IFRS S1 and S2 consolidate the global ESG reporting landscape
The issuance this summer of the international sustainability standards has created fresh considerations for U.S. companies related to sustainability reporting.
The International Sustainability Standards Board (ISSB), established by the International Financial Reporting Standards (IFRS) Foundation for the purposes of harmonizing global sustainability reporting, issued its first standards on June 26. The ISSB issued IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 – Climate-related Disclosures. S1 and S2 were developed to help companies meet the sustainability-related information needs of their investors using a single reporting framework.
Relevance for U.S. companies
U.S. companies have numerous reasons to consider how the ISSB standards may affect their existing and future sustainability reporting.
- Establishes a global baseline
Prior to the release of S1 and S2, many companies chose to report under multiple voluntary frameworks with varying consistency. The ISSB standards have addressed this problem by establishing a “global baseline” for sustainability reporting. Jurisdictions are considering mandating the ISSB standards or establishing their own sustainability standards boards to cooperate with the ISSB as a global foundation to build their own standards, according to the ISSB’s Frequently Asked Questions.
- Promises alignment across other voluntary frameworks (e.g., CDP)
The Carbon Disclosure Project or CDP, used by 18,700 companies, announced that it will incorporate IFRS S2 into its disclosure methodology. Other organizations, including the European Financial Reporting Advisory Group or EFRAG, which is responsible for developing the European Sustainability Reporting Standards, have made similar commitments to support interoperability with the ISSB.
- Replaces the TCFD recommendation
The ISSB standards fully incorporate the TCFD recommendations including disclosures about governance, strategy, risk management, and metrics and targets. Additionally, the IFRS Foundation will assume responsibility for monitoring companies’ progress on climate disclosures beginning in 2024, essentially marking the culmination of the TCFD.
- Incorporates the SASB standards:
S1 requires companies to “refer to and consider the applicability of the disclosure topics in the SASB [Sustainability Accounting Standards Board] standards” as part of reporting using the ISSB standards. Additionally, the IFRS Foundation now oversees updates to the SASB standards and is developing a revised methodology to do so. Current SASB reporters can use existing SASB reports to inform their ISSB disclosures.
Next steps for U.S. companies
These standards are effective for the fiscal year beginning Jan. 1, 2024 – however, companies may choose to begin using the standards immediately. Below are some steps to take before adoption.
Before adopting the ISSB standards, U.S. companies may wish to undergo a materiality assessment, assess their readiness for the reporting and obtain limited assurance against a selected reporting framework.
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