The IFRS foundation recently published a guide on the application of the ISSB standards, as institutional investors have continued to encourage their use.
Below, we’ve covered all the details, including what this means for UK companies, and how we can help.
What is ISSB?
The International Sustainability Standards Board (ISSB) was announced in November 2021 during COP26 in Glasgow. The ISSB was established as part of the IFRS Foundation due to investor and company demand for:
- Decision-useful, comparable information
- Ending the ‘alphabet soup’ of voluntary initiatives
- An efficient reporting landscape
The objective of the ISSB is to generate high-quality standards for a global baseline of sustainability disclosures, building on the market-led initiatives including the Climate Disclosure Standards Board (CDSB) and the Task Force on Climate-related Financial Disclosures (TCFD).
Recent developments
In June 2023 the ISSB published its first two standards:
- IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information
- IFRS S2 – Climate related Disclosures
IFRS S1
We all know accountants are well known for their creativity and this is showcased here with their imaginative names for the standards. Satire aside, IFRS S1, broadly speaking, sets out general requirements for a complete set of sustainability-related financial disclosures whilst disclosing sustainability-related risks and opportunities that could reasonably be expected to impact the entity.
The impact refers to the entity’s cash flow, value of equity, cost of capital or access to finance in the short, medium and long term. Entities are required to report on:
- The entity’s governance of sustainability risks and opportunities.
- Decisions made that could result in future cashflows that have not yet met the criteria for reporting.
- Impacts on the entity’s reputation, performance and prospects as a consequence of the actions it has undertaken.
- The entity’s development of knowledge-based assets.
- Reporting covers interaction through the entity’s value chain.
IFRS S1 states that sustainability-related risks and opportunities include:
- Employment practices and those of suppliers and partners.
- Wastage related to packaging.
- Events that could disrupt the supply chain.
- Assets controlled.
- Investments controller including investments in associates and joint ventures.
- Sources of finance.
For more information on IFRS S1, view the exposure draft here
IFRS S2
IFRS S2 operates in a similar way to IFRS S1 but specifically covers climate-related disclosures. IFRS S2 requires the disclosure of climate-related information to enable users of the financial statements to understand the effects of climate-related risks and opportunities on the entity’s strategy and decision-making, including any transition plans. The reporting requirement covers four areas:
- Governance – how the entity monitors climate-related risks and opportunities.
- Strategy – how climate-related risks and opportunities could enhance, threaten or change and entities business model or prospects.
- Risk management – how climate-related risks and opportunities are identified, assessed, managed and mitigated by the entity.
- Metrics and targets – how the entity manages and monitors its performance for climate-related risks and opportunities.
IFRS S2 also requires an entity to undertake climate-related scenario analysis including physical risks (flooding, wildfire, storms, etc.) and risks associated with the transition to a low-carbon economy. For companies already reporting under TCFD, these will already be carried out.
IFRS S2 requires entities to disclose relevant cross-industry metrics including:
- Greenhouse gas (GHG) emissions in accordance with the Greenhouse Gas Protocol – for absolute measurements and intensity ratios.
- Transition risks – the amount and percentage of assets and/or activities vulnerable to climate-related transition risks.
- Physical risks – the amount and percentage of assets and/or activities vulnerable to climate related physical risks.
- Climate opportunities – the amount and percentage of assets and/or activities aligned with climate-related opportunities.
- Capital deployment ($) towards climate risks and opportunities.
- Internal carbon prices (if applicable).
- Percentage of management remuneration linked to climate.
What does this mean for UK companies?
A decision regarding the endorsement by the UK Government is expected by Q1 in 2025 and would form part of a wider Sustainability Disclosure Reporting Framework. Once this process is complete the FCA will be able to use the UK standards to introduce requirements for UK-listed companies to report sustainability-related information to their investors and the government will also decide on disclosure requirements for the UK endorsed disclosures for entities who do not fall under the FCA regulatory.
While we wait for the government timeline in 2025 Q1 we anticipate that UK listed will be required to report against the ISSB standards for periods beginning 1 January 2026 with large entities following immediately after.
The adoption of IFRS S1 and S2 is expected to have several implications for UK businesses:
- Enhanced Transparency – Companies will be required to provide more detailed and comparable information on sustainability disclosures
- Investor confidence – Providing a standardised approach to sustainability reporting is expected to boost investor confidence and potentially attract more investment (from both investors and financial institutions) into UK businesses that demonstrate strong ESG performance.
- Regulatory compliance – Companies will need to align their reporting practises with the new standard necessitating updates to their sustainability reporting frameworks and processes.
- Competitive advantage – Early adopters of the ISSB standards may gain a competitive advantage by demonstrating their commitment to sustainability and reporting practices.
Questions? Cooper Parry can help
The ISSB framework will be a significant and complex change for ESG reporting amongst many UK businesses. It is also the first ESG legislation making extensive carbon reporting mandatory. It will definitely be an upgrade from existing SECR.
Early preparation is critical to ensure a smooth implementation and transition to these new standards.
If you need support with you carbon footprint, have any questions about the above, or anything sustainability-related, don’t hesitate to get in touch.
