ISSB publishes new sustainability standards for global corporate reporting

The International Sustainability Standards Board has published its sustainability standards - IFRS S1 and IFRS S2.

IFRS S1 - requires an entity to disclose information in its financial statements about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, access to finance or cost of capital over the short, medium or long term. Sustainability-related risks and opportunities that could not reasonably be expected to affect an entity’s prospects are outside the scope of the standard. 

IFRS S2 – requires an entity to disclose climate related risks and opportunities.

Key takeaways:

1. The disclosures required by the standards must be published as part of an entity's general purpose financial statements.
2. The sustainability/climate related financial disclosures shall cover the same reporting period as an entity's financial statements.
3. The standards can be applied to an entity's financial statements regardless of whether they report in accordance with IFRS or GAAP.
4. An entity shall apply IFRS S1 and IFRS S2 for annual reporting periods beginning on or after 1 January 2024. Earlier application is permitted.
5. Sustainability related financial information must be comparable, verifiable, timely and understandable.
6. Companies have to disclose material information about sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects. Commercially sensitive information about a sustainability-related opportunity does not have to be disclosed.
7. IFRS S1 and IFRS S2 – Companies have to provide financial disclosures against 4 pillars (which appear to be modelled off the existing TCFD framework) – Governance, Strategy, risk management and metrics and targets.

• Governance – Companies will have to disclose the governance processes they use to monitor and manage sustainability-related risks and opportunities (IFRS S1) and climate related risks and opportunities (IFRS S2). This will require providing information about the make-up of a company's board, the skill set of the directors and the way in which decisions are made on sustainability related issues.
• Strategy – requires an entity to disclose the sustainability-related risks and opportunities (IFRS S1) and climate related risks and opportunities (IFRS S2) that could reasonably be expected to affect the entity’s prospects and the anticipated effects of those sustainability-related risks/climate related risks and opportunities on the entity’s business model and value chain. For climate related risk the entity must disclose whether the risk is a climate-related physical risk or a climate-related transition risk. There is a focus here on the resilience of a company's sustainability strategy. This limb requires companies to disclose quantitative and qualitative information about how sustainability-related risks/climate related risks and opportunities have affected the financial performance and cash flows of the company for the reporting period.
• Risk Management – requires a company to disclose the processes and policies a company uses to identify and monitor sustainability-related/climate related risks, including information about data sources and how the company assesses the nature, likelihood and magnitude of sustainability/climate related risks and opportunities.
• Metrics – IFRS S1 requires an entity to disclose for each sustainability risk/opportunity the metrics the entity uses to measure and monitor that sustainability-related risk or opportunity; and its performance in relation to that sustainability-related risk or opportunity, including progress towards any targets the entity has set. Example metrics are not included for IFRS S1 but the standard guides people to the Global Reporting Initiative Standards and the European Sustainability Reporting Standards.

For IFRS S2 a company must disclose:

• Scope 1, 2 and 3 emissions and measure its greenhouse gas emissions in accordance with the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004) unless required otherwise and disclose the approach it uses to measure its greenhouse gas emissions. 
• Climate-related transition risks and climate related physical risks and the amount and percentage of assets or business activities vulnerable to climate-related transition/physical risks;
• climate-related opportunities and the amount and percentage of assets or business activities aligned with climate-related opportunities.
• Capital deployment—the amount of capital expenditure, financing or investment deployed towards climate-related risks and opportunities.
• Internal carbon prices. 
• Remuneration – the entity shall disclose whether and how climate-related considerations are factored into executive remuneration and the percentage of executive management remuneration that is linked to climate related considerations. 
• The quantitative and qualitative climate-related targets it has set to monitor progress towards achieving its climate related goals, and any targets it is required to meet by law, including any greenhouse gas emissions targets and any planned use of carbon credits. Any information about the planned use of carbon credits shall clearly demonstrate the extent to which these carbon credits are relied on to achieve greenhouse gas emissions targets.