The International Sustainability Standards Board (ISSB) has made a significant stride toward standardising sustainability-related disclosures on a global scale. ISSB recently introduced an inaugural set of disclosure standards, IFRS S1 and IFRS S2, cementing the importance of transparent ESG reporting in capital markets.
The new Standards are the culmination of work carried out by the Task Force on Climate-related Financial Disclosures (TCFD), whose framework heavily influenced their development. This pivotal move signals an increasing emphasis on the direct relationship between sustainability and financial materiality for investors worldwide.
About IFRS S1 and IFRS S2
Two disclosure standards will take effect for annual reporting periods beginning on or after 1 January 2024: IFRS S1 (the ‘General Requirements Standard’), aimed at communicating the sustainability-related risks and opportunities investors face over the short, medium and long term; and IFRS S2 (the ‘Climate Standard’), which establishes specific climate-related disclosures.
The purpose of IFRS S1 and IFRS S2 is to provide a global baseline for sustainability-related disclosures, improving investor trust and market confidence in company disclosures about sustainability and helping to inform investment decisions. They will also create a shared language for disclosing climate-related risks and opportunities on a firm’s prospects.
The Standards are built on the same conceptual framework as the IFRS Accounting Standards, making them easily translatable across jurisdictions and ensuring that companies provide sustainability reporting in the same reporting package as their financial statements.
ISSB’s Standards will have a broad reach
Where most compliance regulation of this type is directed at large firms, the ISSB Standards have an intentionally broad scope, including companies of all sizes. Numerous jurisdictions, including the UK, Canada, Australia, New Zealand, China, Hong Kong, Singapore, Malaysia, Nigeria and Japan, have already signaled their intention to integrate the new Standards into their regulatory regimes. IOSCO has also endorsed the Standards, a move that will likely encourage widespread adoption. EU bodies that recently released the final European Sustainability Reporting Standards (ESRS) that form part of the Corporate Sustainability Reporting Directive (CSRD) framework have indicated that the two sets of standards have “a high degree of climate-disclosure alignment.”
A ‘climate first’ transitional period is available, which will enable entities to provide only climate-related disclosures in their first year of applying the Standards—but more robust reporting requirements won’t wait for long.
Overcoming potential challenges
Firms that have been engaged in reporting under TCFD will likely already have the required elements in place to satisfy the new Standards. Smaller firms, however, may struggle to implement them.
Here are IQ-EQ’s recommended best practices to ensure a smooth transition:
- Start now: Use the time on hand to prepare for the coming disclosure standards by evaluating internal sustainability-related systems and data collection processes; considering the sustainability-related risks and opportunities relevant to the business; and reviewing the ISSB’s Standards and TCFD recommendations
- Gather decision-useful information: Because of their expanded scope and global audience, the Standards are designed to be actionable and cost-effective rather than prohibitive and unwieldy. Ensure you have systems in place to collect sustainability-related information that supports investor decision-making
- Align reporting with financial statements: The Standards are designed to be reported alongside a company’s related financial statements, so prepare to support improved stakeholder understanding of the connections between sustainability-related risks and opportunities, the actions taken by the company to address them, and information in the company’s financial statements
- Watch for overlap: Review any potential overlap between the Standards and other regulatory or voluntary standards to ensure consistency. Be prepared to address any gaps, and consider implementing disclosure controls
How IQ-EQ can help
As a dedicated partner in regulatory compliance and accounting services, IQ-EQ can assist your business in navigating these new sustainability-related disclosure requirements. We aid in advising, providing strategy, and preparing your disclosures in alignment with the evolving regulatory landscape, enabling you to concentrate on core business operations.
These services fit into our wider, four-pillared ESG offering of ESG Set Up, ESG Data Strategy, ESG Data Collection and ESG Reporting.