The ISSB is a new body under the IFRS Foundation that develops sustainability disclosure standards for investors and financial markets.

The ISSB was announced at COP26 in November 2021 and has the support of the G7, the G20, IOSCO, the FSB and other stakeholders.

The ISSB aims to address the fragmentation and inconsistency of existing voluntary sustainability reporting frameworks and to provide a comprehensive, comparable, and credible global baseline of disclosures. The ISSB builds on the work of market-led initiatives such as the CDSB, the TCFD, the VRF and the WEF.

The provision of rigorous, reliable, and comparable sustainability information enables informed investment and economic decisions in the public interest. This approach promotes the proper functioning of capital markets, building trust, resilience, efficiency, transparency, and accountability. Sustainability factors are becoming a mainstream part of investment decision-making. There are increasing calls for companies to provide high-quality, globally comparable information on sustainability-related risks and opportunities.

The ISSB and the International Accounting Standards Board (IASB) are the standard-setting bodies under the umbrella of the Foundation. The IASB is the standard setter for the IFRS Accounting Standards for traditional financial accounting, while the ISSB develops the IFRS Sustainability Disclosure Standards.

Each board is independent, and their Standards complement each other to provide investors and other capital market participants with comprehensive information to meet their needs. The staff of the IASB and the ISSB always work in coordination to ensure their Standards are compatible.

The ISSB cannot mandate the application of its standards, and so local jurisdictions will need to determine whether to require adoption of the proposed ISSB standards.

Assurance requirements are not within the ISSB’s remit. However, regulators may choose to require assurance. Regardless of local assurance requirements, companies will need to ensure the have the processes and controls in place to produce robust and timely information.

The key difference between the ISSB standards and the CSRD is around ‘double materiality’. The ISSB standards focus only on the impact of sustainability-related risk or opportunity that could be reasonably be expected to affect the company’s prospects. Apart from this, the CSRD also focuses on the impact of the company’s impacts on wider stakeholders, including the environment.

The ISSB standards leverage the TCFD pillars of governance, strategy, risk management and metrics and targets. The standards include industry-specific guidance and reference the SASB standards. Standards also draw content from other sustainability reporting bodies such as the Climate Disclosure Standards Board (CDSB), the Value Reporting Foundation (VRF) comprising the SASB and International Integrated Reporting Council (IIRC) and the International Accounting Standards Board (IASB). The climate standard also refers to the Greenhouse Gas Protocol for guidance on calculations of greenhouse gas emissions.

The ISSB has released two standards:

a) S1 – General Requirements for Disclosure of Sustainability-related financial information

b) S2 – Climate-related disclosures

IFRS S1 sets out general requirements for the content and presentation of an entity’s sustainability-related financial disclosures.

IFRS S2 requires specific metric category disclosures, including Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions generated during the reporting period. The core content of the disclosures should include information on an entity’s governance processes and controls, strategy, risk management practices, and metrics and targets used to monitor, manage, and report performance in relation to the identified risks and opportunities.

Beyond the general sustainability reporting requirements in IFRS S1, the standards’ first thematic area of focus is climate-related disclosures through IFRS S2. The objective of the standards is to require an entity to disclose decision-useful information about its climate- and sustainability-related risks and opportunities to primary users of general-purpose financial reports, including those that may be providing resources to the entity.

Sustainability risks and opportunities are an uncertain social or environmental event or condition that, if it occurs, could cause an actual or a potential material impact on a company or on the value of an investment. These are risks and opportunities that affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term.

An entity’s sustainability-related risks and opportunities arise out of the interactions between the entity and its stakeholders, society, the economy, and the natural environment throughout the entity’s value chain. These interactions, which can be direct and indirect, result from operating an entity’s business model in pursuit of the entity’s strategic purposes and from the external environment in which the entity operates.

IFRS-S1 refers to sustainability-related risks and opportunities. These are broader than climate-related risks and opportunities and refer to both social and environmental events or conditions that impact an entity.

Climate-related risks or opportunities specifically refers to the potential negative or positive effects of climate change on an entity.

These risks are categorised as climate-related physical risks and climate-related transition risks, whereas efforts to mitigate and adapt to climate change can produce climate related opportunities for an entity.

These are risks resulting from climate change that can be event-driven (acute physical risk) or from longer-term shifts in climatic patterns (chronic physical risk).

Acute physical risks arise from weather-related events such as storms, floods, drought, or heatwaves, which are increasing in severity and frequency.

Chronic physical risks arise from longer-term shifts in climatic patterns including changes in precipitation and temperature which could lead to sea level rise, reduced water availability, biodiversity loss and changes in soil productivity.

These risks could carry financial implications for an entity, such as costs resulting from direct damage to assets or indirect effects of supply-chain disruption. The entity's financial performance could also be affected by changes in water availability, sourcing and quality,and extreme temperature changes affecting the entity's premises, operations, supply chains, transportation needs and employee health and safety.

These are risks that arise from efforts to transition to a lower-carbon economy.

Transition risks include policy, legal, technological, market and reputational risks. These risks could carry financial implications for an entity, such as increased operating costs or asset impairment due to new or amended climate-related regulations. The entity's financial performance could also be affected by shifting consumer demands and the development and deployment of new technology.

The UK’s Department of Business and Trade (DBT) recently announced the UK Sustainability Disclosure Standards (SDS) that will be based on the ISSB standards. The UK standards will divert from the global baseline only if necessary for UK specific matters. The UK SDS will be referenced in legal or regulatory requirements for UK entities and decisions on disclosure requirements will be taken independently by the UK government (for UK registered companies and LLPs) and by the FCA for UK listed companies.

ISSB standards are effective from 1 Jan 2024, however actual applicability will depend on local jurisdictions. The UK Government has indicated its intention for UK companies to adopt the ISSB’s standards and is in the process of setting up an appropriate endorsement mechanism.

As part of this process, the government is establishing two advisory committees; the first to provide a recommendation on whether a standard should be endorsed, the other to cover matters of public policy and to consider how the ISSB Standards fit alongside existing reporting requirements for UK companies in scope. An endorsement decision on the first two standards is expected to be made by July 2024.

The standards do not specify a single location and the standards allow for cross-referencing to information presented elsewhere, but only if it is released at the same time as the general-purpose financial report.

In preparing disclosures an entity should:

(a) use all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort; and

(b) use an approach that aligns with the skills, capabilities and resources that are available to the entity for preparing those disclosures.

In addition, the standards provide relief to entities to provide quantitative information about the anticipated financial effects of a climate-related risk or opportunity if the entity does not have the skills, capabilities, or resources to provide that quantitative information.

To the extent that this information could be expected to materially affect investor’s assessments of company future cashflows, this should be reported.

IFRS S1 defines material information in alignment with the International Accounting Standards Board’s (IASB®’s) definition, which states that information is considered material if omitting, misstating, or obscuring it could be reasonably expected to influence decisions that primary users make based on that reporting.

If an entity determines that information about a sustainability-related opportunity is commercially sensitive in the limited circumstances described in paragraph B35, the entity is permitted to omit that information from its sustainability-related financial disclosures. Such an omission is permitted even if information is otherwise required by an IFRS Sustainability Disclosure Standard, and the information is material.

Refer to IFRS S1 - paragraphs B34-B35 to assess if your entity qualifies for exemption.