Disclosures required under the ISSB's Sustainability Disclosure Standards (IFRS S1 and S2)

An update providing more detail on the disclosures required under the new IFRS Sustainability Disclosure Standards (S1 and S2).

In an earlier update we provided an overview of the International Sustainability Standards Board's (ISSB) Sustainability Disclosure Standards S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and S2 (Climate-related Disclosures) (together the IFRS Sustainability Disclosure Standards).

Greater detail on S1 and S2 is set out below.

The aim of the Sustainability Disclosure Standards

The purpose of the Sustainability Disclosure Standards is to provide "decision-useful" information on sustainability-related risks and opportunities (SRROs) (S1) and climate-related risks and opportunities (CRROs) (S2) for primary users of general purpose financial reports. Primary users are defined in S1 as existing and potential investors, lenders and other creditors. The disclosures are intended to provide primary users with information on SRROs and CRROs that could reasonably be expected to affect the reporting entity's cash flows, access to finance or cost of capital over the short, medium and long-term. The disclosures will help those users make decisions on providing resources to the reporting entity (i.e. equity or debt finance or credit) or on influencing the entity's use of its economic resources (e.g. by exercising voting rights).

Once adopted, the standards are intended to be used together although transitional relief allows reporting entities to make disclosures only under S2 in the first annual reporting period that they comply with the standards.

What must be disclosed?

The table below summarises the information that should be disclosed by reporting entities under S1 and S2. The requirements cover both the principles for disclosure and the core content. The latter is grouped under 4 pillars that reflect the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations (governance, strategy, risk management, and metrics and targets).

We have produced a summary comparing the disclosures required under S1 and S2. Please contact us if you would like a copy.

S1 and S2 require the use of "all reasonable and supportable information that is available to the entity at the reporting date without undue cost and effort" to assess SRROs or CRROs. The Application Guidance in Appendix B of S1 lists some of the data sources entities can use (such as information used to prepare the entity's financial statements). It also explains that an entity does not need to make an exhaustive search for information to identify SRROs. As S1 deals with disclosure requirements for all SRROs, this guidance also covers the information that may be available to assess CRROs. What amounts to undue cost or effort will depend on an entity's specific circumstances and a cost-benefit balance between those efforts and the benefits for users.

What is the timing for disclosures?

The IFRS sustainability disclosures should be made at the same time as an entity's related financial statements and cover the same reporting period. At present, S1 does not mandate interim sustainability disclosures. If interim financials are required by national laws or regulators (e.g., securities regulators or stock exchanges), or an entity elects to publish them, S1 provides that the disclosures should focus on new information, events and circumstances and not duplicate what was previously reported.

After year 1, disclosures must include a year-on-year comparison. They should also disclose comparative information for narrative and descriptive disclosures if it would be helpful to understand the sustainability disclosures.

Are disclosures mandatory?

Like the IFRS Accounting Standards, the Sustainability Disclosure Standards must be adopted by a particular jurisdiction to be mandatory. The IFRS website shows the global adoption of the IFRS Accounting Standards (see IFRS - Who uses IFRS Accounting Standards?). At present there is no comparable global adoption chart on the IFRS website for the sustainability disclosures. However, several countries including the UK, Canada, Japan, Singapore and South Africa have already indicated that they are considering adopting S1 and S2.

The International Organization of Securities Commissions (IOSCO) also endorsed the ISSB's Sustainability Disclosure Standards on 25 July 2023 (see Ashurst Governance & Compliance Update – Issue 39). This is likely to encourage countries to adopt the disclosure standards.

Current status of IFRS S1 and S2 in the UK

The UK government has committed to adopt the IFRS Sustainability Disclosure Standards and the process to do that is already underway. On 19 July 2023, the Financial Reporting Council (FRC), issued a call for evidence to inform the proposed endorsement of the standards in the UK.

On 2 August 2023, the Department for Business and Trade published guidance on the government's framework to create UK Sustainability Disclosure Standards (UK SDS). Pursuant to the framework, the Secretary of State for Business and Trade will consider the endorsement of the IFRS Sustainability Disclosure Standards, to create UK SDS by July 2024. UK endorsed standards will only divert from the global baseline if absolutely necessary for UK specific matters.

The Financial Conduct (FCA) also intends to update its reporting requirements for listed companies in line with the S1 and S2 once they are endorsed for use in the UK.

Status of IFRS S1 and S2 in the EU

The EU adopted mandatory European Sustainability Reporting Standards (ESRS) on 31 July 2023. Entities within the scope of the Corporate Sustainability Reporting Directive ((EU) 2022/2464) (CSRD) will need to make disclosures that comply with the ESRS (see The Corporate Sustainability Reporting Directive - An overview (ashurst.com)). The EU and the ISSB continue to work together to avoid duplicatory requirements. 

Where should disclosures be located?

Beyond requiring a reporting entity to make its sustainability disclosures as part of its general purpose financial reports, S1 doesn't mandate a precise location for the disclosures. Possible options are identified in the standards including as part of the management commentary or similar report. The disclosures can be in the same location as information disclosed to meet other requirements (e.g., information required by regulators).  If entities take this option, the IFRS disclosures must be clearly identifiable and not obscured by additional information. 

Statement of compliance

S1 requires reporting entities to make an unqualified statement that its sustainability-related financial disclosures comply with S1 where all the requirements in the standard are met. A statement of compliance cannot be made where the entity is only partially compliant.

Guidance and potential conflict with other standards

Both S1 and S2 include Application Guidance in Appendix B (which form an integral part of the relevant standard). The Accompanying Guidance was published with both standards to illustrate certain issues but is not interpretive guidance (i.e., the only way in which the requirements in the standards could be applied).

S1 requires reporting entities to refer to and consider if disclosure topics in the SASB Standards apply to them. Reporting entities are permitted (but not required) to refer to and consider if alternative standards such as the CDSB Frameworks apply provided they do not conflict with S1 requirements.

The Global Reporting Initiative (GRI) Standards and the ESRS can be referred to and considered if the reporting entity considers they help it identify relevant information to disclose and do not conflict with the IFRS Sustainability Disclosure Standards.

Reporting entities must disclose the standards or guidance that they have applied.

The ISSB intends these standards to provide a global baseline on which other national standards will be built that will allow users to easily compare the disclosures of different entities. Therefore, S1 permits additional disclosures being made with IFRS Sustainability Disclosures provided that the information require by the IFRS standards is not obscured. 

Respondents to the 2021 exposure drafts wanted to see a high degree of interoperability between the IFRS Sustainability Disclosure Standards and jurisdictional requirements, especially with the EFRAG (formerly the European Financial Reporting Advisory Group) ESRS and the US Securities and Exchange Commission (SEC) proposals for climate-related disclosures. The ISSB has formed a Jurisdictional Working Group (JWG) to discuss the IFRS standards and jurisdiction initiatives. It has also established the Sustainability Standards Advisory Forum (SSAF), which is technical advisory body whose members are drawn from jurisdictional and regional bodies and can input into ISSB's standards.

As the EU's ESRS have only recently been published and the SEC's climate disclosures are delayed, it is still too early to understand how these requirements will interact with the IFRS Sustainability Disclosure Standards for corporates operating in multiple jurisdictions.