Everything You Need to Know About the IFRS’ Sustainability Standards
There are a lot of net zero declarations and corporate green goals making business headlines these days but with so many homegrown sustainability reporting programs, it’s hard to know who is actually making progress or meeting industry standards. Where sustainability reporting remains a voluntary element of business strategy and operations, it can be especially murky since there is limited pressure to meet climate targets.
Yet implementing sustainability into broader business planning can have notable advantages. If we’ve learned anything in the COVID pandemic, it’s that global supply chains are not future-proof. Those that can document their resiliency and their progress in reducing and mitigating risks can ensure future cash flow and growth, making them a better bet for investors.
The International Sustainability Standards Board (ISSB), introduced by the International Financial Reporting Standards (IFRS) Foundation attempts to consolidate a number of sustainability reporting programs, and create a report format that will be useful to the finance industry, including investors, lenders, and insurance underwriters.
By bringing many of the existing standards under one umbrella, it allows for easier industry benchmarking, and allows the data users to make confident financial decisions.
What Is the IFRS?
The IFRS is a not-for-profit organization dedicated to publishing and supporting internationally-recognized standards for the business community. The goal is to bring standardization to business reporting.
Even if you’re new to sustainability reporting, you may already be familiar with the IFRS’s International Accounting Standards Board (IASB). These standards set out how to prepare a globally-understandable financial report, an invaluable tool in today’s international business markets.
In fact, reports compliant with IFRS Accounting Standards are required by organizations in 140 jurisdictions around the world, and permitted in many more. With such a large footprint, and given the way sustainability reports are increasingly required to be included in annual financial reports, it’s easy to see why the IFRS Sustainability Standards are expected to be incorporated by businesses across the globe.
What Is the ISSB?
The ISSB operates under the IFRS in the same way the IASB does. Introduced in November 2021, the ISSB aims to provide internationally-harmonized and enforced sustainability standards for the business community.
If your organization has previously prepared sustainability reports, you know how broad the scopes of available standards and frameworks can be. Depending on your industry and jurisdiction, you might have several standards to choose from, and where reporting is still voluntary, choosing different frameworks from your competitors makes it hard to benchmark industry progress.
Fortunately, the introduction of the ISSB aims to reduce some of the confusion and overlap. It consolidates pre-existing standards from the Climate Disclosure Standards Board (CDSB) and CDP, as well as the Value Reporting Framework.
Sustainability Standards from the ISSB are still in progress, but are well supported by a panel of experts representing:
- The CDSB
- The IASB
- The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD)
- The VRF
- The World Economic Forum
Who Reports to ISSB?
The IFRS, and by extension the ISSB, aren’t legal entities that can mandate reporting according to their standards, but given the widespread adoption of the IASB standards, it’s expected the ISSB standards will also be widely used.
Who exactly will incorporate the ISSB standards into their reporting remains to be seen, but it can be assumed that anyone preparing sustainability documents to meet the information needs of investors and the capital market will likely have to familiarize themselves with the ISSB standards and complete reports in accordance with their requirements.
The scope of the currently-proposed standards is primarily for both private and public for-profit organizations. Non-profit entities could also use it, but might need to amend some of the terminology in the individual standard paragraphs to better suit their operations.
Companies who are already reporting to a standard administered by an organization that is part of the ISSB’s standards development panel, including the CDP, TCFD, and VRF, can expect their reports will ultimately need to become ISSB-compliant.
What is Covered in the ISSB Standards?
While the ISSB standards are still in development, two draft documents were issued in 2022 for comment. These were the Exposure Draft IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and the Exposure Draft IFRS S2 Climate-related Disclosures.
Disclosure of Sustainability-Related Financial Information
The aim of this document is to require reporting organizations to document their significant sustainability-related risks and opportunities in a manner that is relevant to users of primary financial data when determining enterprise value and whether or not to provide investment.
While this information is expected to be included in corporate financial reports, it goes beyond what is typically included in a standard financial document and includes:
- Governance of sustainability-related risks and opportunities, as well as how leadership addresses these
- Decisions made that could create future sustainability risks and opportunities but have not yet been deemed significant
- How corporate reputation has been influenced by its actions related to sustainability-related risks and opportunities
For all disclosures, reporting corporations should focus on four major areas: governance, strategy, risk management, and metrics & targets. This is meant to give a holistic view of how risks and opportunities are identified, addressed and measured on a year-over-year basis.
Risks and opportunities should be identified throughout the businesses operations and among its business partners. This includes:
- Both internal employment practices and those of suppliers
- Packaging wastage
- Controlled assets such as production facilities
- Invested assets, including joint ventures and business partners
Sustainability-related financial information is more than crunching numbers, and the report is expected to be fairly narrative in its format. It is not sufficient for the report to simply list the steps taken to mitigate sustainability-risks in the reporting year.
For example, if the decision was made to close a particular plant because it relied too heavily on a sensitive or at-risk watershed, the report can’t simply state the plant has been closed. It also needs to contextualize the impacts this closure will have on business, and how more sustainable operations will be achieved going forward either by relocating operations or adapting production at existing facilities to be less water intensive.
When preparing an ISSB-compliant sustainability report, it’s important to always keep the end reader in mind. The report is meant to help investors and lenders make capital decisions. This is not solely an annual state-of-business report.
