The International Sustainability Standards Board (ISSB) has issued its inaugural standards: IFRS S1 and IFRS S2. The Standards will help to improve trust and confidence in company disclosures about sustainability to inform investment decisions in sustainable finance.

The Standards were officially launched by ISSB Chair Emmanuel Faber at the IFRS Foundation’s annual conference June 26, 2023.

True value of nature

Emmanuel Faber set a sombre tone, saying: “We do not recognise nature … the price we pay and what we account for in the financial statement is not what it took for nature to create.” He told the audience that we do not pay the true price of water, giving a personal example. “I ran a company that was the largest almond user in North America … all these elements were grown in California. We needed a lot of water, we paid for that water but what we never paid for was the value that there may come a day where there won’t be enough water for everyone in the Napa Valley.” Faber explained that it was vital to invest in the true value of nature and the protection of ecosystems.

Faber asked the audience to consider the effects of climate risk on the insurance market. The largest Californian insurance company announced last month (May 27) that it would stop issuing any new home insurance packages because of the price and the cost of dealing with the extreme weather events, floods and fires in California. “I’m not talking here about 2050, I’m not talking here about a small emerging country, I’m talking about 2023 [in California].” said Faber.

Faber focused on the role the ISSB Standards will play in ensuring that companies disclose globally comparable information about sustainability-related risks and opportunities, he said: “The ISSB Standards have been designed to help companies tell their sustainability story in a robust, comparable and verifiable manner. We know that better information leads to better economic decisions.”

The standards

The standards fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD):

IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term. IFRS S1 is effective for annual reporting periods beginning on or after January 1, 2024 with earlier application permitted as long as IFRS S2 is also applied.

The objective of IFRS S1 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.

IFRS S1 sets out the requirements for disclosing information about an entity’s sustainability-related risks and opportunities. In particular, an entity is required to provide 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 sets out specific climate-related disclosures and is designated to be used with IFRS S1. IFRS S2 is effective for annual reporting periods beginning on or after January 1, 2024 with earlier application permitted as long as IFRS S1 is also applied.

The objective of IFRS S2 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.

IFRS S2 applies to:

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

IFRS S2 sets out the requirements for disclosing information about an entity’s climate-related risks and opportunities. In particular, IFRS S2 requires an entity to disclose information that enables users of general purpose financial reports to understand:

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.

Global baseline

The ISSB developed IFRS S1 and IFRS S2 with the benefit of extensive market feedback and in response to calls from the G20, the Financial Stability Board and the International Organization of Securities Commissions (IOSCO), as well as leaders in the business and investor community.

The ISSB Standards are suitable for application around the world, creating a truly global baseline.

The ISSB will work with jurisdictions and companies to support adoption.

The first steps will be creating a Transition Implementation Group to support companies that apply the standards and launching capacity-building initiatives to support effective implementation.

Game-changer

Mark Manning, Strategic Policy Adviser on Sustainable Finance, Financial Conduct Authority (FCA) announced that the FCA will align with the ISSB’s new proposals on ESG ratings data and service providers, a move flagged at the City & Financial ESG data regulation summit 2023. Manning said: “This is a strategic game-changer, a real milestone for the industry”. He added “[they] will answer the clear market demand for complete, consistent, comparable and reliable investment material and corporate disclosure on sustainable related matters.”

There have been positive messages of support and collaboration from organisations around the world. Zhongming Zhu, Vice Minister of China’s Ministry of Finance announced China’s commitment to supporting the work of the ISSB and the development of global sustainability disclosure standards: “We are excited to welcome the IFRS Foundation and the ISSB to Beijing and look forward to supporting the development of the office into a hub for engagement, cooperation, capacity building and innovation”.

And Pamela Steer, President and CEO, CPA Canada said, “As our collective focus turns to the successful adoption of the ISSB’s global baseline, collaboration and resource-sharing is vital.”