On June 26, 2023, the International Sustainability Standards Board (ISSB) released its inaugural standards which set out requirements for sustainability-related (IFRS S1) and climate-related (IFRS S2) financial disclosures (ISSB Standards). The new standards fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and consolidate the requirements of multiple other leading sustainability reporting frameworks. As a result, the ISSB Standards set out comprehensive reporting requirements which, for many companies, will require considerable thought and resources to implement.
For companies located in Canada, there is currently no mandatory requirement to comply with the ISSB Standards. However, the Government of Canada, as well as various regulatory and professional agencies, has voiced support for the ISSB and the movement towards standardized and mandatory climate-related financial disclosures. So the question remains: To ISSB or not to ISSB?
For an overview of the impact of such standards on the global ESG landscape and on Canadian companies more specifically, please read our other bulletin entitled "New ISSB Standards - The World Is Aligning On ESG Disclosure Requirements, Is This the End of the Alphabet Soup for ESG Disclosure Requirements and How Will Canada Position Itself?" .
What is the ISSB?
The ISSB was launched at the United Nations Framework Convention on Climate Change's 2021 conference of the parties, known as COP26, in Glasgow, Scotland. The creation of the ISSB had global support including from the G7, the G20 and more than 40 Central Bank Governors. The Government of Canada was a vocal advocate for the creation of the ISSB and, perhaps unrelated, Montreal was selected to host the ISSB's North American office.
A primary objective of the ISSB is to develop standards for a global baseline of sustainability disclosures.
IFRS S1 sets out disclosure requirements related to sustainability-related risks and opportunities, while IFRS S2 sets out climate-related disclosures. While the ISSB Standards fully incorporate the recommendations of the TCFD, they also consolidate sustainability-related disclosure frameworks established by the Climate Disclosure Standards Board, Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council.
Both IFRS S1 and IFRS S2 are organized around the TCFD's concept of four overarching pillars:
- Governance with respect to climate-related risks and opportunities;
- Strategy with respect to actual and potential impacts of climate-related risks and opportunities;
- Risk management processes to identify, assess and manage climate-related risks; and
- Metrics and targets to assess and manage climate-related risks and opportunities.
The ISSB is working with organizations such as the European Financial Reporting Advisory Group and the Global Reporting Initiative to ensure its standards are aligned and interoperable with other reporting frameworks. The standards are also 'GAAP agnostic', meaning they can be applied by a company preparing their financial statements in accordance with International Financial Reporting Standards (IFRS) Accounting Standards or generally accepted accounting principles (GAAP).
What's New in the Final ISSB Standards?
The ISSB released drafts of the IFRS S1 and IFRS S2 standards for public review and comment in March 2022. During the 120-day consultation period, ISSB received approximately 1,400 responses. As a result of this consultation, numerous changes were made to the final standards, including:
- Introducing temporary relief from various requirements, including the disclosure of Scope 3 GHG emissions (indirect emissions, ie. those of suppliers) and the requirement for sustainability-related financial disclosures to be released concurrently with financial statements, for the first annual reporting period in which a company applies the standards.
- Establishing criteria to identify when a company does not need to provide quantitative information about financial effects of a sustainability-related risk or opportunity.
- Introducing limited exemptions to allow a company to omit commercially-sensitive information about a sustainability-related opportunity.
IFRS S1 – Sustainability-related Disclosures
Companies following this standard must provide disclosure based on the following concepts:
- Focus on material information, which is defined in a consistent manner with the IFRS Accounting Standards. Sustainability-related risks and opportunities must be disclosed if that information could reasonably be expected to affect its prospects and influence decisions by investors. Material information about sustainability-related risks and opportunities throughout a company's value chain must also be disclosed.
- Fair presentation requires a company to provide a complete, neutral and accurate depiction of sustainability-related risks and opportunities.
- The reporting entity for IFRS S1 disclosures must be the same as the reporting entity for the financial statements.
IFRS S2 – Climate-related Disclosures
IFRS S2 requires an entity to disclose information about climate-related risks associated with both physical risks (e.g. resulting from extreme weather or sea level rise) and transition risks (e.g. associated with policy and technology changes), as well as climate-related opportunities. The disclosure requirements in relation to strategy and metrics and targets, in particular, are particularly stringent and include:
- Information on how the entity has responded to and plans to respond to climate-related risks in its strategy and decision-making, including how it plans to achieve its climate-related targets;
- Actual and anticipated effects of climate-related risks and opportunities on the entity's financial position, financial performance, and cash flows;
- Measurement of absolute greenhouse gas emissions including Scope 1, Scope 2 and Scope 3 emissions; and
- Information on all quantitative and qualitative climate-related targets, including metrics used to monitor progress, performance against the target, and third party review of targets.
IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after January 1, 2024.
What's Next and Why it Matters
The ISSB Standards released on June 26, 2023 are only the beginning, as ISSB has a clear mandate to develop additional standards to address issues such as biodiversity and human rights. ISSB has already indicated it will work with the Taskforce for Nature-related Disclosures (TNFD) and other existing nature-related standards to develop incremental enhancements to the IFRS S1 and S2 to address the intersection of climate and biodiversity disclosures.
The Government of Canada has repeatedly voiced its commitment to move towards mandatory climate-related financial disclosures based on the TCFD recommendations. Through its membership in the G7, Canada has also voiced support for the ISSB standards and the goal of creating global climate-related reporting standards. Given the ISSB's wholesale adoption of the TCFD, as well as Canada's consistent support for the ISSB initiative, it is likely that Canada will, at minimum, incorporate elements of the ISSB's standards into Canadian reporting requirements in the future.
This expectation is supported by the fact that, also on June 26, 2023, Financial Reporting & Assurance Standards Canada finalized the membership of the Canadian Sustainability Standards Board (CSSB), which is comprised of representatives from public and private companies. The CSSB will partner with the ISSB to support the uptake of ISSB Standards in Canada.
Adoption of the ISSB Standards in Canada is also likely to be supported, and potentially advocated for, by institutional and private investors. Corporate Canada demonstrated strong support for the ISSB mandate through its supports of Canada's bid to host the ISSB, which was supported by large pension funds, financial institutions, securities regulators, accounting firms and other large Canadian companies.
Given the broad support for the ISSB Standards, in Canada and globally, Canadian entities should prepare for increasing expectations, and potentially requirements, to adopt the standards. The ISSB Standards require comprehensive and detailed disclosure to allow users of financial reporting to understand how an entity is (or is not) assessing and managing sustainability-related and climate-related risks and opportunities. The minimal transition provisions mean entities should thoroughly understand the requirements of the ISSB Standards prior to adopting the standards, as it is likely that most companies will need to implement new reporting or monitoring activities.
Although implementing the new standards will likely be a challenge for many entities, the threshold for adopting the ISSB Standards will only increase moving forward. Rather than "To ISSB or not to ISSB", perhaps the right question to ask is "If not now, when?".
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