On 26 June 2023, the International Sustainability Standards Board (the “ISSB”) issued its inaugural International Financial Reporting Standards (“IFRS”) Sustainability Disclosure Standards (the “Standards”), heralding progress in the development of a global baseline of sustainability-linked disclosures. The Standards build on the concepts that underpin the IFRS Accounting Standards, which are required in more than 140 jurisdictions, but notably not in the United States for domestic issuers subject to regulation by the Securities and Exchange Commission (“SEC”), which must apply US Generally Accepted Accounting Principles (“US GAAP”). Despite broad investor appetite for transparent, uniform and comparable disclosure rules, the scope of required sustainability disclosure and timing for adoption of the SEC’s pending climate disclosure rule remains unresolved.
- IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (“IFRS S1”) requires an entity to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects. The effect on the entity’s prospects refers to the effect on the entity’s cash flows, its access to finance, or cost of capital over the short, medium or long term.
- IFRS S2 Climate-related Disclosures (“IFRS S2”) requires an entity to provide information about its exposure to climate-related risks and opportunities. Information to be disclosed includes both physical risks—such as extreme weather events—as well as transition risks, such as changes in customer behaviour.
Both IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024. Accordingly, where the Standards have been adopted for a 2024 reporting cycle, relevant disclosures will begin to be published in 2025 in an entity’s general purpose financial reports (subject to transitional provisions), alongside an “explicit and unreserved statement of compliance” when disclosing against the Standards. Whilst the launch of the Standards has been a welcome step, seeking to provide greater uniformity in corporate reporting, individual jurisdictions will decide whether entities will be required to comply with the Standards.
What do the standards cover?
Both IFRS S1 and IFRS S2 incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”). Under both Standards, entities will be required to disclose:
- governance procedures used to monitor, manage and assess sustainability-related risks and opportunities, including climate-related risks and opportunities;
- overall strategy for managing those risks and opportunities;
- processes used to identify, prioritise and monitor those risks and opportunities; and
- performance relative to those risks and opportunities, including by reference to any targets it has set or is required to meet by law or regulation.
Investors should benefit from these decision-useful Standards when assessing whether to make investment decisions relevant to a particular entity. In particular, adoption of the Standards should produce more consistent, comparable and reliable corporate sustainability disclosures, thereby better informing capital allocation decisions and corporate strategies flowing from the top.
Although the Standards are likely to be adopted by governments and regulators in many jurisdictions, mandatory application depends on each jurisdiction’s endorsement. The UK government, for instance, has signalled support for the ISSB and confirmed that it will consult on a framework to adopt and endorse the Standards for the UK. Once available for use in the UK, the UK Financial Conduct Authority (“FCA”) intends to update its climate-related disclosures for listed companies under the Listing Rules to reference them. It is expected to consult in Q4 2023.
While the U.S. SEC will not adopt the Standards, there likely will be some substantial overlap between the expected final SEC disclosure rules and the Standards with respect to climate disclosure. However, one large open question is whether disclosure of Scope 3 emissions, required by the Standards, will also be required under the SEC final rule. Despite the lack of SEC rules mandating sustainability disclosure, the overwhelming majority of large US companies already produce voluntary sustainability reports (including Scope 3 emissions disclosures). To the extent that the final SEC climate disclosure rule is less prescriptive than the Standards, many U.S. issuers may still seek to comply on a voluntary basis with the Standards in their voluntary sustainability reports. The ISSB will now work with jurisdictions and entities to support adoption of the Standards. The first steps will be creating a Transition Implementation Group to support entities that apply the Standards and launching capacity-building initiatives to support effective implementation.