Sustainability Reporting Updates
Authored by Tara Fisher
Earlier this month, the International Sustainability Standards Board (ISSB) approved reporting rules that allow companies to only report on climate-related risks when adopting two new sustainability disclosures.
An emerging trend in the accounting field, Environmental, Social and Governance reporting, commonly referred to as ESG reporting, has faced numerous challenges when it comes to consistency in standards. One thing that has been consistent, however, is that investors generally view climate-related risks and opportunities as the most relevant and urgent with respect to information reporting.
The two new standards in play are S1 General Requirements for Disclosure of Sustainability-related Financial Information, and S2 Climate-related Disclosures. With an effective date of January 1, 2024, companies are seeking guidance and insight into how such disclosures should be prepared.
The new measures provide some relief to companies because it allows them to focus solely on the climate-related disclosures in S2, and many companies already have established systems and processes in place. S1 would still apply, but companies wouldn’t have to begin reporting on other sustainability-related risks and opportunities until the following year.
According to Vice Chair Sue Lloyd, the ISSB wants companies to use the relief in a manner that allows them to “focus in and apply S2, using S1 to the extent relevant to applying S2.” She added that, if you want to provide information on extra stuff because you’ve been sharing that information in the past, “you could do that but you’d need to say ‘I have used the relief,’ so that investors are on notice this isn’t the full spectrum of S1.” Lloyd stated, “We’d be saying you’re using the relief because you’re not going to commit to applying S1 for all of your sustainability-related risks and opportunities in the full way that S1 requires.”
It's important to note that S1 and S2 are the first two ESG standards to be developed by the ISSB. The timeframe for this project was less than a year. A statement by ISSB Chair, Emmanuel Faber, said “This transitional relief ensures companies can phase in their approach, initially focusing on the quality of the climate-related information they provide.” Faber acknowledged that “companies around the world are not all starting from the same place…we expect many of the companies that already disclose information beyond climate to continue to do so.”
A recent report published by the International Federation of Accountants, along with the AICPA and CIMA, marks important trends in sustainability disclosures and illustrates the increase in corporate reporting on ESG measures. The report, The State of Play: Sustainability Reporting and Assurance, found that 95 percent of the entities reviewed provided ESG disclosures in 2021 but the 1,350 companies are situated in 21 different foreign jurisdictions.
The report states that there is a growing need for harmonized ESG standards because 86% of the companies reviewed used multiple standards and separate reporting frameworks to prepare their sustainability information. As noted earlier, this creates issues with comparability and consistency. Thus, the work being done by the ISSB in allowing companies to phase-in the new disclosure standards by prioritizing climate-related risks at the start is relevant to the larger discussion of how this emerging trend will be adopted and integrated into the traditional financial reporting framework over time.
Sources:
Lugo, Denise. “Companies Can Focus Solely on Climate-Related Disclosures at First Adoption Next Year, ESG Rulemaker Says”. Thomson Reuters. https://tax.thomsonreuters.com/news/companies-can-focus-solely-on-climate-related-disclosures-at-first-adoption-next-year-esg-rulemaker-says/
“The State of Play: Sustainability Disclosure & Assurance – 2019-2021 Trends & Analysis”. IFAC, AICPA & CIMA. https://ifacweb.blob.core.windows.net/publicfiles/2023-02/IFAC-State-of-Play-Sustainability-Assurance-Disclosures_0.pdf