Thursday 5 May 2022
At the end of March the newly created International Sustainability Standards Board (ISSB) issued two exposure drafts. The first deals with general sustainability-related disclosure requirements (IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information) whilst the second is concerned more specifically with climate-related disclosures (IFRS S2 Climate-related Disclosures).
Of course, both sets of requirements will be dependent, amongst other things, on whether the drafts become published standards. Whilst non-publication would be most unlikely, the content might well change – in the way that it does during the drafting of traditional financial reporting standards. The feedback / consultation period is now open with the ISSB’s aim to issue these first standards by the end of 2022.
In the same way that the IFRS asked a serious of questions to the reporting community as to whether they were the correct umbrella body to develop globally accepted sustainability standards - questions which were answered to the affirmative – these exposure drafts include a series of questions which may determine the final version of the reporting requirements.
By looking at these questions our wide community of reporters, practitioners, trainers, advisors, analysts, can gain an insight into the aims of the ISSB and the possible ‘direction of travel’ for reporting over the coming years; new disclosure angles, new challenges, new reporting processes etc.
In this article we’ll take an overview of the questions posed in that second Exposure Draft (which we’ll refer to as ‘S2’) and from that gain a flavour of what’s in store. The questions are varied in length and detail depending on the subject matter and what they are seeking to find out from respondents.
Question 1: Objective
The overall objective of S2 is to require entities to disclose information relating to their exposure to climate-related risks and opportunities. The objective of this is to enable users to assess the impact on the entity’s ‘enterprise value’. This first question asks for feedback on these objectives – whether respondents agree with it, and whether it would provide decision useful information.
Question 2: Governance
The Exposure Draft proposes that an entity will be required to disclose information about its governance structure, including details on the governance body (and a description of management’s role) that has oversight of climate-related risks and opportunities. Question 2 asks for feedback as to whether respondents agree with the requirements for disclosures on governance processes and on the controls and procedures used to monitor and manage climate related issues.
Question 3: Identification of climate-related risks and opportunities
S2 will require the entity to identify and disclose a description of climate-related risks and opportunities along with a time-frame (short, medium, longer-term) for their expected impact on the business model. This third question asks respondents whether they believe those requirements are sufficiently clear, and whether (based upon industry defined topics) they would lead to improved relevance and comparability for decision useful information.
Question 4: Concentrations of climate-related risks and opportunities in an entity’s value chain.
S2 will require qualitative based disclosures relating to the current and anticipated effects of climate-related actions on the entity’s value chain (and where in the chain those risks and opportunities are concentrated). Question 4 asks whether respondents believe those disclosures should be qualitative rather than quantitative.
Question 5: Transition plans and carbon offsets
Entities will be required to disclosure their transition plans. This set of disclosures will include information about how the entity plans to achieve any climate-related targets it has set, including information about carbon offsets, its plans and critical assumptions for legacy assets as well as both quantitative and qualitative information about the progress of transition plans previously disclosed by the entity. This wide-ranging question asks respondents whether they are in agreement with these requirements, whether there should be any additional disclosures, and whether the requirements adequately balance cost to the entity against benefits to users.
Question 6 – Current and anticipated effects
S2 requires entities to disclose the effects of climate-related actions on financial position, financial performance and cash flows for the reporting period and the future anticipated effects. This is a major quantitative disclosure requirement. The questions asks whether respondents agree with this approach, whether they should be qualitative and whether the current as well as future focus is appropriate.
Question 7 – Climate resilience
Entities will be required to assess their ‘climate resilience’ using climate-related scenario analysis. The questions asks whether respondents agree with what it is intended users will be informed about with regard to that resilience. In addition, it asks whether respondents agree with alternative proposals if climate resilience cannot be assessed using climate-related scenario analysis.
