How were the inaugural ISSB Sustainability standards developed?
As noted above, the response to the IFRS Consultation paper was overwhelmingly in support of the formation of the ISSB to develop international sustainability standards. Similarly, in the standards development process, the ISSB received ‘extensive market feedback from the G20, the Financial Stability Board, and the International Organization of Securities Commissions (IOSCO), as well as leaders from the business and investor community.’5
Two key considerations respondents to the consultations raised included the challenges some entities might have in applying the standards and ‘the importance of achieving a high degree of interoperability with jurisdictional requirements.’6
The challenges that some entities might have included proportionately higher compliance costs, the availability of expertise and high-quality data in some markets, industries and parts of the value chain. The ISSB addressed these problems by introducing the concept of requiring ‘all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort, with respect to preparing disclosures about the financial effects of a sustainability-related risk or opportunity under the requirements of IFRS S1 and IFRS S2. It also made provision for using an ‘approach that is commensurate with the skills, capabilities and resources that are available to the entity for preparing those disclosures.’ While this will allow entities to carry out a less exhaustive search for information if the cost is determined to be prohibitive, entities are still expected to provide useful information, and ‘the greater the usefulness of information about a sustainability-related risk or opportunity for users, the greater the effort expected of an entity in obtaining that information.’7
Given the high degree of importance attached to interoperability, the IFRS formed a Jurisdictional Working Group (JWG) comprised of representatives from global institutions, including IOSCO as an observer. In addition, the Sustainability Standards Advisory Forum (SSAF) was established to continue this collaborative effort with respect to IFRS S1 and IFRS S2.
Key determinations SSAF made included the primary objective would be to meet the needs of primary users of financial statements — investors, creditors and other lenders, and that disclosures would be based on a materiality assessment that was consistent with that used for IFRS Accounting Standards.
Additionally, with respect to the placement of information required by IFRS Sustainability Disclosure Standards, such information could be placed in the same location as other information, provided that the entity ensures that ‘the sustainability financial disclosures are clearly identifiable and not obscured by that additional information’.8
While there are additional requirements in the ISSB standards, the JWG also confirmed the ‘core content’ of the Standards being in alignment with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations on governance, strategy, risk management and metrics and targets.
IFRS materiality Information is material if omitting, misstating or obscuring that information would reasonably be expected to influence the decisions that primary users of financial statements make on the basis of those reports
One illustrative example of this concept of interoperability relates to two recent climate disclosure laws passed in California. The Climate Corporate Data Accountability Act requires entities to disclose their greenhouse gas emissions and the Climate-related Financial Risk Act requires entities to produce a climate-related financial risk report. As highlighted in the AICPA & CIMA summary of these bills, ‘the laws promote interoperability and the reduction of duplicative efforts by allowing entities to satisfy their reporting requirements … using disclosures prepared to comply with other reporting requirements if those disclosures satisfy all the requirements of the relevant law.’9 The use of IFRS S1 and IFRS S2 was provided as an example.