The ISSB Releases Drafts of Global Baseline Sustainability Disclosure Standards

April 21, 2022

The International Sustainability Standards Board (“ISSB”) marked its first significant milestone recently with the release of exposure drafts of the first two sustainability disclosure standards for public consultation:

IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (found here) (the “Sustainability Standards”); and
IFRS S2 Climate-related Disclosures (found here) (the “Climate Standards”, and together with the Sustainability Standards, the “Proposed Standards”).

The Proposed Standards are a significant development in the global movement towards mandatory climate-related disclosures, as their final iterations are intended to provide the first global baseline of sustainability-related disclosures. With that objective in mind, the ISSB is working with stakeholders to ensure the Proposed Standards can be adopted into jurisdictional requirements. In Canada, this would mean that accounting and capital markets regulators would have to adopt the Proposed Standards in order for them to apply to Canadian reporting issuers. Although the Canadian Securities Administrators (“CSA”) has not publicly stated whether it would adopt the Proposed Standards it strongly supported the establishment of the ISSB. In additional several Canadian securities regulators are members of the Sustainability Taskforce of the International Organization of Securities Commissions (“IOSCO”), which is working with the ISSB through the review process of the Proposed Standards.

The public consultation period for the Proposed Standards will close on July 29, 2022. The ISSB intends to review received comments during the second half of 2022 and issue the final standards expeditiously. On April 6, 2022, the International Financial Reporting Standards (“IFRS”) Foundation, which established the ISSB, announced an agreement with the Chartered Professional Accountants of Canada. After Frankfurt, Germany, Montreal will host the ISSB’s second home office that will carry out several key functions for the board.

Context and Purpose of the Proposed Standards

The development of a global baseline for sustainability- and climate-related disclosures is expected to bring needed consistency and comparability to sustainability-related disclosures, which will make such disclosures more useful for investors and other end users. Globally accepted standards will also facilitate corporate disclosures across multiple jurisdictions, reducing the costs and difficulties associated with preparing disclosures that comply with varied requirements. Recognizing these benefits, the ISSB’s Proposed Standards are responsive to stakeholder feedback from entities such IOSCO and build upon the Task Force on Climate-Related Financial Disclosure’s (“TCFD”) voluntary but widely recognized recommendations as well as the industry-based disclosure requirements derived from the Sustainability Accounting Standards Board (“SASB”) standards.

The Proposed Standards also build upon the prototypes and recommendations of the Technical Readiness Working Group (“TRWG”), which was created in March 2021 by the IFRS Foundation Trustees to prepare substantive materials for the ISSB’s consideration after it was formally announced. Our review of the TRWG prototypes is found here.

Facilitating accurate assessments of enterprise value is a driving purpose for the Proposed Standards. With respect to the Sustainability Standards, the disclosure requirements are explicitly intended to allow end users of disclosures to assess enterprise value. Further, materiality assessments must be made by reporting issuers in the context of the information necessary for users to assess enterprise value. In the case of the Climate Standards, the driving purpose is to allow end users of disclosures to assess the effects of significant climate-related risks and opportunities on an entity’s enterprise value.

I. An Overview of the Sustainability Standards

A. Objective and Scope

The Sustainability Standards set out the key requirements for sustainability-related financial disclosures with the overarching requirement for entities to disclose material information about their significant sustainability-related risks and opportunities. The Sustainability Standards build upon the TCFD’s recommendations, as well as components of various frameworks and standards published in a December 2020 presentation by a number of leading reporting organizations, including SASB and the Climate Disclosure Standards Board (the “December Presentation”). The Sustainability Standards also provide guidance on identifying and developing appropriate disclosures for risks and opportunities that are not addressed by an IFRS Sustainability Disclosure Standard, such as by directing reporting issuers to industry-based SASB standards, non-mandatory ISSB guidance, and other recent pronouncements from prominent standard-setting bodies.

Information disclosed pursuant to the Sustainability Standards must include a complete, neutral and accurate depiction of the reporting issuer’s sustainability-related financial information. Such information is broader than information reported in financial statements, and may include information about:

an entity’s governance of sustainability-related risks and opportunities, and its strategy for addressing them;
decisions made by the entity that could result in future inflows and outflows that have not yet met the criteria for recognition in the related financial statements;
the entity’s reputation, performance and prospects as a consequence of the actions it has undertaken, such as its relationships with people, the planet and the economy, and its impacts and dependencies on them; and
the entity’s development of knowledge-based assets.

The Sustainability Standards are designed to be used by profit-oriented entities that have their financial statements prepared in accordance with IFRS Accounting Standards or other generally accepted accounting principles (also known as GAAP). It may also be possible for non-profit and public sector entities to apply the Sustainability Standards, provided the descriptions for certain disclosure items are modified in recognition of those differences. An entity that complies with all relevant Sustainability Standards is expected to include an explicit, unqualified statement of compliance in its financial statements.

B. Core Content of the Sustainability Standards

The Sustainability Standards require a reporting issuer to provide the following disclosures, which mirror the TCFD’s recommendations:

Governance: The governance processes, controls and procedures an entity uses to monitor and manage sustainability-related risks and opportunities;
Strategy: The approach for addressing sustainability-related risks and opportunities that could affect an entity’s business model and strategy over the short, medium and long term;
Risk Management: The processes an entity used to identify, assess and manage sustainability-related risks; and
Metrics and Targets: Information used to assess, manage and monitor an entity’s performance in relation to sustainability related risks and opportunities over time.

