The heat associated with environmental, social, and governance (ESG) disclosures data disclosure keeps escalating. When it comes to ESG reporting organizations are consistently urged to get ready and step up their ESG disclosures as quickly as possible. Nevertheless, turning this advice into action proves to be considerably more valid. Upcoming key standards, among which are the International Sustainability Standards Board (ISSB) Standards and the European Sustainability Reporting Standards (ESRSs) being structured in line with the Corporate Sustainability Reporting Directive (CSRD) regulation, are gradually bringing more clarity to the recently prevailing condition of uncertainty when the reporting entities were left at the crossroads struggling up to understand and navigate sustainability reporting requirements. Read about IFRS S1 and IFRS S2, the first two IFRS Sustainability Disclosure Standards developed by the ISSB and published on June 26, the latest update on ESRS’s current status and other ESG disclosure-related news in our fresh material below.
Needless to say, the most disturbing problem calling for interoperability in the regulatory space of ESG disclosure is the proliferation of overlapping reporting standards and regulations, with global regimes competing with local rulebooks, self-regulatory systems butting up against mandatory requirements, and separate frameworks applying to companies and investors taking stakes in them.
Another challenge for investors is that dozens of other standard setters have emerged in recent years, each with a different acronym and measurement methodology – something known as ESG’s “alphabet soup”.
The creation of the ISSB was a major step in establishing a global consensus for sustainability disclosures and simplifying the fragmented regulatory landscape, according to industry participants. To reach the interoperability and mission of reducing the alphabet soup one of the first things needed is ‘a shift from Voluntary to Mandatory that will trigger a global baseline that connects the dots and the mutual collaboration in creating one common language of sustainability-related disclosures’, with this message Ndidi Nnoli-Edozien, IFRS, addressed the audience of the Eurofiling Conference held in June 2023 in Frankfurt.
On 26 June, the International Sustainability Standards Board (ISSB) issued its inaugural standards — IFRS S1 and IFRS S2 which are envisaged to help with improving trust and confidence in company disclosures about sustainability to inform investment decisions.
At a glance. IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information sets out the general requirements for a company to disclose information about its sustainability-related risks and opportunities that is useful to users of general purpose financial reports (referred to as ‘investors’ throughout this document) in making decisions relating to providing resources to the company.
IFRS S2 Climate-related Disclosures sets out the requirements for a company to disclose information about its climate-related risks and opportunities while building on the requirements described in IFRS S1. IFRS S2 integrates the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and requires the disclosure of information about both cross-industry and industry specific climate-related risks and opportunities.
After all said and done, it is for the first time, the Standards create a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects.
IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024, meaning that investors can begin to see information in 2025 based on companies applying the Standards for their 2024 reporting cycle.
Companies must adhere to both Standards simultaneously to demonstrate compliance with IFRS Sustainability Disclosure Standards. However, the ISSB has granted relief from certain requirements during the initial year of implementing the Standards. For instance, companies have the flexibility to limit their disclosures to climate-related risks and opportunities when applying IFRS S1 and IFRS S2 in the first year.
To learn more, see the Project Summary available at the link.
Under the Corporate Sustainability Reporting Directive (CSRD), large and most listed companies in the EU – including companies outside the EU with listed securities on an EU-regulated market – will be required to start adopting ESRSs within a few months. The scope of large companies will gradually expand in the subsequent years, eventually encompassing non-EU parent companies with substantial activity and a presence in the EU.
The last step before finalising the first set of ESRSs is a four-week public consultation,which has just opened and closes on 7 July 2023. The EU is expected to adopt the final standards in August.
Subject to no objections being raised by the EU Parliament and Council, the new standards will become effective for the first companies to adopt from 1 January 2024.
EFRAG XBRL Taxonomy methodology and architecture paper has been published and is available here. Worth noting that EFRAG XBRL taxonomies are expected to be issued for public consultation by EFRAG. At this stage, it is also known that the European and Market Securities Authority (ESMA) is responsible for developing the draft regulatory technical standards (RTS) that should rely on the taxonomy prepared by EFRAG.
With the final tranche of international and EU sustainability reporting standards for the FY24 reporting cycle just around the corner, it is crucial to properly estimate the time and effort required for their implementation. Businesses do not need to wait for publication: the key decisions have already been made giving business leaders the clarity they need to take their implementation activities seriously.
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