Stuart Brown

Kreston Global ESG Committee member, Head of Technical and Compliance at Duncan & Toplis

duncantoplis.co.uk

Stuart is an FCA-qualified chartered accountant with more than 10 years of practical accounting and audit experience.

He leads the technical developments for Duncan & Toplis. This covers audit, financial reporting and maintaining quality of work.

He has recently been appointed to Duncan & Toplis’ operations board and become a member of the ICAEW’s influential Ethics Advisory Committee. Stuart also sits on the Kreston Global ESG Committee.

International Sustainability Standards Board issues first reporting standards

June 28, 2023

On 26 June 2023, The International Sustainability Standards Board (ISSB) issued its first two reporting standards, IFRS S1 and IFRS S2.

The need for global consistency: ISSB’s first reporting standards

The issuing of these inaugural standards signifies the “ushering in a new era of sustainability-related disclosures in capital markets worldwide”.

One of the most significant limiting factors to the effectiveness of climate reporting has been the number of different bases on which entities report on. There has been a desperate need for global consistency. It is hoped that the release of these standards will be a turning point for the disclosure of climate-related risks and opportunities specific to individual entities.

These first two standards build on the ISSB’s objectives to;

• Develop standards for a global baseline of sustainability disclosures meeting the information needs of global investors.
• Enable companies to provide comprehensive, decision-useful sustainability information to global capital markets.
• Deliver a common language of sustainability disclosures, with the flexibility for regional ‘building blocks’ to be added by regulators when necessary to meet local and multi-stakeholder information needs.

IFRS S1: General requirements for disclosure of sustainability-related financial information

S1 covers the general requirements for disclosure of sustainability-related financial information.

S1 sets the scene for the specific requirements of S2 and for future sustainability standards covering areas other than climate.

S1 adopts the structure of the Task Force on Climate-Related Financial Disclosures (TCFD). S1 also refers to other standards and frameworks in the absence of a specific ISSB standard.

The standard’s main objective is to “require an entity to disclose information about its sustainability-related risks and opportunities that is useful to users of general-purpose financial reports in making decisions relating to providing resources to the entity.”

There is a requirement that an entity discloses information about all such risks and opportunities that could reasonably be expected to affect the entity’s prospects.

S1 prescribes how an entity prepares and reports such disclosures, setting out general requirements for the content and presentation of those disclosures so that the information is useful to the users of that information.

In particular, the standard requires that an entity provides disclosures about:

1. the governance processes, controls and procedures the entity uses to monitor, manage and oversee sustainability-related risks and opportunities;
2. the entity’s strategy for managing sustainability-related risks and opportunities;
3. the processes the entity uses to identify, assess, prioritise and monitor sustainability-related risks and opportunities; and
4. the entity’s performance in relation to sustainability-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation.

IFRS S2: Climate-related disclosures to drive sustainable decision-making

S2 covers the specific requirements of climate-related disclosures.

The main objective of the standard is to “require an entity to disclose information about its climate-related risks and opportunities that is useful to users of general-purpose financial reports in making decisions relating to providing resources to the entity.”

S2 also incorporates the TCFD recommendations and guidance and includes a requirement to provide industry-specific disclosures. Industry-specific metrics are included as illustrative guidance, taken from SASB standards.

S2 specifically applies to:

1. climate-related risks to which the entity is exposed, which are:
   1. climate-related physical risks; and
   1. climate-related transition risks; and
2. climate-related opportunities available to the entity.

In particular, the standard requires that an entity provides disclosures about:

1. the governance processes, controls and procedures the entity uses to monitor, manage and oversee climate-related risks and opportunities;
2. the entity’s strategy for managing climate-related risks and opportunities;
3. the processes the entity uses to identify, assess, prioritise and monitor climate-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process; and
4. the entity’s performance in relation to its climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation.

Effective date and adoption: Understanding the timeline for implementing ISSB Standards

Both standards are effective for periods beginning on or after 1 January 2024, early adoption is permitted as long as both standards are applied.

Voluntary adoption and potential assurance requirements for entities

Adoption of the standards is voluntary. However, local jurisdictions may make their adoption mandatory for certain classes of entities.

At this stage there are no specific assurance requirements in place. However, analysis provided by IFAC would indicate that of the entities reviewed that did report some ESG information, over 50% have obtained some level of assurance on that information between 2019 – 2021.

Assurance has been gained from the entity’s auditor (who provides the majority) and other service providers.

Although there are no specific international ESG assurance standards currently set, the majority of assurance work was performed under ISAE 3000 (revised). The vast majority of reviews obtained limited assurance with c10% obtaining reasonable assurance.

Future plans: ISSB’s global promotion and consultation on additional reporting elements

The ISSB will be promoting the standards worldwide, working with local jurisdictions and focusing on the standard’s connectivity with financial statements. There is also currently a public consultation on four projects to further understand the standard-setting priorities covering ecosystems, human capital, human rights and integration in reporting. Further standards covering other elements of ESG are likely to follow.

European Sustainability Reporting Standards (ESRS) and Corporate Sustainability Reporting Directive (CSRD): Aligning with ISSB efforts

In addition to the ISSB standards, EFRAG has been developing the European Sustainability Reporting Standards (ESRS – 12).

These standards have a mandatory implementation for applicable entities with a progressive phase-in period over several years, with early adoption being encouraged.

The standards have a comprehensive coverage of ESG matters, not just focusing on climate to start with.

The standards have the concept of double materiality and the ESG reports must be made in the management report, at the same time as the financial statements.

The standards also have a mandatory assurance element, starting as limited but moving to reasonable over time.

EFRAG is working with the ISSB to promote interoperability.

The European standards certainly seem to have built on the international ones so far, and are mandatory with a mandatory assurance element.

Conclusion

The introduction of the two SS standards is a pivotal moment in the reporting of ESG matters.

They provide a basis for international comparability and help bring ESG matters to the forefront of investors’ decision-making.

More will follow but this is a vital moment in the battle towards net zero. Read more about global ESG developments on our sustainability hub.