An In-depth Explainer with the ISSB on IFRS S1

The International Sustainability Standards Board (ISSB) recently published IFRS S1 and IFRS S2, marking the introduction of sustainability disclosure standards. These standards aim to provide a high-quality global baseline for sustainability disclosures to aid investment decisions and enhance capital markets' efficiency and resilience.

The new standards aim to facilitate effective communication between companies and investors regarding sustainability risks and opportunities. Investors are provided with globally comparable information that helps them understand how these factors will impact a company's future value. The standards ensure reliable, focused information for investment decisions across different regions.

Our work focuses on establishing a truly global baseline of disclosures to provide standardized information for investors worldwide. By collaborating with international Securities Regulators like IOSCO and various jurisdictions, we ensure the suitability of our standards for global capital markets. Sustainability reporting involves not only investor interests but also other stakeholders and jurisdictional requirements, leading us to incorporate incremental targeted disclosures alongside the global baseline.

Key Aspects of Sustainability Standard 1 (S1) The video discusses the key aspects of Sustainability Standard 1 (S1), emphasizing its role in disclosing sustainability-related risks and opportunities for investors. S1 requires companies to include these disclosures in their financial reporting package, aligning them with financial statements. It sets out general requirements for content and presentation, focusing on governance, strategy, risk management, metrics, and targets.

Structure & Objective of Sustainability Standard 2 Sustainability Standard 1 is structured into six sections: objective of the standard; scope including ISSB standards; conceptual foundations like materiality; core disclosure requirements covering governance and strategy; general requirements applicable to all ISSB standards; judgments uncertainties errors section. The main objective of S1 is to disclose information about sustainability-related risks that could impact cash flows or access to finance over different time frames.

Significance of Sustainability Information for Investors Sustainability related information is crucial for investors as it directly impacts a company's cash flows in the short, medium, and long term. The interactions between the company and its stakeholders (society, economy, natural environment) throughout its value chain determine sustainability risks and opportunities.

Interconnectedness of Company Operations with Resources A company operates within an interdependent system involving resources and relationships along its value chain. Dependencies on these resources like water can lead to sustainability risks or opportunities. Understanding these dependencies helps companies assess their impact on different resources.

Moving from the objectives of S1, this section focuses on establishing conceptual foundations to guide companies in aligning with ISSB standards. S1 defines parameters for essential information disclosure crucial for investor decision-making, emphasizing fair presentation requirements that include revealing sustainability risks and opportunities accurately.

Materiality is a key concept in ISSB standards, focusing on providing investors with information about sustainability-related risks and opportunities that could impact the entity's prospects. The filter used for disclosures is borrowed from IFRS Accounting Standards, requiring information to be significant enough to influence investment decisions if missing or misstated. This aligns with an investor-focused approach and ensures connection with financial statements content.

The concept of connected information is crucial in S1 reporting, aiming to provide a comprehensive package for effective communication. IFRS S1 emphasizes the importance of clear connections between sustainability-related risks and opportunities, governance strategies, metrics, targets, and disclosures. The ISSB plays a vital role in ensuring that investors can understand the interconnected information provided by requiring consistency between financial statements and sustainability disclosures.

S1 focuses on reporting sustainability-related risks and opportunities in alignment with the Task Force for Climate-Related Financial Disclosures (TCFD) recommendations. It emphasizes providing information on governance, strategy, risk management processes, metrics, targets to monitor performance effectively. The structure and concepts of S1 are familiar to those acquainted with TCFD recommendations.

In the general requirements section of S1, compliance with all ISSB standards is crucial. A company can assert compliance only if it meets all these requirements, allowing for an explicit statement of compliance. Compliance exempts companies from disclosing information prohibited by law or regulation and protects commercially sensitive sustainability-related opportunities.

Companies are required to disclose material information on sustainability-related risks and opportunities, including climate-related aspects. Beyond climate concerns, other sources of guidance play a crucial role in directing companies towards identifying and disclosing relevant risks and opportunities. These include the SASB standards, industry-specific disclosure topics, CDSB framework for water and biodiversity disclosures, as well as materials from investor-focused standard setters.

Timing and Location of Disclosures Opportunities Sustainability-related financial disclosures must align with financial statements in timing and reporting period to provide investors timely information. Companies have relief in the first year of reporting to ISSB standards for preparation. Location of disclosures is flexible, allowing companies to include them within various reports as part of an overall package provided to investors globally.

Requirements for Comparative Information Comparative information disclosure is required for all amounts in the current reporting period unless specified otherwise by ISSB standards. In the first year applying ISSB standards, comparative information may not be necessary, offering relief particularly during initial reporting stages.