Question 8 – Risk management
The Exposure Draft would extend the disclosures about risk management beyond the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), upon which the main text of the proposed standard is based. The TCFD disclosures focus only on climate-related risks. The S2 proposal is to reflect information relating to both risks and opportunities, and the process or processes an entity uses to assess both. This is based on the ISSB’s assessment that both risks and opportunities can relate to or result from the same source of uncertainty. The Board seeks feedback as to whether respondents agree with this (dual) approach.
Question 9 – Cross-industry metric categories and greenhouse gas emissions
S2 would incorporate the TCFD’s concept of cross-industry metrics and metric categories, the aim being to improve the comparability of disclosures across reporting entities (regardless of their industry). The Exposure Draft proposes seven cross-industry metric categories that all entities would be required to disclose.
- greenhouse gas emissions (GHG) on an absolute and intensity basis.
- transition risks.
- physical risks.
- climate-related opportunities.
- capital development towards climate-related risks and opportunities.
- internal carbon prices.
- percentage of executive management remuneration that is linked to climate-related considerations.
This is a wide-ranging question asking respondents whether (for example) they agree with the level of GHG information required, and whether additional disclosures should be included to assist users.
Question 10 – Targets
The Exposure Draft proposes a requirement to disclose information about the entity’s emission-reduction targets. This would include information relating to the target’s objective - for example whether that objective is mitigation, adaptation, or conformity with sector / science-based initiatives. In addition, information would be disclosed about how the entity’s targets compare with those prescribed in the latest international agreement on climate change. Feedback is requested on whether respondents agree with this approach and whether, in their opinion, the definition of the ‘latest international agreement on climate change’ is sufficiently clear.
Question 11 – Industry-based requirements
Derived from the Sustainability Accounting Standards Board (SASB) set of standards, S2 would require some industry-based (as compared to cross-industry) disclosures that address significant sustainability-related risks and opportunities related to climate change. The ISSB sees this requirement as consistent with previous recommendations made to it that their work builds upon existing sustainability standards and frameworks. In short it appears this requirement would lead to businesses applying a revised form of existing SASB standards that would be relevant to them (and relating to risks and opportunities related to climate change) – the overall objective being to improve what the ISSB describes as ‘international applicability’, enabling entities to apply sustainability disclosure requirements regardless of their jurisdiction. This (very long) question in short asks for feedback as to whether this is an approach that can be agreed upon.
Question 12 – Costs, benefits and likely effects
The ISSB sets out its commitment to ensure that implementing the Exposure Draft proposals appropriately balances costs and benefits. Question 12 asks for comments on this and, for example, whether respondents have any comments on the likely costs of ongoing application which the Board should consider.
Question 13 – Verifiability and enforceability
Whatever type of information is presented, its ability to be verified gives users confidence that the information is complete, neutral and accurate. Question 13 asks for feedback as to whether any disclosure requirements proposed in the Exposure Draft would present particular challenges of either verification and/or enforcement by auditors and regulators.
Question 14 – Effective date
Respondents are asked for feedback on the length of time after the standard is issued for it to become effective. Any response would include details on the degree of preparation required by the entity to apply the proposals and also whether respondents believe that some requirements could be applied earlier than others.
Question 15 – Digital reporting
The ISSB plans to enable digital consumption of sustainability-related financial information from the outset. This question asks for comments or suggestions that would facilitate the development of digital reporting - for example, any particular disclosure requirements that could be difficult to tag digitally.
Question 16 – Global baseline
The ISSB intends its suite of IFRS Sustainability Disclosure Standards to provide a comprehensive global baseline for the assessment of enterprise value. This penultimate question asks respondents whether there any aspects of the proposals that could limit the ability of those standards to be used in this global manner.
Question 17 – Other comments
And finally, if there has not been enough opportunity so far, then respondents can make their other concerns, or thoughts known.
Clearly, there is a lot of ground covered in this set of proposals. Future articles will dig a little deeper into particular requirements which are the subject of those 17 questions above.
In the meantime, remember that the consultation period closes on 29th July.
All feedback will be assessed by the Board.