On 26 June 2023, the International Sustainability Standards
Board (“ISSB“) issued its long-awaited
inaugural global sustainability disclosure standards: IFRS S1
(General Requirements for Disclosure of Sustainability-related
Financial Information) and IFRS S2 (Climate-related
Disclosures) (together, the
“Standards“).1 The ISSB also
released a related Sustainability Standards Navigator tool and a
three-minute video. The ISSB’s aim is for the Standards
to be the global baseline of all sustainability-related
disclosures.
Background
The ISSB, first announced at COP 26, was established by the
International Financial Reporting Standards Foundation
(“IFRS Foundation“) to develop a
comprehensive global baseline of sustainability disclosure
standards to meet demands from investors for transparent, reliable
and comparable reporting by companies on climate and other
sustainability-related matters.
The first draft versions of the Standards were published on 31
March 2022 and were made available for public consultation until 29
July 2022. The ISSB subsequently reviewed the comments made during
the public consultation period and has now published finalised
versions of the Standards (for further background information on
the ISSB and the Standards, read our earlier blog posts here, here and here).
The Standards
Disclosure requirements
IFRS S1 requires entities to disclose material information about
all sustainability-related risks and opportunities that could
reasonably be expected to affect the entity’s prospects. For
the purposes of IFRS S1, “prospects” refers to the
entity’s cash flows, access to finance or cost of capital over
the short, medium or long term, whilst “material
information” refers to information that if omitted, misstated
or obscured could reasonably be expected to influence the decisions
of users of financial reports, such as investors.
The specific disclosures required under IFRS S1 are grouped into
four categories:
- Governance: entities must disclose the
governance processes, controls and procedures that they use to
monitor and manage sustainability-related risks and opportunities.
This must include, among other things, information about the
governance body(s) for oversight of sustainability-related risks
and opportunities, as well as management’s role in the
processes and controls used to oversee sustainability-related risks
and opportunities; - Strategy: entities must disclose the approach
that they use to manage sustainability-related risks and
opportunities. This must include, among other things, information
to enable users of financial reports to understand the
sustainability-related risks and opportunities that could
reasonably be expected to affect the entity’s prospects and the
effects of any such risks and opportunities on the entity’s
strategy and decision making; - Risk management: entities must disclose the
processes that they use to identify, assess, prioritise and monitor
sustainability-related risks and opportunities. This will include
information about, among other things, the inputs and parameters
that the entity uses, whether and how the entity uses scenario
analysis to inform its identification of sustainability-related
risks and whether and how the entity prioritises
sustainability-related risks relative to other types of risk;
and - Metrics and targets: entities must disclose
their performance in relation to sustainability-related risks and
opportunities, including progress towards any targets the entity
has set or is required to meet by law or regulation. This must
include, among other things, the metrics used to set targets and to
monitor progress towards reaching targets, the specific
quantitative or qualitative targets the entity has set or is
required to meet and the period over which the targets apply.
IFRS S2 builds upon IFRS S1 by requiring entities to disclose
material information about climate-related risks and opportunities
that could reasonably be expected to affect the entity’s
prospects. It is designed to be used in addition to IFRS S1.
The specific disclosures required under IFRS S2 are grouped into
the same four categories as IFRS S1:
- Governance: entities must disclose, among
other things, information about the governance body(s) for
oversight of climate-related risks and opportunities, as well as
management’s role in the governance processes, controls and
procedures used to monitor, manage and oversee climate-related
risks and opportunities; - Strategy: entities must disclose, among other
things, information to enable users of financial reports to
understand the climate-related risks and opportunities that could
reasonably be expected to affect the entity’s prospects and the
effects of any such risks and opportunities on the entity’s
strategy and decision making; - Risk management: entities must disclose the
processes that they use to identify, assess, prioritise and monitor
climate-related risks and opportunities. This will include
information about, among other things, the inputs and parameters
that the entity uses, whether and how the entity uses
climate-related scenario analysis to inform its identification of
climate-related risks and whether and how the entity prioritises
climate-related risks relative to other types of risk; and - Metrics and targets: entities must disclose,
among other things, the quantitative and qualitative
climate-related targets they have set to monitor progress towards
achieving their strategic goals, as well as any targets that they
are required to meet by law or regulation, including any greenhouse
gas emissions targets.