Feedback from 1400 comment letters highlighted the need for more guidance in understanding new reporting concepts. Two types of guidance are provided in S1: application guidance, which is mandatory and offers detailed instructions on key aspects like identifying sustainability risks and opportunities; illustrative guidance, optional background material to assist users with examples on identifying various sustainability-related risks beyond climate using sassy standards.

Proportionality is key in developing global baseline standards for sustainability reporting, catering to companies of all sizes and resources. The focus is on making the transition manageable by using familiar terminology and concepts like materiality from IFRS Accounting Standards. Emphasis is placed on allowing companies to use available information without undue cost or effort, considering their skills, capabilities, and resources.

Immediate Application of IFRS S1 and Proportionality Companies can start using IFRS S1 immediately to improve their reporting standards. The approach is designed to be proportionate, allowing for a gradual transition to more comprehensive information collection over time.

Early Start on Sustainability Reporting Journey Encouraging companies to begin the sustainability reporting journey by applying standards like IFRS S2 from 2024 onwards. Emphasizing the importance of starting early with climate information due to investor demand and utilizing platforms like CDP for sustainability data.

The video concludes by emphasizing that an overview of S1 has been provided, encouraging viewers to explore further details on the website ifrs.org.

The discussion revolves around the impact of consolidating initiatives like SASB and TCFD into ISSB standards. Questions arise on how this consolidation affects other existing frameworks such as GRI and the new European sustainability reporting standards. Preparers are urged to consider the implications of these changes on their reporting practices.

Alignment of Standards: Transitioning from SASBI & TCFD to ISSB The ISSB standards align closely with the TCFD recommendations and SASBI standards, forming a solid foundation for reporting on climate and sustainability topics. Companies already using SASBI or TCFD guidelines are well-positioned to transition to ISSB standards in the future. GRI and ESRS will coexist alongside ISSB as global baselines for broader stakeholder reporting, each serving distinct purposes in sustainability disclosure.

Harmonization Efforts: Integrating Frameworks for Enhanced Reporting ISSB's integration of SASBI's industry-specific approach and enhancement of TCFD recommendations reflects a comprehensive global solution desired by investors worldwide. The collaboration between different frameworks like GRI, ESRS, and ISSB aims at harmonizing disclosures for both investor-focused communication and compliance with European requirements. By leveraging commonalities among these frameworks, companies can streamline their reporting processes effectively.

Key Steps in Identifying Sustainability Risks Identifying and defining sustainability risks and opportunities is crucial for companies to comply with reporting requirements. The process involves understanding the conceptual basis of where these risks stem from, such as impacts and dependencies. Companies can utilize sources of guidance like SASB standards to identify relevant industry-specific disclosure topics.

Integration of Sustainability Disclosures Disclosure of sustainability-related risks and opportunities should be integrated within financial reporting packages, potentially co-located with financial statements or management commentary sections. Integrated Reporting Framework offers a comprehensive approach to incorporating S1 and S2 disclosures, aligning concepts like governance with existing frameworks for value creation.

The focus is on the use of published standards for investors' benefit. There are two approaches: voluntary adoption by some and regulatory endorsement by IFRS Foundation, known for accounting standards. Collaboration with IOSCO to review and potentially endorse the standards globally.

Audit standards foreign we're also seeing a lot of questions in the chat about audit while auditing is not a part of the issb responsibilities. The standards do elicit verifiable disclosures.

Verifiability is a key aspect of sustainability disclosure standards set by ISSB, focusing on providing useful information for investors. Companies are required to ensure their reported information can be verified to enhance its usefulness. Collaboration with organizations like IAASB shows the growing importance of sustainability audits in the reporting ecosystem.

Recent update on the Task Force on Climate-related Financial Disclosures (TCFD) impacts reporting. Companies currently reporting under TCFD may need to report on all International Sustainability Standards Board (ISSB) standards for compliance.

The Financial Stability Board recently announced the incorporation of TCFD recommendations into S1 and S2 documents, marking a significant milestone in their journey towards standardization. This move signifies a shift from voluntary to regulatory compliance, as envisioned since the inception of TCFD. The announcement also highlights the transition of monitoring responsibilities from FSB to TCFD, solidifying TCFD's role as a legacy organization for past initiatives.

The conclusion emphasizes the beginning of educational content and programming by the IFRS Foundation, inviting viewers to join upcoming events. It highlights a second part on climate-related disclosures scheduled for July 18th and encourages participation through provided links.