ISSB Standards: general and climate

From the IFRS Institute – September 7, 2023

The publication of the first two IFRS® Sustainability Disclosure Standards – general requirements and climate – is a key milestone in the International Sustainability Standards Board (ISSB)’s vision: to create a global baseline of investor-focused sustainability reporting that local jurisdictions can build on. In this article, we provide an introduction to how the standards are organized, what disclosures they require and the practical implications for companies.

The ISSB Standards are designed to be applied together to support companies in identifying and reporting sustainability information that investors need for informed decision-making. They are intended to meet the needs of all types of companies, not just the most sophisticated. The standards will not only provide investor-focused information to help drive effective capital markets, but they also signify an important change in the status of sustainability reporting – marking a huge step toward achieving equal footing with financial reporting.

The ISSB Standards are effective from January 1, 2024, but it will be for individual jurisdictions to decide whether and how to incorporate the standards into local requirements, or for companies to decide to adopt voluntarily. IOSCO² endorsed the standards in July 2023, and the list of countries considering adopting or incorporating the standards into local requirements is growing. It is therefore important to monitor the reporting requirements of a company’s parent and subsidiaries. However, unlike the application of accounting standards, sustainability reporting requirements can affect a company regardless of where the company (or its parent or subsidiaries) is domiciled for financial reporting purposes.

It is becoming increasingly common for customers to request data from key suppliers as an input to their own sustainability reporting or other compliance obligations – e.g. information about greenhouse gas emissions or labor rights. In addition, specific to the ISSB’s Standards, CPD³ announced that it will incorporate the climate standard into its disclosure system from 2024, “ensuring a rapid accelerated early adoption of the global baseline standard for sustainability-related financial information.”⁴

As sustainability reporting grows and obligations transcend formal reporting requirements, interoperability is emerging as a key concern for companies (see discussion of interoperability below).

The general and climate standards are designed to be applied together and alongside future topic- or industry-specific standards. To achieve this interoperability, the general standard provides a framework for companies to report on all relevant sustainability-related topics across the areas of governance, strategy, risk management, and metrics and targets.

This framework is supported by more detailed guidance on how to report on climate-related risks and opportunities in the climate standard. In the future, additional standards covering other topics are expected – but in the meantime, companies will use guidance highlighted in the general standard to report on other topics, as explained further in this article.

The ISSB did not start from scratch in developing these standards – they are based on existing frameworks and standards, including TCFD⁵ and SASB⁶. The ISSB is also committed to working with the GRI⁷ to ensure its new investor-focused standards are complementary to and compatible with the existing GRI standards – which have a different objective of meeting wider stakeholders’ information needs.

There are a number of transition reliefs on adoption of the standards, but a key one is the ability to take a climate-first approach in the first year of application. A company would still need to apply the general standard, but only in so far as it relates to climate-related risks and opportunities.

In summary, a company:

identifies sustainability-related risks and opportunities that could reasonably be expected to affect its prospects; and
discloses material information.

In disclosing material information about sustainability-related risks and opportunities, a company makes judgments about materiality. The resulting sustainability-related financial information needs to provide insight into the sustainability-related risks and opportunities that could reasonably be expected to affect the prospects of the company.

The following diagram and discussion summarizes the process a company goes through in determining what information to report.

The reporting entity and its value chain

Companies provide sustainability-related financial disclosures for the same reporting entity as the financial statements. This means that each element of a company’s general purpose financial reports (which includes both the financial statements and sustainability-related financial disclosures) provides information about the same consolidated group or reporting entity.

However, sustainability-related financial disclosures provide broader information than the financial statements. Where relevant, they include information about sustainability-related risks and opportunities arising up and down the reporting entity’s value chain.

The concept of the ‘value chain’ used in the standards includes the full range of interactions, resources and relationships related to a reporting entity’s business model and the external environment in which it operates. It encompasses everything that the reporting entity uses and relies on to create, consume and dispose of its products or services. This may include interactions, resources and relationships:

within the reporting entity itself – e.g. production activities or relationships with the workforce;
upstream – e.g. with raw material manufacturers, service providers or suppliers;
downstream – e.g. with distributors or customers; and
with the external environment – e.g. financing, geographical, geopolitical or regulatory environments.

