Understanding the IFRS Sustainability Disclosure Standards
Published: 29 Sep 2023 · Last updated: 3 Oct 2023
Of all of the regulations and frameworks relating to Environmental, Social, and Governance (ESG) reporting, the IFRS Sustainability Disclosure Standards, developed by the International Sustainability Standards Board (ISSB) are the first set of standards to be recognised globally and adopted unanimously by the G20. They therefore represent a new era of more harmonised sustainability-related disclosures and standards of reporting worldwide.
What is the ISSB?
In 2021, the ISSB was developed by the International Financial Reporting Standards (IFRS) at COP26 in Glasgow, following a strong market demand for its establishment. The increasing focus on non-financial disclosures warranted the creation of an independent body which could regulate and standardise non-financial reporting processes and sit alongside the International Accounting Standards Board (IASB).
ESG experts believe that the standards set by the ISSB will prove particularly useful for businesses and investors operating in jurisdictions like the United States, where regulations are anticipated but have not yet been adopted, because the standards will apply for both voluntary and mandatory disclosures. This means that they can be easily integrated with other established regulations and will set an overarching standard for any new legislations put into place at a later date.
Setting the Standard
Earlier this year, the ISSB published the IFRS Sustainability Disclosure Standards (IFRS SDS). These standards are divided into two sections:
- IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information
- IFRS S2 Climate-related Disclosures.
IFRS S1 – General Requirements
Effective from 1st January 2024, IFRS S1 establishes general guidelines for disclosing sustainability-related financial information that is useful to users of general purpose financial reports when making decisions related to an organisation’s resources and exposure to climate-related risks.
The standard mandates the disclosure of sustainability-related risks and opportunities that could impact an entity's cash flows, access to finance, or cost of capital in the short, medium, or long term. IFRS S1 sets the framework for how these disclosures should be prepared and presented, ensuring they are useful during decision-making processes.
IFRS S1 requires firms to disclose information that helps decision-makers to understand:
- Governance processes used to monitor and manage sustainability-related risks and opportunities.
- Strategies for managing sustainability-related risks and opportunities.
- Processes used to identify, assess, prioritise, and monitor sustainability-related risks and opportunities.
- Performance in relation to sustainability-related risks and opportunities, including progress towards any targets or legal requirements.
Initially presented as an Exposure Draft in March 2022, the ISSB redeliberated its proposals based on stakeholder feedback and officially issued IFRS S1 in June 2023. Early adoption is allowed, so many organisations are electing to submit disclosures before they are legally required to, either to familiarise themselves with the process or gain feedback prior to their mandatory disclosures.
IFRS S2 – Climate-related Disclosures
As with IFRS S1, the information disclosed under IFRS S2 should be useful to decision makers.
Alongside the standards listed in IFRS S1, IFRS S2 also covers:
- Climate-related risks to which the entity is exposed, including physical risks and transition risks.
- Climate-related opportunities available to the firm.
ESRS vs. IFRS – How does CSRD compare?
The summer of 2023 saw a landmark event in ESG reporting standards, when all G20 companies reached a joint consensus and elected to collectively adhere to the ISSB’s IFRS Standards. However, the EU Commission recently adopted the European Sustainability Reporting Standards (ESRS) for its new Corporate Sustainability Reporting Directive (CSRD), meaning that organisations that fall into the eligibility criteria of CSRD will be required to report on ESRS standards instead.
Our recent whitepaper offers a guide to CSRD and ESRS including eligibility criteria and a metric overview.
The main difference between CSRD and IFRS is the new concept of double materiality. CSRD requires companies to do a double materiality assessment (including impact and financial materiality) to determine which metrics and data points are required in the reporting process. This is different to IFRS which requires an exclusively financial materiality assessment.
This means that EU companies may have to report on both IFRS and ESRS if they operate both inside and outside of Europe. Firms based outside of Europe will only have to report on ESRS for significant subsidiaries based within Europe. To hear from our compliance experts on eligibility criteria, take a look at our “CSRD in focus” webinar.
The ISSB’s IFRS S1 and S2 marks a big step forward in harmonising global ESG reporting standards. As international investments expand, and as focus on non-financial metrics continues to grow, understanding IFRS will be indispensable for businesses and investors alike. However, with additional regulations such as the CSRD to consider, alongside voluntary and mandatory country-specific guidelines (such as the SEC, the PRA’s SDR, and the European Commission’s SFDR), it’s always best to consult an ESG expert to ensure your organisation is adhering to the relevant regulations and is not going to encounter difficulties further down the line.
The KEY ESG team are on hand for any questions you may have. Get in touch if you have any queries at all, or book a free demo of our platform today to see how our intuitive software can automate your reporting procedures.
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