Together, IFRS S1 and IFRS S2 fully incorporate the
recommendations of the Task Force on Climate-related Financial
Disclosures (“TCFD“) (for further
information on the TCFD Recommendations, read our earlier blog
posts here and here).
Timing
The Standards are intended for use by companies for annual
reporting periods beginning on or after 1 January 2024, meaning
that the earliest they could be disclosed is in companies’ 2025
annual reports. The requisite disclosures should be reported at the
same time as the entity’s related financial statements and
should cover the same reporting period as the financial
statements.
“Transition relief” is available for certain entities
that apply the Standards, including entities that participate in
asset management, commercial banking or insurance activities. If
relevant entities decide to use this “transition relief”,
they do not have to make certain disclosures in the first annual
reporting period in which the Standards apply, including (for
example) their scope 3 greenhouse gas emissions and additional
information about their financed emissions.
Application
The Standards are voluntary and so it is up to the governments
of jurisdictions across the globe to decide whether they want to
mandate them. In its Green Finance Strategy, the UK Government has,
for example, stated that it intends to launch a formal assessment
mechanism to determine whether the Standards are suitable for UK
companies, following which the Standards could be brought into
national legislation (for further information on the UK Green
Finance Strategy, read our earlier blog post here).
Given that the extensive ISSB stakeholder consultations included
the US Securities and Exchange Commission
(“SEC“) and other global standard
setters to ensure “interoperability” of the Standards
across various jurisdictions, the governments of other
jurisdictions may well follow a similar approach to the UK
Government and consider mandating the Standards. As a result, the
Standards may be a “preview” of various future
sustainability-related disclosure requirements, including (for
example) the SEC’s climate disclosure final rule expected in
October 2023 (for further information on the SEC’s climate
disclosure rule, read our earlier update here).
Related publications
A related ISSB release provides more details regarding the
Standards. The ISSB also published an overview of the ISSB project and a feedback statement summarising the proposals
contained in draft IFRS S1 and draft IFRS S2, the feedback on the
proposals and the ISSB’s response.
What next?
The ISSB will now work with governments and companies across the
globe to support the adoption of the Standards. To do so, the ISSB
will firstly create a Transition Implementation Group to support
companies that apply the Standards and launch capacity-building
initiatives to support their effective implementation. The ISSB
will also continue to work with governments that wish to mandate
the Standards, as well as with the Global
Reporting Initiative to support efficient and effective
reporting when the Standards are applied in combination with other
reporting standards, such as the TCFD and SASB standards (for
further information on these standards, read our earlier article here).
Footnote
1. To view the related Standards please follow the links
provided. Note, registration is required for access: IFRS S1 and IFRS S2.
Visit us at
mayerbrown.com
Mayer Brown is a global services provider comprising
associated legal practices that are separate entities, including
Mayer Brown LLP (Illinois, USA), Mayer Brown International LLP
(England & Wales), Mayer Brown (a Hong Kong partnership) and
Tauil & Chequer Advogados (a Brazilian law partnership) and
non-legal service providers, which provide consultancy services
(collectively, the “Mayer Brown Practices”). The Mayer
Brown Practices are established in various jurisdictions and may be
a legal person or a partnership. PK Wong & Nair LLC
(“PKWN”) is the constituent Singapore law practice of our
licensed joint law venture in Singapore, Mayer Brown PK Wong &
Nair Pte. Ltd. Details of the individual Mayer Brown Practices and
PKWN can be found in the Legal Notices section of our website.
“Mayer Brown” and the Mayer Brown logo are the trademarks
of Mayer Brown.
© Copyright 2023. The Mayer Brown Practices. All rights
reserved.
This
Mayer Brown article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein.
