26 October 2022*

What’s the issue?

Sustainability-related risks and opportunities arise not just in the reporting entity1 itself, but right across a company’s value chain. Therefore, reporting on a company’s impacts and dependencies that give rise to those risks and opportunities is important.

In practice, many companies are likely to face challenges in obtaining information about activities outside their control, including:

  • understanding the quality and availability of data;
  • obtaining information in a timely manner;
  • presenting measurement techniques that are aligned with other parties; and
  • where necessary, identifying appropriate estimates and approximations when data is unavailable.

It will take time to implement systems, processes and controls that will allow timely reporting.

Reporting on a wide range of activities, resources and relationships across the value chain helps investors understand a company’s impacts and dependencies. To get a head start on the practical challenges of obtaining relevant and reliable data, start engaging with relevant parties in your value chain now.

Dana Chaput
Partner, ESG Reporting Transformation
KPMG China

Patrick Chu
Partner, Head of ESG Reporting and Assurance
KPMG China

Pat Woo
Partner, Head of Environmental, Social and Governance, Hong Kong SAR
KPMG China

Irene Chu
Partner, ESG Advisory
KPMG China

Dana Chaput
Partner, ESG Reporting Transformation
KPMG China

Angus Choi
Partner, ESG Advisory
KPMG China

Rani Kamaruddin
Partner, ESG Advisory
KPMG China

Jonathon Ko
Partner, ESG Advisory
KPMG China

Derek Yuen
Partner, ESG Reporting and Assurance
KPMG China

What was proposed?

Under the proposals2, a company would provide material information about all significant3 sustainability-related risks and opportunities in the reporting entity itself and throughout its value chain – e.g. Scope 3 greenhouse gas (GHG) emissions.

For example this could include activities, resources and relationships:

  • in the entity itself – e.g. production activities or relationships with the workforce;
  • upstream – e.g. with raw material manufacturers or service providers; 
  • downstream – e.g. with distributors or customers; and/or
  • with the external environment – e.g. financial, geographical, geopolitical or regulatory.

The International Sustainability Standards Board (ISSB) analysis of the feedback shows support for the current scope of the proposals. However, the feedback also indicates that companies anticipate many practical challenges in applying the proposals – e.g. because of the difficulty and cost involved in obtaining reliable information about value chain activities that are outside their control.

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What’s the ISSB’s latest thinking?

The ISSB does not intend to change the substance of its proposals on value chain reporting or the definition of ‘reporting entity’. 

However, it may provide more clarity and guidance on value chain reporting in future IFRS® Sustainability Disclosure Standards or through other types of guidance. For example, it agreed ways to address the data availability and data quality challenges associated with disclosing Scope 3 GHG emissions under proposed IFRS S2. The ISSB may consider requiring greater transparency about the quality of information and data from the value chain that is used in Scope 3 disclosures.

What’s the impact?

It will take time to develop effective sustainability reporting because its scope is broader than many companies are used to – i.e. it would involve data from outside the organisation and the extensive use of estimates. Companies could find gathering quality data particularly challenging and the proposals could have significant implications for their processes, systems and controls beyond financial reporting – especially if they are large groups or conglomerates.

Actions for management

  • Familiarise yourself with the proposals and understand what they would require. See our guide for more detail.
  • Understand your value chain to identify where sustainability-related risks and opportunities arise. Use this to determine the types of data that you may need to collect.
  • Engage with parties in your value chain early to begin the process of gathering the relevant information.
  • Identify areas where estimates will be needed until reliable data is available from your value chain.
  • Consider what broader changes in processes, controls and systems will need to be made to define, capture and report the appropriate data.

How did we get here?

The ISSB discusses breadth of reporting required (i.e. scope) and other fundamental concepts at its October 2022 meeting.

Document version Reference
Proposed IFRS S1 ED/2022/S1 Published 31 March 2022
Proposed IFRS S2 ED/2022/S2 Published 31 March 2022
ISSB Board meeting: 20–23 September 2022; Frankfurt

AP3B and AP4B: Plan for redeliberations

Meeting summary

Topics that the ISSB discussed further included ‘breadth of reporting required’

ISSB Board meeting: 18–21 October 2022; Montreal

AP3: Cover note and summary of redeliberations

AP3A: Update to plan for redeliberations

AP3B: Fundamental concepts

AP3C and AP4D: Interoperability – key matters

Meeting summary

The ISSB agreed with its proposals for value chain and the reporting entity
ISSB Board meeting: 13-15 December 2022; Montreal

AP4b: Scope 3 greenhouse gas emissions

Meeting summary

The ISSB agreed to a later effective date for reporting on Scope 3 emissions and reporting cycle reliefs
ISSB Board meeting: 17-19 January 2023; Frankfurt

AP4b: Greenhouse gas emissions-reporting period relief

Meeting summary

The ISSB agreed that reporting cycle relief will be extended to include Scope 1 and 2 emissions

1 A reporting entity prepares general-purpose financial statements and is the same for financial statements and sustainability reporting. Under the proposals, if the reporting entity is a group then both its consolidated financial statements and its sustainability reporting would be for the parent and its subsidiaries.

2 Proposed IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and proposed IFRS S2 Climate-related Disclosures.

3 See article for discussion on removing the word ‘significant’.

* Article has been updated based on the ISSB January 2023 decisions.

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