The Impact of ISSB’s IFRS S1 and S2 on Global Sustainability Reporting

Sustainability has evolved from being a niche concern to a central component of corporate strategy and governance. In today’s business environment, stakeholders, including investors, customers, and regulators, demand transparency regarding how companies manage their environmental, social, and governance (ESG) responsibilities. Sustainability disclosure standards provide a framework for organizations to communicate their sustainability-related risks and opportunities. These standards are crucial for ensuring that sustainability information is consistent, comparable, and useful for decision-making. 

This blog explores the landscape of sustainability disclosure standards, focusing on the International Sustainability Standards Board (ISSB), which issued its first two sustainability reporting standards on June 26, 2023: IFRS S1 and IFRS S2. These standards mark a significant step toward creating a global baseline for sustainability reporting. 

Sustainability reporting involves disclosing a company’s impact on the environment, society, and economy. It includes various metrics such as greenhouse gas (GHG) emissions, biodiversity impacts, resource use, and supply chain sustainability. These reports serve as the primary means for organizations to communicate their environmental risks and opportunities to stakeholders like investors, regulators, and customers. 

Over the last decade, sustainability reporting has emerged as the fastest-growing form of non-financial reporting. According to recent data, 96% of the largest 500 companies by market capitalization published a sustainability report in 2022, up from 86% in 2018. This surge reflects the growing recognition of sustainability as a critical factor in long-term business success. 

The ISSB, established by the IFRS Foundation, was created to address the fragmented landscape of voluntary sustainability-related standards and requirements that add cost, complexity, and risk to both companies and investors. The ISSB’s mandate is to develop and issue a comprehensive global baseline of sustainability reporting standards—known as IFRS Sustainability Disclosure Standards. These standards aim to provide consistent, comparable, and high-quality sustainability reporting that meets investor needs. 

On June 26, 2023, the ISSB issued its first two sustainability reporting standards:

1. General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1):
   • Purpose: IFRS S1 serves as the core framework for disclosing material information about sustainability-related risks and opportunities across an entity’s value chain. It requires entities to provide comprehensive information about how sustainability factors affect their financial performance and position.
   • Scope: The standard covers all sustainability-related risks and opportunities, emphasizing the need for transparency across a company’s operations. This holistic approach ensures that investors and other stakeholders have access to material information that could impact a company’s financial stability.
2. Climate-related Disclosures (IFRS S2):
   • Purpose: IFRS S2 is the first thematic standard and focuses specifically on climate-related disclosures. It sets out detailed requirements for entities to disclose information about climate-related risks and opportunities.
   • Scope: Given the global emphasis on climate change, IFRS S2 provides a structured approach for companies to report on how climate risks and opportunities impact their business. This includes governance, strategy, risk management, and metrics and targets related to climate.

The IFRS Sustainability Disclosure Standards are based on the four pillars of the Task Force on Climate-Related Financial Disclosures (TCFD) framework:

1. Governance: Disclosures related to the organization’s governance around sustainability risks and opportunities.
2. Strategy: The actual and potential impacts of sustainability risks and opportunities on the organization’s businesses, strategy, and financial planning.
3. Risk Management: The processes used by the organization to identify, assess, and manage sustainability risks.
4. Metrics and Targets: The metrics and targets used to assess and manage relevant sustainability risks and opportunities.

This alignment with the TCFD framework ensures that the structure of the IFRS Sustainability Disclosure Standards will be familiar to companies that have already adopted or are planning to adopt the TCFD framework. Moreover, it facilitates the integration of sustainability information into financial reporting, making it easier for investors to assess the long-term value and resilience of companies.

The adoption of the IFRS Sustainability Disclosure Standards (ISSB Standards) is gaining traction globally, with several jurisdictions actively consulting and integrating these standards into their regulatory frameworks. This momentum highlights the increasing recognition of the need for consistent and high-quality sustainability-related disclosures to enhance transparency and inform investment decisions. Below, we explore the progress and consultations in key regions: 

Canada: Leading the Way with the Canadian Sustainability Standards Board (CSSB) 

Canada is at the forefront of this movement with the Canadian Sustainability Standards Board (CSSB) releasing its proposals for the first Canadian Sustainability Disclosure Standards. These standards, based on the ISSB Standards, aim to address the growing demand for consistent sustainability disclosure. The CSSB proposes an effective date of January 2025, emphasizing the urgency to meet investor expectations and maintain Canada’s appeal to foreign investors. The consultation period is open until June 10, 2024. 

