In October 2022, the International Sustainability Standards Board (“ISSB”) met to discuss comments received and future work pertaining to the ISSB’s proposed disclosure standards for Disclosure of Sustainability-related Financial Information (“Draft S1”) and Climate-related Disclosures (“Draft S2”).
The ISSB’s reconsideration of topics addressed in its proposed disclosure standards provides insight into the progress the ISSB is making towards the development of a global baseline of sustainability-related standards. Additionally, the ISSB’s clarification of certain proposed disclosure standards might also inform the key debates that jurisdictions worldwide are deliberating as they consider and finalize their mandatory climate-related disclosure requirements. Below we summarize the ISSB’s background; key topics discussed during the October meetings; and the ISSB’s “next steps” with respect to the finalization of the Drafts.
Background on the ISSB and the exposure drafts
At the UN Climate Change Conference (COP 26) in November 2021, the International Financial Reporting Standard Foundation Trustees announced the creation of the ISSB, a standard-setting organization that is subject to the oversight of the IFRS Foundation. The ISSB was established to develop a comprehensive global baseline of sustainability disclosure standards. The ISSB consolidates the Climate Disclosure Standards Board (“CDSB”) and the Value Reporting Foundation and builds on multiple sustainability and climate-related disclosure standards, including the Task Force on Climate-Related Financial Disclosures (“TCFD”), the International Integrated Reporting Council and Sustainability Accounting Standards Board (“SASB”) industry-based disclosure standards.
In March 2022, the ISSB issued for public comment Draft S1, which is focused on sustainability-related risks and opportunities, and Draft S2, which is focused on specific climate-related risks and opportunities. The ISSB exposure drafts’ publication coincided with the simultaneous publication of climate-related disclosure proposed rules by the U.S. Securities & Exchange Commission (“SEC”) and the European Financial Reporting Advisory Group (“EFRAG”).
An ISSB Jurisdictional Working Group (“JWG”), which is comprised of members of the ISSB and representatives from China, Europe (the European Commission and EFRAG), Japan, the United Kingdom (the Financial Conduct Authority and Financial Reporting Council) and the United States (the SEC), was formed in April 2022 and most recently met on 19 September 2022 to discuss feedback received on their respective climate-related disclosure proposals. The working group continued its discussions on deriving a common global baseline of climate-related disclosure standards and on the importance of interoperability between jurisdictions and frameworks to avoid dual reporting, reduce costs and to mitigate the complexity of reporting for companies and investors.
Key topics discussed during the October 2022 meetings
Based on feedback received on the Draft proposals, the ISSB reconsidered key definitional terms, including the definition of “materiality” to be used in ISSB standards; interoperability between jurisdictional frameworks; GHG emissions metrics and measurement methodologies; inclusion of Scope 3 disclosures and safe harbours; and, reconfirmed the use of industry-specific sustainability disclosure standards.
In Fundamental concepts (Agenda Paper 3B), the ISSB voted to clarify the key definitional term of materiality. The ISSB confirmed its definition of “materiality” will be the same definition found in IFRS Accounting Standards.
The IFRS accounting standards define “materiality” as follows:
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.
If accepted in a global baseline, the ISSB’s definition of “materiality” could impact the amount and type of information reporting companies would be required to report under their respective jurisdiction’s rules. The ISSB’s proposed definition aligns with a focus on the financial reporting impact of climate-related risks and opportunities, which are materiality concepts that closely align with SEC reporting and SASB standards. In contrast, the “double materiality” concept reflected in the EFRAG/ ESRS and other jurisdictions’ disclosure rules, would require disclosure of information that is both important to a company’s financial value and to an understanding of a company’s impact on external stakeholders.
In, Interoperability (Agenda Paper 3C & 4D), the ISSB voted in favour of aligning the disclosure requirements proposed in Draft S1 and Draft S2 with the TCFD Framework and in support of a global baseline that would meet the informational needs of stakeholders; require disclosures be subject to materiality assessments; and require disclosures include the impact of climate-related risks and opportunities on an entity’s financial position, financial performance and cash flows.
In, GHG emissions and climate resilience (Agenda Paper 4C), the ISSB confirmed use of the GHG Protocol Standards to measure GHG emissions; confirmed certain metrics and targets entities use to measure, monitor and manage their GHG emissions; and, confirmed using and disclosing climate-related scenario analysis to inform identified climate-related risks and opportunities.
With respect to GHG emissions measurement methods, the ISSB staff suggested providing an accommodation for entities that had been using a GHG emissions measurement method that differed from the GHG Protocol Standards (Agenda 4C, Section 7) in order to enhance the interoperability and flexibility of the ISSB standards.
In, Scope 1 and Scope 2 GHG emissions (Agenda Paper 4A), the ISSB voted in support of the approach and metrics to be used to disclose Scope 1 and Scope 2 GHG emissions including disclosure of absolute gross Scope 1 and Scope 2 GHG emissions generated during the reporting period; separate disclosure for consolidated accounting groups and unconsolidated investees; and, developing guidance and providing clarifications regarding disaggregating information between consolidated accounting groups and unconsolidated investees.
In, Scope 3 GHG emissions (Agenda Paper 4B), the ISSB voted in favour of requiring disclosure of Scope 3 GHG emissions; confirmed that entities should consider the 15 Scope 3 GHG emissions categories described in the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard; and, continued to deliberate on relief programmes to address data availability and data quality, among other challenges presented by Scope 3 emissions.
The ISSB staff recommended (Agenda Paper 4B, Section 4) that the ISSB consider introducing a later effective date for Scope 3 GHG emissions disclosures; working with security regulators to establish safe harbour provisions for Scope 3 GHG emissions disclosures; and, supporting preparers of Scope 3 GHG emissions disclosures by developing implementation guidance.
Moreover, the ISSB staff recommended that where reliable information is unavailable, entities should still provide estimates – i.e. emphasizing that data availability is not a sufficient basis to exclude GHG emissions from Scope 3 (Agenda Paper 4B, Section 15).
The ISSB tentatively decided to maintain the requirement that entities provide industry-specific disclosures as set out in Appendix B to Draft S2, which is largely based on the SASB Standards.
If the ISSB proposals described above are finalized or recognized as forming a global baseline, they are likely to materially influence the climate-related disclosure requirements and interoperability of such requirements across multiple jurisdictions.
The ISSB will continue to discuss feedback on Draft S1 and Draft S2 in the following months and continue to redeliberate on the proposed disclosures, and aims to publish the IFRS Sustainability Disclosure Standards in the first half of 2023, slightly later than the original target set by the end of 2022.
The ISSB is requesting feedback from stakeholders to set its agenda priorities on:
- new research and standard setting projects for the development of the ISSB’s two year work plan, and
- continued work with preparers and stakeholders in interpretation and application of the proposed standards, once published.
If you have questions concerning the material discussed in this client alert or wish to request support in engaging and providing feedback to the ISSB on the exposure drafts, please contact the members of our Securities and Capital Markets and Regulatory and Public Policy practices.