IFRS Sustainability Standards – Background information You Must Know

In recent years, discussions around the environment and climate has been prevalent in many countries. Many are increasingly concerned about the climate and the environment and the effect activities of businesses are having on them and keep pushing for actions on the part of the authorities to minimize the adverse effects of these businesses on the environment.

Business owners on the other hand are increasingly concerned about the effect these possible environmental regulations will have on their businesses.

Investors and other users of financial statements are eager to have captured on financial reports of entities information on possible environmental impacts and how these affect the Sustainability of the entity being reported on. Simply put, these gave rise to Sustainability reporting issues.

This article examines in some detail the background of the Sustainability Standards currently being issued by the International Sustainability Standards Board (ISSB)

Background Of Sustainability Reporting Frameworks

  • Sustainability reporting has attracted increasing interest from various stakeholders in recent years. The demand for a holistic approach to corporate reporting, with key components that incude sustainability reporting, financial reporting, and assurance, has emerged.
  • In response to both the demand for information from the investment community and broader public expectations of the role of businesses in society, a plethora
    of frameworks, methodologies and metrics for sustainability reporting have been developed.

Why International Sustainability Standards Are Needed

1. Currently, there are various sustainability related reporting frameworks, standards and metrics. Some focus on nonfinancial information and sustainability related matters, while others focus specifically on climate related discosures. The target audience for those frameworks, standards and metrics varies, e.g., investors and wider society.

2. Although the information may overlap in certain respects, the differences in subject matter and audience lead to diverging approaches to materiality with either an emphasis on the impact of sustainability matters on an entity, or an entity’s impact on
the external environment or both. The diversity in objectives and approaches indicated the urgent need for a global framework to provide greater comparability and reduce the complexity in sustainability reporting.

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Background IFRS Sustainability Standards

1. The IFRS Foundation was encouraged by stakehoders to be involved in the work towards a coherent and comprehensive corporate-reporting system
and the developmentof a converged, gobal framework on sustainability
related reporting. Therefore, the Trustees of the IFRS Foundation, through a consultation process, assessed the demand for sustainability reporting at
a global level and explored the IFRS Foundation’s role in the development
of gobal sustainabiity standards.

2.The feedback received by the IFRS
Foundation from multipe stakehoder consultations on both the need to play a role in sustainability standard setting and on the changes to its constitution gave a clear message –there is a growing demand to improve the gobal consistency and comparability of sustainability reporting and an urgent need
for action.The IFRS Foundation, which had been responsible for setting global accounting standards for several years, started to deiberate and plan for
the establishment of the International Sustainability Standards Board (or
the ISSB).

Formation Of The International Sustainability Standards Board (ISSB)

In Apri 2021, in response to demands from global capital markets for the development of standards to provide a comprehensive global baseline
of sustainability disclosures, the Trustees of the IFRS Foundation pubished a proposal to amend the IFRS Foundation’s Constitution to accommodate the formation and operation of the ISSB. The establishment of the ISSB was
announced by the Trustees of the IFRS Foundation on 3 November 2021, during the Finance Day of the COP26 climate change conference.

To lay thegroundwork for the new board, prior to the establishment of the ISSB, the IFRS Foundation set up a Technical Readiness Working Group (TRWG) with the objectives to accelerate convergence in global sustainability reporting standards and to undertake technical preparation for the ISSB
under the governance of the IFRS Foundation. The TRWG was comprised of representatives from the Taskforce for Cimate-related Financial Disclosures (TCFD), the Vaue Reporting Framework (VRF), theClimate Disclosure, the World Economic Forum (WEF) and the
Standards Board (CDSB), The international Accounting Standards Board (IASB), supported by the International Organization of Securities Commissions (IOSCO) and its Technica Expert Group of securities reguators.

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Development Of the Sustainability Standards

1. The TRWG’s work on general requirements for the disclosure of sustainability-related financial information and the climate-related disclosure resulted in prototype
standards titled General Requirements for Disclosure of Sustainability-related Financial Information Prototype and Climate-related Disclosures Prototype
respectively, published on the IFRS Foundation’s website in November 2021.

2. The prototype standards were not subject to the IFRS Foundation’s formal due process or that of any TRWG member. Calls from users of general purpose financial reports for more consistent, complete, comparabe and verifiabe sustainabiity-related financial
information, led the ISSB, in March 2022, to publishits first two Exposure Drafts on IFRS S1 General Requirements for Disclosure of Sustainability related Financial Information and IFRS S2 Climate-related Disclosures for public comment that ended in July 2022.

3. The Exposure Drafts were built on
theTRWG’s prototype standards, as well as the work of standard-setters and framework-providers, which had been subject to extensive pubic consultation and re-deliberation. The Exposure Drafts attracted significant interest in the market and the ISSB received over 700 comment letters and survey responses as feedback on each of the Exposure Drafts, with respondents representing a range of stakeholder groups and geographies.

Issuance of IFRS S1 and IFRS S2
On 26 June 2023

After a year of deliberations on the feedback received on the two Exposure Drafts, the ISSB issued its first two FRS sustainability
disclosure standards (the ISSB standards).

Objectives Of The Standards

The standards are aimed to enable
users of genera purpose financial reports to assess an entity’s exposure to and management of sustainabiity-reated risks and opportunities over the short, medium and ong term, and inform their decisions relating to providing
resources to an entity.

Connectivity Of IFRS with Sustainability Standards

The sustainability-related financial
information supplements and compements the information in the entity’s general purpose financia statements. Under the governance of the IFRS Foundation, the ISSB works closely with the International Accounting Standards Board (the IASB), to ensure connectivity and compatibility between the IFRS accounting standards and the ISSB standards.

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Structure Of The IFRS Sustainability Standards

1. IFRS S1and FRS S2 are comprised of their main text, as wel as five and
three appendices respectively. The appendices are integral parts of IFRS S1 and IFRS S2 and have the same authority as their main text.

2. IFRS S1 and IFRS S2 are accompanied by Illustrative Guidance, Illustrative Examples and
Basis for Conclusions (BC), but these are not part of IFRS S1 and IFRS S2 nor are they intended to provide interpretative guidance.

3. In addition, IFRS S2 is accompanied by Industry-based Guidance on Implementing IFRS S2,which is
not intended to create additional requirements. The Implementation Guidance and Illustrative Examples of IFRS S1 and IFRS S2 as well as the Industry based Guidance on Implementing IFRS S2, accompany those standards and illustrate aspects of them, while the BC summarises the considerations of the ISSB in developing those standards.

Interoperability Of IFRS And Sustainability Standards

The ISSB standards can be used on a stand-alone basis or integrated into jurisdictional requirements to serve broader stakeholder or other public policy needs. The ISSB, with fourteen board members from various parts of the world, is committed to formal engagement with jurisdictions that deveop their own sustainability reporting requirements. Within the context
of inter-operability with other jurisdictions, several initiatives have been taken.

For more details on this subject, you may visit the following websites

1. Ernst and Young website

2. IASplus (Delloite) website

https://www.iasplus.com/en-ca/projects/esg-projects-deloitte-cfr/completed-projects/issb-general-requirements-for-disclosure-of-sustainability-related-financial-information-ed

 

3. IFRS website

https://www.ifrs.org/projects/completed-projects/2023/general-sustainability-related-disclosures/exposure-draft-and-comment-letters/

It is our belief the information in this article gives you some insight into the background of IFRS Sustainability Standards that are currently in issue.

 

For more information visit also IFRs website

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