Governance, strategy, risk management, and metrics and targets

The disclosures fall into four categories, which are consistent with the four pillars of the TCFD.⁵Disclosures in these areas have the following objectives.

	To help investors understand…
Governance	the governance processes, controls and procedures a company uses to monitor, manage and oversee sustainability-related risks and opportunities.
Strategy	the company’s strategy for managing sustainability-related risks and opportunities.
Risk management	the company’s processes to identify, assess, prioritize and monitor sustainability-related risks and opportunities; and whether and how these processes are integrated into the company’s overall risk management processes.
Metrics and targets	the company’s performance in managing its sustainability-related risks and opportunities, including progress towards any targets it has set or is required to meet by law or regulation.

The ISSB refers to the information disclosed as ‘sustainability-related financial disclosures’ – demonstrating that disclosures need to be connected with information in the financial statements, not a disconnected exercise.

Finance and sustainability teams will need to work closely together so that the information disclosed is complementary and based on the same facts and circumstances. Although the sustainability-related information may differ in nature from information presented in the financial statements, it needs to be consistent to the extent possible. This is required regardless of whether financial statements are prepared under IFRS Accounting Standards or other generally accepted accounting principles.

Companies will need processes and controls in place so that they can provide sustainability-related information of the same quality, and at the same time, as their financial statements.

Step 1: Risks and opportunities

Sustainability-related risks and opportunities are specific to a company and arise from its:

dependencies on resources and relationships; and
impacts on resources and relationships.

These impacts and dependencies can arise from both within the company and across its value chain. When these dependencies and impacts create risks and opportunities, they can affect the company’s cash flows, its access to finance or cost of capital, and needed its prospects. Sustainability-related risks and opportunities may often be matters that management already monitors and manages when running the business.

Companies need to identify sustainability-related risks and opportunities that could reasonably be expected to affect the company’s prospects and determine the scope of their value chain in relation to each. To do this, companies exercise judgement, using all reasonable and supportable information available at the reporting date without undue cost or effort.

Companies apply the ISSB Standards and:

MUST consider disclosure topics in the industry-specific SASB⁶ Standards; and
MAY consider the CDSB⁸ Guidance for Water- and Biodiversity-related Disclosures; plus:
- other investor-focused frameworks; and
- industry or local practice.

Companies reassess the scope of all affected sustainability-related risks and opportunities when a significant event or change in circumstances occurs.

Step 2: Material information

Having identified sustainability-related risks and opportunities to report, a company then applies the relevant ISSB Standard and identifies material information to disclose.

If no relevant IFRS Sustainability Disclosure Standard applies to an identified sustainability-related risk or opportunity, a company uses judgment to identify information that:

is relevant to investors’ decision-making; and
faithfully represents the identified sustainability-related risk or opportunity.

In making this judgment, companies consider additional sources of guidance indicated by the general standard. Companies:

MUST consider the metrics associated with disclosure topics in the industry-specific SASB⁶ Standards; and
MAY consider the CDSB⁷ Guidance for Water- and Biodiversity-related Disclosures as well as other investor-focused frameworks and industry or local practice (consistent with Step 1) plus:
- ESRSs⁹,and
- GRI⁶ Standards.

In addition to the above requirements and guidance, management applies judgment to identify other or additional material information required to provide a complete, neutral and accurate depiction (i.e. faithful representation) of each sustainability-related risk or opportunity specific to the company. This could include, for example, providing additional explanation about a specified metric.

The role of materiality judgments

Materiality plays a critical role under the ISSB Standards. Companies make materiality judgments so their reporting focuses on information that is relevant to their facts and circumstances, rather than simply providing a prescribed list of information. For example:

companies are not required to provide disclosures specified in the standards if the information is immaterial;
companies are required to provide information required for a fair presentation of a sustainability-related risk or opportunity that is not otherwise specified in the standards if that information is material; and
companies are not required to ensure their disclosures are perfectly precise in all respects, but they are required to ensure that factual information and assumptions applied in making estimates are free from material error.