Japan: Integrating IFRS Standards with Local Specificities 

Japan’s approach involves the Sustainability Standards Board of Japan (SSBJ), which has issued exposure drafts of sustainability disclosure standards tailored for the Japanese market. The SSBJ intends to incorporate all requirements from IFRS S1 and IFRS S2, while also considering jurisdiction-specific options that entities can choose to apply. This consultation is a significant step towards aligning Japan’s sustainability reporting with global standards, and it remains open until July 31, 2024. 

Singapore: A Focus on Climate-Related Disclosures 

Singapore is focusing on climate-related disclosures as part of its broader sustainability reporting rules. The Singapore Exchange Regulation (SGX RegCo) is consulting on how to integrate the ISSB Standards, particularly IFRS S1 and IFRS S2, into its reporting requirements. The proposals include a guide to assist issuers with the phased implementation, beginning in 2025. While the initial focus is on climate-related disclosures, SGX RegCo encourages issuers to voluntarily adopt the broader ISSB Standards in anticipation of future regulations. The consultation period closes on April 5, 2024. 

Ongoing Global Consultations: A Collaborative Approach 

Other jurisdictions, including Australia, Malaysia, Brazil, Costa Rica, Sri Lanka, Nigeria, and Turkey, are also progressing towards the adoption of the ISSB Standards. Brazil, Costa Rica, Sri Lanka, Nigeria, and Turkey have already made definitive decisions to adopt or otherwise use these standards, reflecting a growing consensus on the importance of global baseline sustainability disclosures. 

Supporting Global Adoption: The Role of the IFRS Foundation 

The IFRS Foundation is playing a crucial role in supporting the global adoption of the ISSB Standards. In February 2024, it published the Preview of the Inaugural Jurisdictional Guide, which outlines the features of various jurisdictional approaches to adoption. This guide aims to enhance transparency and provide capital markets, regulators, and stakeholders with the necessary tools to navigate the implementation process. 

The proliferation of sustainability reporting standards can create challenges for companies, including increased complexity and costs. Today, there are more than 600 different sustainability reporting standards, frameworks, and guidelines worldwide. This fragmented landscape can make sustainability reporting a complex and repetitive process, leading to inconsistent and non-comparable data. 

However, the establishment of the ISSB and the introduction of IFRS S1 and S2 represent a significant step toward standardization. By providing a global baseline for sustainability reporting, these standards will help companies focus on the most material sustainability issues, reduce the burden of multiple reporting requirements, and enhance the quality and consistency of sustainability disclosures. 

For organizations, selecting the right sustainability reporting standards is a critical step toward improving environmental performance. It is essential to focus on standards that align with the organization’s sustainability and ESG materiality, are widely recognized, and provide clear guidance on key performance indicators (KPIs).

Some of the most important sustainability reporting standards include:

1. EU Corporate Sustainability Reporting Directive (CSRD): A comprehensive sustainability reporting framework for EU companies and large international companies doing business in the EU.
2. IFRS ISSB Standards: Global standards for sustainability and climate reporting that connect sustainability information with financial statements.
3. TCFD: A framework for disclosing climate-related financial risks, which is being integrated into the ISSB standards.
4. CDP: A global environmental disclosure system focused on climate change, forests, and water security.
5. GRI: A long-standing global framework for sustainability and impact reporting.
6. SASB: An industry-specific sustainability reporting framework that is now being integrated into the ISSB standards.
7. B Corp: A certification and set of standards for corporate social, environmental, and governance performance, particularly for small-to-medium companies.

Sustainability disclosure standards play a crucial role in shaping how companies report on their sustainability performance and how stakeholders evaluate these reports. The introduction of the IFRS Sustainability Disclosure Standards by the ISSB marks a significant milestone in the journey toward global standardization of sustainability reporting. These standards provide a comprehensive framework that connects sustainability information with financial reporting, making it easier for investors and other stakeholders to assess a company’s long-term value and resilience.

As sustainability reporting continues to evolve, companies that adopt these standards will be better positioned to meet stakeholder expectations, manage sustainability risks, and capitalize on opportunities that contribute to long-term success. By selecting and adhering to the right sustainability reporting standards, organizations can build trust, enhance their corporate reputation, and drive positive environmental and social outcomes.