Getting Ready Series: International Sustainability Standards Board Standards

In June 2023, the International Sustainability Standards Board (“ISSB”) published two sets of corporate disclosure standards, which are set to become the global baseline for sustainability and climate-related reporting (“the Standards”):

• IFRS S1, which sets out overarching reporting requirements relating to sustainability-risks and opportunities that could reasonably be expected to affect an entity’s prospects in the short, medium and long term; and
• IFRS S2, which sets out supplementary specific climate-related disclosures designed to be used with IFRS S1.

The Standards are intended to provide investors worldwide with more consistent, complete and comparable sustainability-related financial information that is able to “tell their sustainability story in a robust, comparable and verifiable manner”.[1] Importantly, the Standards are focused on enhancing interoperability, by incorporating or building on existing frameworks, standards and recommendations such as those from the Task Force on Climate-related Financial Disclosures (“TCFD”),[2] the Sustainability Accounting Standards Board, and the Global Reporting Initiative (“GRI”).[3]

[1] IFRS - ISSB issues inaugural global sustainability disclosure standards

[2] A comparison of what IFRS S2 requires as compared to the TCFD recommendations can be found here

[3] A summary of interoperability considerations for GHG emissions when applying GRI Standards and ISSB Standards can be found here

Mandatory reporting under the Standards will depend on national implementation and regulatory processes. The UK government has said it aims to make a UK-endorsed version of the Standards available in Q1 2025, with implementation into law to follow thereafter. As implementation will require consultation and legislation, the government has said any changes that may be introduced would be effective no earlier than accounting periods beginning on or after 1 January 2026. In parallel, the UK’s Financial Conduct Authority has confirmed that it intends to update its existing climate-related reporting rules for listed companies once the Standards are endorsed. The FCA also plans, as part of its consultation on implementing the UK-endorsed Standards, to consult soon on strengthening its expectations for transition plan disclosures with reference to the TPT Disclosure Framework, given the overlap with IFRS S2.

One of the first jurisdictions to finalise climate reporting rules substantially based on IFRS S2 is Hong Kong, which will apply to companies listed on the Main Board of the Hong Kong Stock Exchange from 1 January 2025 in a phased manner.[1]

[1]  Reporting on a comply-or-explain basis will apply from this date, save for Scope 1 and Scope 2 emissions which will be mandatory. Large cap issuers (Hang Seng Composite LargeCap Index constituents) will upgrade to mandatory reporting for the remaining aspects (including Scope 3) from FY2026.

The Standards are expected to be adopted widely just as TCFD has been. The International Organization of Securities Commissions and the G20’s Financial Stability Board have quickly endorsed the Standards, which should incentivise national authorities worldwide to adopt them.

In fact, in addition to the UK and Hong Kong, the Standards have already received support from Australia, Brazil, Canada, Chile, Egypt, Japan, Kenya, Malaysia, Nigeria, Singapore and South Africa amongst others, who have indicated that they are considering implementing one or both of the Standards. Following COP28, close to 400 organisations from over 64 jurisdictions committed to advancing the adoption or use of the Standards at a global level.

The Standards’ key objectives include promoting consolidation rather than the proliferation of voluntary reporting initiatives, which will help enable companies to disclose decision-useful and comparable information more effectively and at lower cost.

Having absorbed a number of voluntary standards already,[1] and by achieving widespread support, the Standards are also succeeding in setting the global baseline which should help promote consistency in terms of market, regulatory and other stakeholder expectations.

However, they are not the complete picture. The EU’s European Sustainability Reporting Standards (“ESRS”), for instance, go further than the Standards and require businesses to adopt a “double materiality” approach to reporting. This means that companies are required to report on the impact they have on people and planet (“impact materiality”), as well as the impact those factors have on the business (“financial materiality”). The ISSB and EFRAG have recently published interoperability guidance which states that there is a high degree of alignment between the two frameworks and sets out how companies can comply with both regimes. That said, as the ISSB standards do not require impact materiality reporting, the alignment is primarily limited to financial materiality related reporting. This means that companies reporting in accordance with the CSRD will, in effect, already be providing most of the disclosures required under the ISSB standards. Some corporate groups may find themselves subject to both regimes because, for example, they are listed in a jurisdiction that requires ISSB reporting but also have a significant EU footprint. Such groups will have to consider how best to structure their reporting approach and will need to rely on interoperability guidance when doing so.

Conversely, some policymakers are adopting a more conservative approach compared to the Standards. The US Securities and Exchange Commission’s finalised rules published in March 2024 (but which have been stayed for now pending litigation against the rules in the U.S. Court of Appeals) do not require disclosure of upstream and downstream (“Scope 3”) emissions, which is envisaged under the Standards. The UK is also consulting on the inclusion of Scope 3 emissions.

[1] For example, the Climate Disclosure Standards Board and Value Reporting Foundation were consolidated into IFRS.