Understanding Sustainability reporting in 2023 and beyond

There has been a significant increase in Sustainability reporting disclosure requirements in multiple jurisdictions over the past year. Some key developments are; 

• The Corporate Sustainability Reporting Directive (CSRD) and the European Financial Reporting Advisory Group (EFRAG) are on the cusp of releasing the European Sustainability Reporting Standards (ESRS)
• The International Sustainability Standards Board (ISSB) set to release the IFRS S1 and IFRS S2 Standards by mid-2023
• The Task Force for Nature-Related Financial Disclosures (TNFD) is set to be released in the near future. 
• In the US, the Securities and Exchange Commission (SEC) has decided to mandate the reporting of Scope 1 and Scope 2 emissions for all listed companies, with the recommendation of the disclosure of Scope 3 emissions for larger entities, aligned with the TCFD Framework.

These are in addition to the already well-established reporting Frameworks such as the Global Reporting Initiative (GRI) Standards, and the Task Force for Climate-Change Related Financial Disclosures (TCFD). Meanwhile, the Integrated Reporting Framework (IR) along with the Sustainability Accounting Standards Board (SASB) Standards, which formed the Value Reporting Foundation (VRF), has since consolidated with the IFRS Foundation.

Although many of the new developments have taken place in the EU and US, the impact of these will be global. Companies that are trading partners with corporates that operate within these jurisdictions may indirectly be required to align with the reporting requirements being part of their supply chains. 

What are the ISSB reporting standards?

The IFRS Foundation Trustees announced the creation of the International Sustainability Standards Board (ISSB) in November 2021.

The ISSB has issued standards designed to be a global reporting framework for sustainability and will continue to expand coverage by integrating emerging complementary standards. The aim of the ISSB is to give primary users (investors, lenders, and other creditors) of general-purpose financial reporting more complete, comparable and verifiable sustainability-related financial information to help them assess value. It should therefore be noted that the primary stakeholder group that the ISSB seeks to provide information through corporate disclosure are the financial stakeholders.

The ISSB has issued two standards which were released on 27 June 2023; the IFRS S1 and S2 Sustainability Disclosure Standards. 

The two standards cover a range of sustainability topics, such as environmental management, social responsibility, and corporate governance, and provide detailed criteria for assessing an organisation’s sustainability efforts. 

The standard

The ISSB standards build on the four-pillar (Governance, Strategy, Risk Management and Metrics & targets) structure of the Taskforce on Climate Change Financial Disclosures (TCFD).

The General requirements standard (IFRS-S1) defines the scope of reporting and provides core content, presentation and practical requirements. It requires disclosure of material information on all significant sustainability-related risks and opportunities – not just on climate and provides a framework for future standards.

The climate standard (IFRS-S2) replicates the core content requirements of IFRS-S1 and supplements them with specific climate-specific reporting requirements.

Focus areas

IFRS – S1

• Fundamental topics including materiality and sources of guidance
• Practicalities of reporting, including the timing of reporting and proportionality

IFRS –S2

• Greenhouse gas emissions
• Transition plans and targets
• Climate resilience
• Industry-specific materials

What are the requested disclosures?

The standards have indicated the following information will need to be disclosed on an annual basis;

Material information that;

• Provide a complete and balanced explanation of significant sustainability risks and opportunities
• Covers governance, strategy, risk management and metrics and targets
• Focuses on the needs of investors and creditors
• Is consistent, comparable and connected
• Is relevant to the sector and industry
• Is presented across time horizons: short, medium, and long-term

Material metrics based on;

• Measurement requirements specified in the climate proposal or future standards
• Metrics identified from other guidance (e.g. SASB)
• Other metrics used by the company

Materiality

The ISSB confirmed that it will:

• Base materiality on the International Accounting Standards Board description of materiality and will remove references to assess ‘enterprise value’;
• This marks a distinction between ‘financial materiality’ as envisaged by ISSB, and materiality that considers a wider audience of stakeholders, often referred to as ‘impact materiality’ which is the core of the GRI Standards
• Provide guidance on how a company assesses what information is material, and
• Clarify the objective of reporting and its link to value creation

There is a two-step framework for companies to disclose material information across all sustainability-related topics, not just climate.

Step 1 - The ISSB confirmed that companies ‘shall consider’ disclosure topics and metrics in the industry-based SASB standards 

Step 2 - It also provides guidance on material topics companies ‘may consider’ to report using the Global Reporting Initiative (GRI) standards and European Sustainability Reporting Standards (ESRS).

What does it entail?

IFRS S1 General requirements for disclosure of Sustainability-related financial information (IFRS-S1) outlines two initial steps for companies to follow. 

Firstly, companies would be required to identify and report on significant sustainability-related risks and opportunities which they are exposed to. 

To identify these key risks and opportunities, companies should consider the requirements within the IFRS Sustainability Disclosure Standards (IFRS-S2 and future ISSB standards) as well as:

• Sustainability Accounting Standards Board (SASB) standards;
• other investor-focused frameworks; and
• Industry or local practice.

Secondly, companies are required to disclose material information in accordance with IFRS Sustainability disclosure standards where available, including meeting the criteria covered under core content, comprising of Governance, Strategy, Risk Management and Metrics & Targets. 

IFRS S2 General requirements for disclosure of climate-related disclosures (IFRS-S2) build upon recommendations of the TCFD by providing a framework for climate-related risks and opportunities. This includes qualitative disclosures about anticipated effects on the value chain, transition plans and carbon offsets, climate resilience and scenario analysis, industry-specific disclosures, and cross-industry metric categories including GHG emissions. 

What’s next?

These Standards were developed at a much faster pace than the IFRS Accounting Standards. The IFRS-S1 and IFRS-S2 are published now and effective for reporting periods starting on or after 1 January 2024. 

With the advent of these rapid changes in the Sustainability reporting landscape, corporates will need to establish clear linkage and alignment of the new disclosure requirements with their existing Sustainability reporting efforts and frameworks. There exists a growing call by corporates on framework-setting bodies to ensure interoperability of reporting standards and frameworks, and while some alignment already exists within the framework-setting bodies, corporates seek a method to utilise their existing systems and processes to report on the various requirements imposed by such frameworks.

In our view, corporates that will successfully navigate the alphabet soup of Sustainability reporting Frameworks would be the ones that have a broader definition of materiality, which ensures that multiple aspects of sustainability are considered, and such sustainability aspects are considered taking into account a wider audience of organisational stakeholders and not solely those of its financial stakeholders. 

In the same light, corporates reporting on its material impacts should also report the financial implications of such impacts, which then provides valuable information to the financial stakeholders for investment decision-making. However, considering that financial impact is a subset of overall sustainability impacts, a regime of reporting on overall impacts would make it arguably easier to report on financial impacts, in comparison to the other way around.  

Sustainability reporting is changing at a rapid pace and entering an era where Sustainability reports will be a mandatory requirement and would need to be aligned with one or more international frameworks. It is essential that corporates that are yet to embark on their Sustainability reporting journey, and those who have commenced their journey, carefully consider a framework that will enable them to nimbly report on future framework disclosure requirements through a process of alignment and mapping, by choosing a broad enough framework to report their impacts, rather than a framework with a narrower definition of the term “Sustainability”.

(The writers are the Co-Founders of InterBalance – a boutique advisory services provider in the fields of Sustainability and Enterprise Risk Management)