All you need to know about the inaugural ISSB Standards for Sustainability, and Climate-Related Financial Disclosures (IFRS S1 and S2).
What the standards attempt to be, is a complete and consistent global language with which to communicate sustainability and climate-related financial performance.
When launching the inaugural International Sustainability Standards Board (ISSB) standards for global sustainability disclosures (IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2: Climate-related Disclosures), ISSB Chair Emmanual Faber, called it the most challenging and essential frontier for the capital markets and the future of accounting. The challenge being finding a way and an accounting language to express notions that economics cannot and have not captured. To determine the true costs of doing business, and the true potential of the sustainability opportunities before us.
What I’ve attempted this morning is a comprehensive exploration of International Sustainability Standards Board (ISSB) and its game-changing standards for sustainability-related financial disclosures. I will delve into the key features, benefits, and potential impact of these new guidelines, specifically focusing on the ISSB's two key standards: IFRS S1 and IFRS S2.
In today's world, the urgency of addressing environmental and social challenges cannot be overstated. As businesses and investors increasingly recognise the importance of sustainability, there is a growing demand for transparent and comparable reporting on environmental, social, and governance (ESG) factors. The International Sustainability Standards Board (ISSB) has emerged as a key player, responding to this need by developing globally recognised sustainability reporting standards.
The ISSB's sustainability-related financial disclosure standards, IFRS S1 and IFRS S2, are designed to provide a comprehensive reporting framework that bridges the gap between financial and non-financial information. Let's explore the key features that make these standards a game-changer:
IFRS S1 - General Requirements for Disclosure of Sustainability-related Financial Information: IFRS S1 focuses on general sustainability-related financial disclosures. It provides a unified framework that integrates financial and non-financial information, allowing companies to present a holistic view of their performance. This standard enables companies to disclose material sustainability-related information and assists stakeholders in evaluating the entity's value creation and long-term prospects.
IFRS S2 - Climate-related Disclosures: IFRS S2 requires an entity to disclose information about climate-related risks and opportunities that could reasonably be expected to affect the entity’s cashflows, its access to finance (think, divestment campaigns), or cost of capital over the short, medium or long-term. Climate-related risks may take the form of physical risks of climate change (damage, loss due to the physical impacts of climate change) or transition risks (changes in laws, regulations, taxes, etc.). There may be climate-related opportunities as well.
Materiality and Decision-usefulness: Both IFRS S1 and IFRS S2 emphasise the disclosure of material sustainability-related information. Materiality is a key concept in reporting, ensuring that companies focus on information that is relevant to investors, lenders, and other stakeholders. By providing decision-useful information, companies can help drive informed investment choices and foster trust among stakeholders.
Connectivity and Interoperability: The ISSB acknowledges the importance of existing reporting frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI). The ISSB aims to align its standards with these initiatives, fostering connectivity and interoperability. This alignment ensures consistency and compatibility across different reporting platforms, making it easier for companies to adopt and implement ISSB standards.
The implementation of ISSB standards, IFRS S1 and IFRS S2, offers a multitude of benefits to various stakeholders in the sustainable finance ecosystem. Let's explore some of the key advantages:
Enhanced Investor Confidence: By promoting clear and standardised sustainability disclosures, the ISSB standards enhance investor confidence. Investors can easily evaluate companies' ESG performance, assess risks and opportunities, and make informed investment decisions aligned with their values. Consistent and reliable reporting facilitates comparisons between companies, enabling investors to identify leaders in sustainability and allocate capital accordingly.
Accelerated Transition to Sustainability: ISSB standards incentivise companies to prioritise sustainability by encouraging robust reporting. By making sustainability-related information more accessible and comparable, these standards drive companies to adopt more sustainable practices. As more companies disclose their ESG performance, it creates a positive feedback loop, accelerating the transition to a greener, more responsible economy.
Global Alignment and Comparability: The ISSB standards aim to achieve global recognition, ensuring alignment with reporting practices worldwide. By providing a common language for sustainability disclosures, these standards enable companies to communicate their ESG efforts consistently, regardless of their location. This alignment facilitates comparisons among companies, sectors, and regions, allowing for benchmarking and healthy competition toward sustainable excellence.
Strengthened Corporate Accountability: ISSB standards enhance corporate accountability by requiring companies to disclose their contributions to sustainable development. This promotes transparency and encourages companies to align their strategies and activities with global sustainability goals, such as the SDGs. Through such disclosures, companies are held accountable for their impact on the environment, society, and governance practices.
The emergence of the ISSB and its sustainability-related financial disclosure standards, IFRS S1 and IFRS S2, marks a pivotal moment in the field of sustainable finance. As companies and investors recognise the need for comprehensive reporting on ESG factors, the ISSB's unified framework, materiality focus, and connectivity initiatives provide a robust foundation for consistent and comparable disclosures. The implementation of these standards offers a wide array of benefits, including enhanced investor confidence, accelerated sustainability transition, global alignment, and strengthened corporate accountability. With the adoption of ISSB standards, we can pave the way for a more sustainable future, where businesses operate with transparency, accountability, and a commitment to creating long-term value for both shareholders and society.
