There are a lot of net zero declarations and corporate green goals making headlines these days but with so many sustainability reporting programs, it’s hard to know who is actually making progress or meeting industry standards.
Yet implementing sustainability into broader business planning can have notable advantages. Those that can document their resiliency and progress in reducing and mitigating risks can ensure future cash flow and growth, making them a better bet for investors.
To simplify this complex landscape, the International Sustainability Standards Board (ISSB) – introduced by the International Financial Reporting Standards (IFRS) Foundation – attempts to consolidate several sustainability reporting programs into one internationally-harmonized standard.
By bringing several existing standards under one umbrella, it allows for easier industry benchmarking with a report format that will be useful, not just to reporting organizations, but also to the finance industry, investors, lenders, and insurance underwriters.
Here, we take a look at the evolution of the ISSB standards and explore how to future-proof your sustainability reporting in a world where changes in disclosure requirements and new reporting standards are a given.
What Is ISSB?
Designed specifically to address a fragmented landscape of sustainability standards and requirements, the International Sustainability Standards Board was formed in 2021 by the International Financial Reporting Standards (IFRS) body.
The IFRS is already well versed in supporting streamlined reporting through its International Accounting Standards Board (IASB). Given that the IFRS’s accounting standards are familiar around the world, and that sustainability reports are increasingly expected in annual financial reports, it’s easy to see why the IFRS Sustainability Standards are likely to be adopted by businesses across the globe.
Against this backdrop, the ISSB aims to provide internationally-harmonized sustainability standards for the business community. If your organization has previously prepared sustainability reports, you know how broad the scope of available frameworks can be. Depending on your industry and jurisdiction, you might have several standards to choose from, making it difficult to benchmark progress against competitors.
Fortunately, the ISSB aims to reduce some of this confusion and overlap. It consolidates pre-existing standards from the Climate Disclosure Standards Board (CDSB) and CDP, as well as the Value Reporting Framework.
Its standards are also supported by a panel of experts representing the CDSB, the IASB, the Task Force on Climate-related Financial Disclosures (TCFD), the VRF, and the World Economic Forum.
As such, companies who are already reporting to a standard administered by an organization listed above can expect that their reports will ultimately need to become ISSB-compliant.
What is Covered in the ISSB Standards?
On June 26, 2023, the ISSB published its global sustainability and climate disclosure standards. These finalized standards include the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and the IFRS S2 Climate-related Disclosures.
It is hoped that together, these standards will realize a consistent and comparable global baseline for organizations worldwide.
So, how do the ISSB standards promote transparency and accountability? Let’s take a look at each of the standards to see what is involved for reporting organizations.
IFRS S1: Disclosure of Sustainability-Related Financial Information
Designed to go beyond the scope of regular financial reports, this document asks organizations to record their sustainability-related risks and opportunities in a way that is relevant to investors.
It should include:
- Governance of sustainability-related risks and opportunities, as well as how leadership addresses these
- Decisions made that could create future sustainability risks and opportunities but have not yet been deemed significant
- How corporate reputation has been influenced by its actions related to sustainability-related risks and opportunities
For all disclosures, reporting corporations should focus on four major areas:
Governance
This covers the processes, controls, and procedures you use to monitor and manage sustainability-related risks and opportunities. This includes disclosing information such as:
- Who is responsible for oversight of sustainability-related risks and opportunities
- How responsibilities for sustainability-related risks and opportunities are reflected in the terms of reference, mandates, role descriptions, and other related policies
- Management’s role in the governance processes, controls, and procedures used to monitor, manage, and oversee sustainability-related risks and opportunities
Strategy
The Strategy section discloses the approach used to manage sustainability-related risks and opportunities. This includes information such as:
- Sustainability-related risks and opportunities that could reasonably be expected to affect your prospects, business model, and value chain
- Effects of those sustainability-related risks and opportunities on your strategy and decision-making
- Effects of sustainability-related risks and opportunities on your financial position, financial performance, and cash flows for the reporting period
Risk Management
Here, companies should disclose how they identify, assess, prioritize, and monitor sustainability-related risks and opportunities. This includes disclosing information such as:
- Whether and how you use scenario analysis to inform identification of sustainability-related risks
- How you assess the nature, likelihood, and magnitude of the effects of those risks
- How you monitor sustainability-related risks
Metrics & Targets
The final area of IFRS S1 focuses on disclosing performance in relation to sustainability-related risks and opportunities, including progress towards any targets you have set or are required to meet by law or regulation. This includes disclosing information such as:
- The metrics used to measure and monitor sustainability-related risks or opportunities and progress toward goals
- Methods used to calculate different metrics and the inputs to the calculations, including the limitations of the methods used and the significant assumptions made
- Metrics used to set individual targets and to monitor progress toward reaching each target
This is meant to give a holistic view of how risks and opportunities are identified, addressed and measured on a year-over-year basis.
Risks and opportunities should be identified throughout your operations and among your business partners, looking at both internal employment practices and those of suppliers, packaging wastage, production facilities, and invested assets.
How to Compile Your Report
Sustainability-related financial information is about more than just crunching numbers. Your report is expected to be fairly narrative in format and it is not sufficient to simply list the steps taken to mitigate sustainability-risks in the reporting year.
For example, if the decision was made to close a particular plant because it relied too heavily on a sensitive or at-risk watershed, the report can’t simply state that the plant has been closed. It also needs to contextualize the impacts this closure will have on business, and how more sustainable operations will be achieved going forward, either by relocating operations or adapting production at existing facilities to be less water intensive.
