IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information, focuses on a company’s sustainability-related risks and opportunities and how a company will engage with them over the short, medium, and long term. IFRS S2, Climate-related Disclosures, is narrower in scope and solely concerned with climate-specific disclosures. The two standards are intended to be applied together.
The greatest strength of these two new standards is that we are moving corporate reporting in sustainability closer to a ‘universal language’ and away from the current landscape, where companies choose to report against disclosure frameworks or best reporting practices as they understand them. Having one baseline of reporting requirements on sustainability, will facilitate comparisons between companies, and enable investors to make more informed decisions.
The other piece of good news is that the ISSB standards build on what has come before and are part of a wider consolidation of disclosure frameworks, to minimise the confusion amongst companies and investors alike.
As Black Sun has mentioned in the past, alignment is key both for rapid adaptation of frameworks and for sparking positive change faster.
A final strength of the standards is that they allow a certain degree of flexibility in terms of its implementation, which means that companies at different stages of their sustainability journey will report to a different extent. As paragraph 30 of IFRS S1 specifies “an entity need not provide quantitative information about the anticipated financial effects of a sustainability-related risk or opportunity if the entity does not have the skills, capabilities or resources to provide that quantitative information”.
Although the new standards are an undoubted positive for the corporate reporting landscape, its focus remains how sustainability-related issues affect companies (single materiality), rather than how businesses impact sustainability issues, such as climate, biodiversity loss and people (double materiality). As stated in paragraph 2 of IFRS S2, the aim of this standard is to “disclose information about climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term”. This creates a gap between the ISSB standards and the EU’s Corporate Sustainability Reporting Directive (CSRD), which takes a double materiality lens.
More importantly, it raises the questions of whether we are moving fast enough to tackle the climate crisis and the associated biodiversity loss and other sustainability challenges. Do these new standards go far enough in encouraging and facilitating the needed corporate transition towards more sustainable and responsible business?
Will linking sustainability performance to financials in such a clear way increase the sustainability performance of companies, or will it divert attention towards reporting rather than actually minimising harmful impact on people and planet?
These questions can only be answered in the fullness of time and as these standards evolve and become adopted globally.
Will UK companies have to disclose against either IFRS S1 or S2?
As of now neither IFRS S1 or S2 have been adopted by any global jurisdiction. First, the International Organisation of Securities Commission (IOSCO) will assess whether to endorse the standards and then the various national jurisdictions will consider and roll out adoption. The UK government is currently working on a post-Brexit green reporting infrastructure and has indicated that it will recommend companies disclose against ISSB. The FCA (Financial Conduct Authority) has also welcomed the launch of these two standards.[1]
Companies should start preparing on how to report against these standards, but companies that have been reporting against TCFD (Taskforce on Climate related Financial Disclosures) are in advanced place.
For more information about how Black Sun can support you across your reporting suite, please get in touch with our Head of Business Development, Naomi Hawkins.
Black Sun is a global group of strategic advisors, consultants and stakeholder engagement specialists. We believe that brands and businesses can have a big impact on our society – they can shape more ethical practices, build more inclusive communities and deliver more sustainable performance. Ultimately, they can spark positive change in the world.
We partner with visionary companies to define and communicate their purpose, strategy and culture and bring to life their value creation story. Our services and solutions directly address the business-critical concerns of today; best-practice disclosure and accountability through reporting; protecting reputation and building trust with digital communications and helping businesses to effectively communicate their long-term responsibility and sustainability story.
[1] https://www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2/
[2] International Sustainability Standards Board (ISSB) exposure draft consultations: UK government response https://www.gov.uk/government/publications/international-sustainability-standards-board-issb-exposure-draft-consultations-uk-government-response; Green Technical Advisory Group (GTAG) https://www.greenfinanceinstitute.co.uk/programmes/uk-green-taxonomy-gtag/; FCA welcomes launch of ISSB standards, 26 June 2023 https://www.fca.org.uk/news/news-stories/fca-welcomes-launch-issb-standards
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