II. An Overview of the Climate Standards

A. Objective and Scope

The Climate Standards set out the key requirements for the disclosure of information necessary for investors to assess the effect of climate-related risks and opportunities on an entities enterprise value. The Climate Standards prescribe the requirements for the identification, measurement, and disclosure of significant climate-related risks and opportunities, with the objective of providing disclosure users with assistance to assess future cash flows over short-, medium-, and long-term time horizons. This in turn will enable users to assess enterprise value. The Climate Standards will also allow users of disclosures to understand how an entity’s use of resources corresponds with its strategy for managing climate-related risks and opportunities, as well as how it adapts its business model and operations to these risks and opportunities. As with the Sustainability Standards, the Climate Standards build upon their predecessor TRWG prototype, the TCFD’s recommendations, and the December Presentation.

Risks within the scope of the Climate Standards include, but are not limited to, the physical risks associated with climate change as well as the risks associated with the transition to a lower-carbon economy.

B. Core content of the Climate Standards

As with the Sustainability Standards, the Climate Standards mirror the TCFD’s recommendations, with climate framing the disclosure requirements in place of sustainability:

Governance: The governance processes, controls and procedures an entity uses to monitor and manage climate-related risks and opportunities.
Strategy: The approach for addressing significant climate-related risks and opportunities that could affect an entity’s business model, strategy, and access to capital over the short, medium and long term, including an entity’s climate resilience.
Risk management: How climate-related risks and opportunities are identified, assessed, managed, and mitigated by an entity.
Metrics and targets: The metrics and targets used to manage and monitor an entity’s performance in relation to climate-related risks and opportunities, including performance and outcome measures.

III. General Features of the Proposed Standards

The Sustainability Standards contain certain prescriptive guidelines for reporting issuers preparing disclosures compliant with its requirements. These include:

Connected and Comparative Information: Entities must disclose comparative information in respect of the previous period for all metrics that are disclosed in the current reporting period. Where such information would be relevant to understanding a current period’s disclosures, entities must also disclose comparative information for narrative and descriptive disclosures.
Frequency of Reporting: Entities must report their disclosures at the same time and for the same reporting period as the related financial statements.
Location of Information: Entities must disclose information required by the Sustainability Standards as part of its general purpose financial reporting information. This may include in an entity’s management commentary, where such commentary is part of the entity’s general purpose financial reporting.
Errors: Entities must correct material errors from prior periods by restating the comparative amounts for the prior periods disclosed, unless it would be impracticable for them to do so.

The Climate Standards are to be prepared in accordance with the guidelines set out in the Sustainability Standards. However, there are notable, additional requirements set out in the Climate Standards:

Scenario Analysis: Entities must use climate-related scenario analysis to assess their climate resilience unless they are unable to do so. In the event that an entity is unable, it must use an alternative method to assess its climate resilience.
Scope 3 Emissions: Entities must disclose their absolute gross greenhouse gas (“GHG”) emissions generated during the relevant reporting period. These emissions are to be measured in accordance with the Greenhouse Gas Protocol Corporate Standards (“GHG Protocol”), and include all three emissions classifications: Scopes 1, 2, and 3.

Canada and the Proposed Standards

The publication of the Proposed Standards, particularly the Climate Standards, will likely be an influential consideration in the development of Canada’s climate-related financial disclosure regime. The Proposed Standards have arrived shortly after the end of a public consultation period for the CSAProposed National Instrument 51-107 – Disclosure of Climate-Related Matters (“NI 51-107”) and its companion policy, which were published for comment in October 2021. Our review of NI 51-107 is found here.

Although NI 51-107 is, like the Proposed Standards, influenced by the TCFD’s recommendations, there are prominent discrepancies that make the Climate Standards more rigorous than the proposed Canadian regulations. As mentioned above, the Climate Standards would mandate the disclosure of Scope 1, 2 and 3 GHG emissions in accordance with the GHG Protocol, whereas NI 51-107 would feature a “comply or explain” regime (or, as a possible alternative, mandated Scope 1 disclosures) as well as scenario analysis. This is significant because Scope 3 emissions are, for most entities, the greatest source of greenhouse gas emissions and scenario analysis is intended to reveal the entities resilience under certain global warming scenarios. With international momentum behind the Proposed Standards and with Montreal home to the ISSB’s second office, these draft standards will almost certainly be weighed by the CSA as they consider alterations to NI 51-107.

The bottom line

The release of the Proposed Standards marks the first significant milestone for the ISSB on its path to creating a comprehensive set of baseline sustainability standards for global use. The Proposed Standards will, once finalized, facilitate the harmonization of sustainability disclosures across jurisdictions and replace the use of existing voluntary standards. End users of disclosures will benefit from consistent and comparable climate-related financial information, and reporting issuers will benefit from a streamlined and prevailing disclosure framework. However, the release of the Proposed Standards will also likely influence the ongoing development of Canada’s own disclosure regime, as proposed in NI 51-107. With the ISSB’s standards also following the recent release of the United States’ own proposed climate-related disclosure regime, which we reviewed here, the only certainty in respect of Canada’s nascent climate disclosure regime is that it is far from settled.