In the past couple of weeks, we have seen the international sustainability reporting landscape develop at a rapid pace, with the IFRS Foundation’s ISSB Standards at the forefront of many of these developments.
Published in June 2023, the IFRS S1 and S2 standards have outlined a clear and industry-specific set of expectations for measuring, monitoring, and reporting on sustainability-related, and climate-related risks and opportunities for companies across the world. However, the adoption of these standards has been left to national competent authorities for determination, and we see the needle shifting towards IFRS S1 and S2’s widespread usage across different jurisdictions.
Brazil has been leading the charge in their adoption, introducing voluntary ISSB compliance from 2024 onwards, transitioning to mandatory ISSB standards from 2026. The Australian Accounting Standards Board has also proposed draft sustainability disclosure standards modelled on the ISSB. Even within the UK, government publications have highlighted that the new sustainability disclosure standards will be based on the ISSB’s disclosure standards, only diverting “from the global baseline if absolutely necessary for UK-specific matters”.
It is clear that the ISSB standards, IFRS S1 and S2, are slowly cementing themselves as a global baseline for sustainability reporting for firms across all financial services offerings. However, what does it actually entail to report according to the requirements set out by IFRS S1 and S2?
In this post, we explore the significance of the ISSB’s S1 and S2 standards, and why these are pivotal to curating sustainability reporting in the financial services universe.
The ISSB's Pioneering Role
Navigating the world of ESG acronyms is a difficult path to chart alone. There has been a 155% worldwide increase in ESG regulations over the past decade, with more than 400 individual ESG-specific reporting provisions being introduced across 80 countries.
Given the confusion, imagine a world where companies worldwide spoke the same language, and charted the same course when it comes to sustainability reporting.
The new ISSB standards aspire to make that a reality.
The standards are intended to put forward a consistent framework across jurisdictions for organisations to report on ESG matters, allowing investors, stakeholders, and regulators to gain a clearer picture of a company's sustainability performance, and make informed decisions. So far, the ISSB standards have been endorsed by multiple international securities regulators worldwide as a “global baseline”, fit for use. Additionally, regulators within the UK, Australia, Japan, and Singapore, amongst others, look to align their jurisdictional disclosure requirements to the IFRS S1 and S2.
Introducing IFRS S1 and S2
IFRS S1 and S2 represent a significant leap forward in the global push for standardised ESG reporting. These standards set clear guidelines for organisations in monitoring and measuring their sustainability and climate-related activities, ensuring consistency, comparability, and relevance of reporting on a globally established and uniform baseline.
The S1 and S2 reporting frameworks notably fully incorporate recommendations made by the Taskforce on Climate-related Financial Disclosures (TCFD), using the same four concepts of governance, strategy, risk management, and metrics & targets used by the TCFD. However, the ISSB critically differentiates between sustainability reporting (IFRS S1), and climate reporting (IFRS S2).
IFRS S1: the ESG Code
The Sustainability-Related Disclosure Standard, IFRS S1 covers the 'E,' 'S,' and 'G' in ESG. It requires organisations to disclose relevant information about their sustainability strategies, governance structures, and performance metrics. This comprehensive approach provides a global baseline for organisations to benchmark their progress against ESG indicators.
IFRS S2: the Climate Compass
Against the backdrop of the climate crisis, the Climate-Related Disclosure Standard (IFRS S2) zooms in on climate-specific disclosures. It requires organisations to report on their climate strategies, risk management processes, and environmental impacts, fostering transparency on climate-related issues. Additionally, S2 also includes industry-specific reporting guidance for more than 77 industries defined by the SASB and may consider GRI and ESRS interoperability as well.
The Bright Side of IFRS S1 and S2
While the ISSB's work impacts the global financial services community, its significance is particularly pronounced for asset managers, investment managers, banks, and financial institutions.
The publication of IFRS S1 and S2 standards represents a paramount strategic move. The harmonisation enabled by these standards is especially critical for institutions with global operations, as it simplifies compliance with a patchwork of regional regulations and facilitates access to markets with stringent sustainability requirements, such as the European Union.
Firm-disclosed information according to the ISSB is intended not just for investors, but also other external stakeholders interested in obtaining information around sustainability. The existing baseline of IFRS S1 and S2 regulations can therefore be built up incrementally using additional building blocks that are jurisdiction or industry-specific to meet broader multi-stakeholder needs and allow enhanced reporting across the system.
Moreover, the benefits of embracing IFRS S1 and S2 standards are multifaceted.
Fair Presentation and Materiality: The ISSB standards emphasize fair presentation, ensuring the accuracy of sustainability information. This supports well-informed investment decisions based on material ESG factors, reducing information asymmetry and risk.
Efficiency and Reduced Reporting Burden: The standards streamline reporting processes, minimising duplication within reporting. Financial institutions can allocate resources more efficiently, focusing on strategic ESG initiatives rather than navigating a maze of onerous compliance obligations.
Global Benchmarking: The ISSB standards facilitate benchmarking to peers across international jurisdictions. This allows for a broader perspective on investment opportunities, aligning portfolios with global ESG trends and enhancing diversification.
Compatibility with Accounting Standards: These standards are designed to be flexible and compatible with any accounting standard. Financial institutions can seamlessly integrate sustainability reporting into their existing financial reporting framework, ensuring consistency.
Simplified Disclosure and Interoperability: Companies already reporting according to TCFD and SASB standards will find themselves well-placed to apply the ISSB standards. Furthermore, the ESRS and GRI have disclosed a high level of interoperability to the ISSB standards, allowing for the burden of double reporting to be reduced.
Alignment and Reduced Greenwashing Risk: By aligning operations and strategy, the ISSB standards help reduce greenwashing risk.
Long-Term Compliance Roadmap: For companies operating in jurisdictions where regulations are pending or subject to existing reporting regimes, the ISSB standards provide a long-term compliance roadmap. Financial institutions can proactively prepare for evolving regulatory landscapes, reducing compliance-related disruptions and uncertainties.
The adoption of IFRS S1 and S2 offers financial market participants and financial advisers a comprehensive map to navigate the complexities of the vast world of ESG, empowering institutions to thrive in an era where sustainable practices are not just a necessity but a conscious choice to do better.
If you would like to discuss more about the standards, and how the Novatus Global ESG team can help you decode, get in touch with Coralie Nelson (email@example.com).