Companies will need processes and controls in place so that they can provide sustainability-related information of the same quality, and at the same time, as their financial statements.

Consistency in how companies report globally is important to supporting investor decisions, creating a more level playing field for companies seeking investment. From a preparer’s perspective, interoperability is important in easing the burden of reporting. Interoperability runs deeper than a disclosure being the same – it requires alignment in the basis of measurement.

The ISSB has been working closely with jurisdictional standard setters to maximize interoperability between its standards and incoming mandatory reporting frameworks, in particular with the European Commission and EFRAG¹⁰ in the EU. With ESRSs⁹ now issued, the work to analyze interoperability is underway and we expect to report more on this in the coming months. In addition, the SEC expects to issue a final climate rule in October 2023, adding another element to the interoperability analysis.

To meet reporting requirements under the ISSB Standards, companies need a clear reporting strategy, supported by sufficiently rigorous processes and controls to generate high-quality information in a timely manner.

Effective sustainability-related financial disclosures are the output of a robust process to embed sustainability-related topics into all aspects of running a business. The quality of reporting can be strengthened through an effective board-led governance structure, supported by coordination, collaboration and utilization of cross-functional teams.

Teams that may be important to the sustainability reporting process include the following.

The above is the first step, followed by attention to a data collection and reporting close process, and an internal assurance framework.

Team	Responsibilities
Sustainability	Provides expertise on sustainability-related risks and opportunities that could reasonably be expected to affect a company’s prospects
Finance	Provides expertise on the financial statement close process, connectivity to the financial statements and modelling of future financial impacts
Strategy	Provides expertise on how sustainability-related matters are affecting the enterprise strategy and the impact of certain scenarios on business performance
Risk management	Provides expertise on risk management, including its integration with wider business and strategic priorities
Information technology	Provides expertise on current and future data and systems
Investor relations	Provides expertise on communication with investors
Legal	Monitors existing or new regulatory compliance developments
Internal audit	Provides a line of defense through review and testing of processes and controls
Other central functions – e.g. HR, Payroll	Provides background on policies, programs, remuneration and incentives or social-related data

To gain a better understanding of the ISSB’s first two standards, read KPMG First Impressions, Sustainability reporting: General and climate-related requirements.

Footnotes

IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information; IFRS S2, Climate-related Disclosures
International Organization of Securities Commissions
Formerly, Carbon Disclosure Project
Press release, CDP to incorporate ISSB climate-related disclosure standard into global environmental disclosure platform, Nov 8, 2022.
Task Force for Climate-related Financial Disclosures, which will transfer its monitoring responsibilities to the ISSB from 2024.
Sustainability Accounting Standards Board, which merged with the Value Reporting Foundation, which was subsequently merged into the IFRS Foundation.
Global Reporting Initiative
Climate Disclosure Standards Board, which was merged into the IFRS Foundation.
European Sustainability Reporting Standards
European Financial Reporting Advisory Group

Julie Santoro

Partner, Dept. of Professional Practice, Sustainability, KPMG US

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Julie Santoro

Partner, Dept. of Professional Practice, Sustainability, KPMG US

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Ways in which ISSB Standards could affect companies’ sustainability reporting

A general standard and a climate standard

How a company determines what information to report

The reporting entity and its value chain

Governance, strategy, risk management, and metrics and targets

Step 1: Risks and opportunities

Step 2: Material information

The role of materiality judgments

Connecting sustainability and financial reporting

Interoperability is a key concern

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Footnotes

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ISSB Standards: general and climate

Ways in which ISSB Standards could affect companies’ sustainability reporting

A general standard and a climate standard

How a company determines what information to report

The reporting entity and its value chain

Governance, strategy, risk management, and metrics and targets

Step 1: Risks and opportunities

Step 2: Material information

The role of materiality judgments

Connecting sustainability and financial reporting

Interoperability is a key concern

Get ready

Read more

Footnotes

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Contributing author

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KPMG Executive Education

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