When deciding what to include in sustainability disclosures, your team and leadership should consider whether omitting or obscuring a particular element would influence the reader’s decision-making process in terms of whether to pursue investment or not. If it would, then that disclosure is considered material and should be included.
While the General Requirements document lays out the framework for all sustainability reporting, the Climate-Related Disclosures document specifies the particular climate-related risks, opportunities and metrics that need to be reported on. As with the general document, the goal is to allow the reader the ability to assess how these impact enterprise value in the short, medium and long terms.
Potential climate risks in this context are twofold:
- Physical risks incurred as a result of business operations and in the supply chain. These are typically greenhouse gas emissions from fossil fuel combustion for production, comfort heat, or vehicle emission. This also includes Scope 3 emissions in the supply chain.
- Transition risks that could occur or are occurring as the business transitions to a lower-carbon economy. While this transition is necessary to meet net zero goals, it poses risks in terms of production costs and the availability of necessary technology, and these have to be accounted for in climate disclosures.
Similar to the General Disclosures section, the Climate-Related Disclosures focus on governance, strategy, risk management, and metrics & targets.
This section will allow investors to understand how corporate governance oversees, controls and monitors climate-related impacts. The information to be provided includes:
- Identifying the body or individuals responsible for overseeing climate-related risk and opportunities
- How those responsibilities are reflected in the body’s terms of reference, mandates, and other related policies
- What the relevant qualifications of the body or individual are
- How often updates on climate-related risks and opportunities are provided to the body or individual
- The processes through which climate-related risks are incorporated into corporate strategies, decisions on major transactions, and risk management
- How the body or individuals oversees the setting of targets and monitors progress toward achieving these
- A description of management’s role in assessing and managing climate-related risks and opportunities
Documenting strategy helps the reader understand how the organization is positioned to address climate-related risks and opportunities. Climate-related strategy disclosures include:
- Which climate-related risks and opportunities are expected to affect the business model, cash flow, and an organization’s access to financing and capital investment
- How climate-related risks will impact the organizations’ value chain
- The ways in which climate-related risks affect strategy, decision making and transition planning
- The impact of climate-related risks and opportunities on the organization’s financial position, performance, and cash flow over the short, medium and long terms–here, the organization should also discuss how these risks and opportunities inform future financial planning.
- An explanation of the organization’s resilience to climate risks, both the physical and transitional risks discussed above
These process-focused risks help investors and other users of financial data understand how organizations identify, assess, and manage their climate-related risks and opportunities. This includes:
- How risks are identified and the scope of the potential risk is assessed
- How climate-related risks are prioritized relative to other potential business risks and how climate-related risk assessment is incorporated into broader corporate risk assessment processes
- The data sources used for risk assessments, both in terms of their scope and any assumptions made
- Whether these risk assessment processes have changed since the previous reporting period
Metrics & Targets
This section is where climate accounting truly comes into play. The data to report includes cross-industry metrics, as well as industry-specific ones, depending on the organization. The cross-industry metrics include:
- Greenhouse gas emissions including Scopes 1, 2, and 3 emissions, expressed as CO2 equivalent quantities in metric tonnes
- Gross emissions, as well as a breakdown for the parent company and its subsidiaries, separate from any associates, joint ventures, unconsolidated subsidiaries or affiliates
- The amount and percentage of assets or business vulnerable to physical or transitional climate-related risks, or aligned with climate-related opportunities
- The amount of capital expenditures, financing, and investment designated for climate-related risk and opportunities
- A quantification of carbon pricing related to corporate emissions and how this pricing factors into decision making
- The percentage of executive remuneration linked to climate-related considerations
In addition to metrics, the corporation will also have to state climate-related targets and document progress towards achieving these. Since context is important, the targets must be relevant to managing risk, taking advantage of opportunities, and—where relevant—how these relate to international agreements related to climate change.
Industry-Based Climate Disclosure Requirements
In addition to the cross-industry disclosure requirements above, there are additional draft requirements being proposed for a number of sectors including:
- Consumer goods
- Extractives and minerals processing
- Food and beverage
- Health care
- Renewable resources and alternative energy
- Resource transformation
- Technology and communications
Future-Proof Your Sustainability Reporting
We talk a lot about how engaging in conscientious sustainability reporting future-proofs businesses. It helps them proactively identify risks and opportunities that might prevent them from receiving investment in the future or better position them as a market leader going forward. It pinpoints supply chain vulnerabilities, and proactively establishes compliance as the legal landscape changes.
And change is inevitable. Even the ISSB standards are still evolving, as are other ESG frameworks and standards. Preparing annual sustainability reports is not a small undertaking. It can be time consuming, not only in terms of updating annual quantifications, but simply in making sure this year’s report still meets updated standard requirements.
Using a tool like FigBytes helps future-proof your reports and reduces the amount of time you need to spend each year updating formats, keeping on top of approved methodologies and standard requirements, and helps identify where new data gaps might exist. While sustainability reporting should be an annual part of your business operations, it doesn’t need to be a year-long endeavor. If you’re ready to start building a future-proof sustainability reporting process, reach out to one of our FigBytes experts today.