April 4, 2022
Global ESG disclosure standards are edging closer with IFRS proposals
5 Min Read
One of the biggest challenges sustainability professionals face today is how to determine which environmental, social, and governance (ESG) standards, laws, and reporting frameworks apply to their business. It’s a confusing landscape of more than 2,600 climate laws and policies and nearly 2,000 ESG reporting provisions that can affect the way companies disclose sustainability matters. But there’s a light at the end of the tunnel. Last week, the International Sustainability Standards Board (ISSB), established by the IFRS in 2021, launched a consultation on its first two proposed global sustainability standards.
Watch the webinar “Navigating ESG Disclosure Frameworks: Building a Future Proof ESG Program” to learn how to align your ESG disclosures with emerging standards.
What’s IFRS? What’s ISSB?
The International Financial Reporting Standards (IFRS) replaced the International Accounting Standards (IAS) in 2001. Its purpose is to provide accounting rules that public companies can use to ensure their financial statements are consistent, transparent, and comparable globally. Although the U.S. and China do not currently use IFRS, it is used by more countries than any other accounting standard. In 2021, the IFRS Foundation established the ISSB to develop a global baseline of sustainability disclosure standards to give companies a consistent set of rules for reporting ESG information. This will make it easier for investors to compare apples to apples when assessing enterprise value.
What are the IFRS proposals? What’s the big news?
The proposed IFRS sustainability disclosure standards represent a significant step toward a globally consistent, common set of ESG disclosure standards. They have been developed in response to requests from policymakers, investors, and other stakeholders for more complete and comparable information on sustainability-related risks and opportunities. The proposals integrate the work of other major sustainability standards and reporting frameworks, including the Climate Disclosure Standards Board (CDSP), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate Related Financial Disclosures (TCFD), and the World Economic Forum (WEF). ISSB also recently announced collaboration with the Carbon Disclosure Project (CDP) and the Global Reporting Initiative (GRI) as part of this effort. The first proposal (IFRS S1) outlines requirements for general sustainability-related disclosure and the second (IFRS S2) specifies climate-related disclosure requirements.
How will the new IFRS sustainability disclosure standards affect my organization?
The proposed standards are voluntary but opting to use them could help companies get ahead of any regulatory changes that may require them in the future.
- IFRS S1 would require companies to disclose information about all significant sustainability-related financial information. The information disclosed would be based on a company’s consideration of its governance, strategy, risk management, targets, and metrics it uses to measure, monitor, and manage significant sustainability-related risks and opportunities. This approach is consistent with TCFD recommendations but extends them to risks and opportunities beyond those related strictly to climate. Companies would need to provide these disclosures at the same time as financial statements are reported.
- IFRS S2 would require companies to disclose material information about its significant climate-related risks and opportunities. It uses the same approach as IFRS S1, basing disclosures on a company’s consideration of its governance, strategy, risk management, targets, and metrics it uses to measure, monitor, and manage significant sustainability-related risks and opportunities. It also includes a requirement for companies to disclose information about climate-related physical and transition risks and opportunities.
Will IFRS sustainability disclosure standards be mandatory?
Each jurisdiction will decide whether to adopt and/or require companies to use the new IFRS sustainability disclosure standards, just as they have done with the IFRS accounting standards. Jurisdictions that have already adopted the IFRS accounting standards are likely to adopt the two new standards as well. Currently 166 jurisdictions around the world have adopted IFRS standards. Of those, 144 require IFRS standards for all or most companies in their public capital markets. Regarding G20 jurisdictions, fifteen have adopted IFRS standards. Of the remaining five:
- Japan allows IFRS standards on a voluntary basis for domestic companies.
- China, India, and Indonesia have adopted standards that are substantially in line with IFRS standards.
- The U.S. uses generally accepted accounting principles (GAAP) instead of IFRS and only allows foreign securities issuers to use IFRS standards. It is worth noting, however, that the U.S. Securities and Exchange (SEC) has recently issued a proposed ESG disclosures rule that could go into effect as early as the end of this year.
Do the IFRS sustainability disclosure standards meet TCFD recommendations?
The Climate Exposure Draft (IFRS S2) incorporates and adds to TCFD recommendations, which some jurisdictions require. By applying IFRS S2, a company would meet TCFD requirements. IFRS provides a comparison between IFRS S2 and TCFD for easy reference.
When will the new IFRS sustainability disclosure standards come into effect?
The IFRS proposals will be open to public feedback for a 120-day consultation period through July 29. After that, the ISSB aims to publish the new standards by the end of the year, subject to the feedback received.
Watch the webinar “Navigating ESG Disclosure Frameworks: Building a Future Proof ESG Program” to learn how to stay ahead of emerging reporting frameworks and standards.