When preparing an ISSB-compliant sustainability report, it’s important to always keep the end reader in mind. The report is meant to help investors and lenders make capital decisions. This is not solely an annual state-of-business report.
When deciding what to include, your team and leadership should consider whether omitting or obscuring a particular element would influence the reader’s decision-making process in terms of whether to pursue investment or not. If it would, then that disclosure is considered material and should be included.
IFRS S2: Climate-Related Disclosures
While the General Requirements document lays out the framework for all sustainability reporting, the Climate-Related Disclosures document specifies the particular climate-related risks, opportunities and metrics that need to be reported on. The goal is to allow the reader to assess how these will impact enterprise value in the short, medium and long term.
Potential climate risks in this context are twofold:
- Physical risks incurred as a result of business operations and in the supply chain. These are typically greenhouse gas emissions from fossil fuel combustion for production, comfort heat, or vehicle emission. This also includes Scope 3 emissions in the supply chain.
- Transition risks that could occur or are occurring as the business transitions to a lower-carbon economy. While this transition is necessary to meet net zero goals, it poses risks in terms of production costs and the availability of necessary technology, and these have to be accounted for in climate disclosures.
Similar to the General Disclosures section, Climate-Related Disclosures focus on governance, strategy, risk management, and metrics and targets.
Governance
This section will allow investors to understand how corporate governance oversees, controls and monitors climate-related impacts. This will include:
- Identifying the body or individuals responsible for overseeing climate-related risk and opportunities
- How those responsibilities are reflected in the body’s terms of reference, mandates, and other related policies
- What the relevant qualifications of the body or individual are
- How often updates on climate-related risks and opportunities are provided to the body or individual
- The processes through which climate-related risks are incorporated into corporate strategies, decisions on major transactions, and risk management
- How the body or individuals oversees the setting of targets and monitors progress toward achieving these
- A description of management’s role in assessing and managing climate-related risks and opportunities
Strategy
Documenting strategy helps the reader understand how your organization is positioned to address climate-related risks and opportunities. Disclosures will include:
- Which climate-related risks and opportunities are expected to affect the business model, cash flow, and access to financing and capital investment
- How climate-related risks will impact your value chain
- The ways in which climate-related risks affect strategy, decision making and transition planning
- The impact of climate-related risks and opportunities on your organization’s financial position, performance, and cash flow over the short, medium and long term – here, you should also discuss how these risks and opportunities inform future financial planning.
- An explanation of your organization’s resilience to climate risks, both the physical and transitional risks discussed above
Risk Management
These process-focused risks help investors and other users of financial data understand how organizations identify, assess, and manage their climate-related risks and opportunities. This includes:
- How risks are identified and the scope of the potential risk is assessed
- How climate-related risks are prioritized relative to other potential business risks and how climate-related risk assessment is incorporated into broader corporate risk assessment processes
- The data sources used for risk assessments, both in terms of their scope and any assumptions made
- Whether these risk assessment processes have changed since the previous reporting period
Metrics & Targets
Climate accounting comes into play in this section. You will need to report cross-industry metrics, as well as industry-specific ones, depending on your organization. The cross-industry metrics include:
- Greenhouse gas emissions including Scopes 1, 2, and 3 emissions, expressed as CO2 equivalent quantities in metric tonnes
- Gross emissions, as well as a breakdown for the parent company and its subsidiaries, separate from any associates, joint ventures, unconsolidated subsidiaries or affiliates
- The amount and percentage of assets or business vulnerable to physical or transitional climate-related risks, or aligned with climate-related opportunities
- The amount of capital expenditures, financing, and investment designated for climate-related risk and opportunities
- A quantification of carbon pricing related to corporate emissions and how this pricing factors into decision making
- The percentage of executive remuneration linked to climate-related considerations
In addition to metrics, you will also have to state climate-related targets and document progress towards achieving these. Since context is important, the targets must be relevant to managing risk, taking advantage of opportunities, and—where relevant—how these relate to international climate change agreements.
Industry-Based Climate Disclosure Requirements
In addition to the cross-industry disclosure requirements above, there are additional draft requirements being proposed for a number of sectors including:
- Consumer goods
- Extractives and minerals processing
- Financials
- Food and beverage
- Health care
- Infrastructure
- Renewable resources and alternative energy
- Resource transformation
- Services
- Technology and communications
- Transportation
Future-Proof Your Sustainability Reporting
We talk a lot about how engaging in conscientious sustainability reporting future-proofs businesses. It can help you proactively identify risks and opportunities that might prevent you from receiving investment in the future or better position you as a market leader going forward. It pinpoints supply chain vulnerabilities, and proactively establishes compliance as the legal landscape changes.
And change is inevitable. Even the ISSB standards are still evolving, as are other ESG frameworks and standards. Preparing annual sustainability reports is therefore not a small undertaking. It can be time consuming, not only in terms of updating annual quantifications, but simply in making sure this year’s report still meets updated standard requirements.
Using a tool like the AMCS Sustainability Platform helps future-proof your reports and reduces the amount of time you need to spend each year updating formats by keeping on top of approved methodologies and identifying new data gaps.
So, while sustainability reporting should be an annual part of your business operations, it doesn’t need to be a year-long endeavor. If you’re ready to start building a future-proof sustainability reporting process, reach out to one of our AMCS experts today.