclosed year-on-year could change (especially where comparatives for more than one year are presented). Companies will consequently have to continue tracking previously reported estimates to measure them against their actual outcomes, a task that could be burdensome.

Companies will need to better understand the drivers and constraints affecting constituents in the implementation of sustainability standards.

Effective dates

The proposed standards do not include effective dates; these will be set by the ISSB later. Companies will need sufficient time to adjust to the new global baseline. The proposed disclosure requirements will be challenging for many companies because they may not yet have the knowledge, systems and processes to incorporate sustainability-related information in their financial reporting. It will be important to perform further outreach with constituents and field testing of the proposals to help the ISSB better understand the implementation challenges that companies will face. It may also be helpful to consider closely aligning the effective dates of IFRS S1 and IFRS S2 with the effective dates of other major sustainability disclosure frameworks in Europe and the United States, for example, to maximize the potential application as a global baseline as well as a phased-in approach of the requirements, similar to the transition provisions and reliefs that the International Accounting Standards Board included in respect of the initial application of complex IFRS accounting standards, such as IFRS 15 Revenue from Contracts with Customers.

The decisions to be made by the ISSB on these issues upon finalization of the standards will have significant implications for the implementation of sustainability reporting and will affect the processes, controls and systems to be put in place by companies.

Board members and senior executives also need to monitor standard-setting activities and any rules proposed by regulators in local jurisdictions. Specifically, it remains to be seen if, and how, the ISSB standards will be incorporated into the sustainability reporting requirements for companies in Europe, the United States and the rest of the world. Without sufficient harmonization of the requirements, multinational companies could become subject to multiple sustainability reporting frameworks with increased complexity.


The ISSB’s aim in developing sustainability disclosure standards is to drive transparency and enable investors to make better informed choices, and hold companies accountable for sustainability reporting in the same way as they are for financial reporting.

About this article

Related articles

Why there are growing calls for global sustainability standards

Find out why now is the time to establish globally consistent standards for the reporting of nonfinancial information.

24 May 2021 Marie-Laure Delarue