IFRS S1 – A sustainable opportunity for all

The International Sustainability Standards Board’s (ISSB) first two standards have been published, and they represent an important milestone in achieving a global baseline of consistent, high-quality, and comparable sustainability information addressing the needs of capital markets. Companies that already provide disclosures aligned with Taskforce for Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB) standards are likely to be familiar with the principles for reporting within IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) standard. This blog provides practical advice for organisations wishing to get a head start, thoughts on the interaction between IFRS S1 and existing reporting requirements, and lessons learned.

Understanding ISSB and the new reporting framework

The ISSB sits alongside the International Accounting Standards Board (IASB) and is responsible for developing standards for a global baseline of sustainability disclosures. The connections between ISSB and IASB are deliberate and informative. The ISSB’s IFRS S1 is consistent with the key concepts of the IASB’s Conceptual Framework and draws on definitions and requirements from IAS 1 (Presentation of Financial Statements) and IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors). The ISSB has published IFRS S2 Climate-related Disclosures simultaneously with IFRS S1. It also intends to develop additional standards covering other sustainability themes, which may include Human Rights, Health & Safety, Diversity and Inclusion, Biodiversity, etc. We have published a separate blog on IFRS S2.

Relevance

IFRS S1 has been designed to apply to all types of organisations, regardless of size, location, or industry. However, there are mechanisms in place to allow businesses to disclose information in a way that is proportionate to their size and circumstances, for example, in line with their exposure to particular sustainability risks and opportunities.

Adoption

Whilst the new standards will be effective from 1 January 2024, it is up to each jurisdiction to decide on the timing of adoption and implementation. In its 2023 Green Finance Strategy, the UK Government has stated its intention for an endorsement decision on the ISSB standards to be made within 12 months of publication. Additionally, the ISSB standards fully incorporate the TCFD framework, and as a result, we may see early voluntary adoption by some premium-listed UK companies who already include TCFD disclosures in their general-purpose financial statements this coming year-end.

Connectivity and timing

The intention of IFRS S1 is to provide a clear and unambiguous requirement for companies to disclose material information about all sustainability-related risks and opportunities that could reasonably be expected to affect their prospects over the short, medium or long term. The expectation is that disclosures are issued at the same time as financial statements and cover the same reporting period, while facilitating greater connectivity and consistency between sustainability disclosures and financial statements. This concept will be familiar to existing TCFD and Climate-related Financial Disclosures (CFD) reporters. However, for those who publish a stand-alone sustainability report at a different time than the annual report, this connectivity and need for concurrence may represent a significant change.

Coverage

To date, most UK sustainability reporting requirements have been largely focussed on climate-related matters. ISSB changes that; it requires entities to disclose material information about all its sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects; information is material if it could reasonably be expected to influence the decisions that investors and other providers of capital make based on that information. Ultimately, in determining what is decision-useful and material for investors and other providers of capital, companies should assess whether the risks or opportunities would be considered by the board. The scope and coverage for sustainability reporting for companies is likely to increase beyond their current climate-related reporting.

For more information on IFRS S1, see our handy one-page summary.

Where to start?

Lessons from implementing the recommendations of TCFD by UK companies provide a helpful guide and point to 4 key focus areas, namely:

1. Ensure clear “ownership”: For many organisations, responsibilities for TCFD disclosures have crossed multiple functions, including sustainability, investor relations and finance. But with the emphasis on connectivity between sustainability disclosures, the financial statements, and the specifics of the regulatory reporting requirements, involvement of the finance function has become ever more critical. Consequently, direct ownership by the finance function, or a partnership between finance and other functions involved in sustainability reporting, is important to ensure appropriate controls and rigour over sustainability information. Many companies are now making this move.

2. Determine what’s material: Identifying which sustainability risks and opportunities are decision-useful and which information is material is key to understanding the scale of each company’s reporting requirements. IFRS S1 provides some guidance on the user groups and considerations in determining material information. Still, given the importance of identifying gaps early and developing work programs, it can be beneficial to get external support.

3. Evaluate capability and capacity: Once decision-useful sustainability risks and opportunities and material information about them have been identified, companies can assess whether they have the appropriate capability and capacity to meet the reporting requirements. Any shortfalls will likely take time to address, regardless of whether adopting an in-house or outsourced approach. As existing TCFD reporters have experienced, performing meaningful scenario analysis takes time, and the effort required can be underestimated, as is the challenge of aligning reporting timetables. All these aspects of capacity should be considered early.

4. Assess data requirements: For many companies, more extensive data will be required, particularly if additional decision-useful sustainability topics are identified. This isn't something that can be added to one team’s workload and will require additional capacity and likely different skill sets.

Overall, the ISSB’s standards represent the biggest change to corporate reporting in decades and should enable companies to report comprehensively on the sustainability risks and opportunities that could affect their prospects over time. To best leverage the consistent, high-quality, and comparable nature of the IFRS S1 framework, companies should start thinking about the lead time on data gathering and capability building required within their organisations to get ahead of the curve.