IFRS Sustainability Disclosure Standards: What you need to know

How to prepare for the new standards

 

Report developers have a common challenge: they are constantly looking for the sweet spot between compliance and communication. But with a plethora of frameworks, standards and initiatives, the reporting landscape can feel like an impenetrable universe at times - albeit one with the ambitions of achieving something more convergent.

 

The one thing everyone can agree on though, is that signs of simplification are starting to emerge.

 

The launch of the draft IFRS Sustainability Disclosure Standards (‘IFRS Sustainability Standards’) during the UN COP 26 climate summit in November 2021 is a step forwards. These new standards were launched under the remit of a newly established board – the International Sustainability Standards Board (ISSB).

 

What drove the need for another set of standards?

 

The IFRS Sustainability Standards have been developed to achieve one objective – to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors with information about business’ sustainability-related risks and opportunities. The information being disclosed should help investors and similar audiences assess businesses’ enterprise value and make informed decisions.

 

The aim has been to consolidate and build on existing frameworks, standards and guidance rather than creating something entirely new. The draft proposals continue to draw content from and align with other existing standard-setting bodies to help achieve simplicity for reporting entities and, ultimately, drive consistent and comparable reporting (you can read more here).

 

The final IFRS Sustainability Standards will not just focus on meeting the information needs of investors. Because they follow a ‘building blocks’ approach, the standards have the flexibility to incorporate and facilitate additional reporting requirements and regulations aimed at a broader group of stakeholders’ needs.

 

What sustainability disclosure standards have been launched by the ISSB so far?

 

Responding to calls from primary users of this information (i.e., investors, lenders and other creditors), ISSB has released two IFRS Sustainability Disclosure Standards so far:

 

• ED IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information (or ‘General Requirements’ exposure draft)
• ED IFRS S2 – Climate-related Disclosures (or, ‘Climate’ exposure draft)

 

My business will likely use the new Disclosure Standard. Where do I start?

 

The materiality lens: For businesses, any information is to be considered material for disclosure if it influences your investors’ assessments of the business’ enterprise value, including the impact it could cause if you omit, misstate or obscure any such information. This means you will need to report on all your significant sustainability-related risks and opportunities.

 

Does this mean that the IFRS Sustainability Standards focus only on external impacts on businesses?

 

Although not directly stated, the General Requirements draft clarifies that ‘material information’ can include, but is not limited to, both a business’ impact on the economy, environment and society (outward) as well as events that can have a high potential impact on the entity’s future cash flows (inward).

 

Businesses also need to reassess the disclosure topics and material information at each reporting date to reflect that materiality can be dynamic and can change with a business’ circumstances and strategy (you can read more about RY’s approach to double and dynamic materiality here).

 

Beyond these considerations, there are a few more elements you’ll need to consider:

 

• Connected information. Your reporting will need to be connected to your financial statements – that is, your sustainability reporting will need to demonstrate linkage between different sustainability risks and opportunities as well as its impacts on your financial statements.
• When, where and how frequently to report and disclose. You will need to publish your sustainability reporting at the same time, and for the same reporting period, as your financial statements. It will need to be included as a part of your business’ general purpose financial reporting, with cross-referencing in specific instances (you can read more here).
• Presenting comparative information. Unless permitted or required otherwise, you’ll need to present comparative information regarding the previous period for all metrics, key performance indicators and also qualitative information included in your current reporting period. When impracticable to do so, you will be required to disclose the reasons for this.

 

Getting the building blocks in place: how to prepare for the Standards

 

• Watch out for updates: Following the recent public stakeholder consultation on the IFRS Sustainability Standards exposure drafts, stay up-to-date on all stakeholder comments submitted here and keep a lookout for news related to the launch and application date for the final updated standards here.
• Identify gaps and prepare for fast adoption. Next, start identifying similarities and differences between the proposals’ requirements and your existing disclosures. Identify what you will be required to report vs. what you may choose to adopt (topic or industry-focused information) and start preparing for fast adoption, which may be needed
• Prepare your leadership-led governance structure. Relook at your existing governance structures and check for any adjustments required to ensure integration between financial and sustainability focused decision-making.
• Engage with your current process owners and stakeholders. Understand if changes are required in how stakeholders are currently being engaged and how data is being defined, collected and reported.
• Build your organisation’s knowledge. Identify the people who will be working on the new reporting requirements and start building their capacity on the disclosure needs.

 

At RY, we’re constantly updating our knowledge and tailoring our approach and services to meet our clients’ needs in an evolving landscape.

 

If you’d like to know more about our unique approach to delivering effective sustainability reports and how we can help you align with the upcoming IFRS Sustainability Disclosure Standards’ requirements, we’d love to talk.