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IFRS Publishes Essential Guide for Voluntary Adoption of ISSB Standards Amid Investor Pressure
In response to the growing demand from global investors for high-quality, comparable sustainability disclosures, the IFRS Foundation has released a pivotal guide aimed at helping companies voluntarily apply the ISSB Standards.
The guide, Voluntarily Applying ISSB Standards—A Guide for Preparers, was unveiled during New York Climate Week and is expected to serve as a valuable tool for businesses seeking to meet investor demand while preparing for future regulatory changes.
Investor-Driven Push for ISSB Standards
As global financial markets increasingly prioritize sustainability, major investors, including BlackRock, Vanguard, and Capital Group, have called for companies to adopt the ISSB Standards.
These standards, specifically IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures), establish a unified framework for reporting sustainability-related risks and opportunities.
They are designed to provide decision-useful information that is consistent, comparable, and reliable—essential attributes for investors assessing companies across different jurisdictions.
The push for voluntary application of ISSB Standards has gained momentum because it addresses a critical issue: the current patchwork of sustainability reporting frameworks makes it difficult for investors to compare companies across borders.
As Carine Smith Ihenacho, Chair of the ISSB Investor Advisory Group (IIAG), stated at New York Climate Week, consistent disclosures are necessary for investors to manage risks and make informed decisions across diversified portfolios. For many companies, applying the ISSB Standards voluntarily is a strategic move to align with global investor expectations.
Related Article: Sustainability Reporting: A Dive into ISSB's IFRS S1/S2 Standards
The Importance of the ISSB Standards
The ISSB Standards respond to a critical need in the capital markets: the demand for a global baseline of sustainability-related financial disclosures. By voluntarily adopting IFRS S1 and IFRS S2, companies can disclose climate-related and other sustainability-related information in a way that enhances transparency and comparability. This not only helps investors but also supports companies in managing their sustainability risks more effectively.
The standards are part of a broader movement towards regulatory convergence in sustainability reporting. Many jurisdictions, including the European Union with its European Sustainability Reporting Standards (ESRS), are incorporating ISSB Standards into their disclosure frameworks.
Adopting these standards voluntarily offers a strategic advantage for companies operating across multiple regions by creating a "global passport" for sustainability reporting.
Transitioning to ISSB Standards: Reliefs and Proportionality Mechanisms
For companies just starting their sustainability reporting journey, the IFRS Foundation's guide highlights several key transition reliefs and proportionality mechanisms designed to ease the application of the ISSB Standards:
Transition Reliefs: These provide flexibility for companies to phase in the ISSB reporting requirements. For example, in the first year, companies can focus on disclosing only climate-related risks (IFRS S2), postponing broader sustainability disclosures. This phased approach helps companies manage the workload and data collection required for full compliance with IFRS S1 and IFRS S2.
Climate-First Reporting: This allows companies to disclose only climate-related risks in their first year of reporting under IFRS S2, with broader sustainability-related risks and opportunities to be disclosed from the second year onwards.
Comparative Information: In the first reporting year, companies are not required to provide comparative information on sustainability disclosures. However, from the second year onwards, they must include comparative data for all relevant disclosures.
Proportionality Mechanisms: These mechanisms recognize that not all companies have the same resources or capabilities when it comes to sustainability reporting. The ISSB Standards allow for the use of qualitative disclosures in cases where quantitative data is difficult or costly to obtain. This is particularly helpful for smaller companies or those with less experience in sustainability reporting.
Reasonable and Supportable Information: Companies are only required to disclose information that is reasonable and supportable, given their resources and data availability at the time of reporting. This ensures that the reporting process is manageable and does not impose undue burdens on companies.
Aligning with Existing Frameworks: A Seamless Transition
For companies already using established sustainability reporting frameworks like the Task Force on Climate-Related Financial Disclosures (TCFD), SASB Standards, or the Integrated Reporting Framework, the guide offers reassurance: these frameworks are closely aligned with the ISSB Standards. This means that businesses already disclosing sustainability-related information under these frameworks are well-positioned to transition to full compliance with IFRS S1 and IFRS S2.
The guide provides practical advice on how companies can bridge the gaps between their current reporting practices and the requirements of the ISSB Standards.
For instance, SASB reporters can use their existing disclosures as a foundation, adding additional information to meet the broader requirements of IFRS S1 and IFRS S2.
Similarly, companies that follow the TCFD recommendations for climate-related disclosures are already in line with many of the requirements of IFRS S2. The guide suggests that these companies can build on their TCFD reporting by adding industry-specific information, as required by the ISSB Standards.
Why Voluntary Application Matters
Investors are not waiting for regulations to be enacted before demanding sustainability disclosures from companies. By voluntarily applying the ISSB Standards, businesses can meet investor expectations head-on and demonstrate their commitment to transparency and long-term value creation.
This is especially important for companies operating in jurisdictions that have not yet mandated the use of the ISSB Standards.
Jonathan Bailey, Vice Chair of the ISSB Investor Advisory Group, emphasized the importance of high-quality, financially material sustainability data for investors. Voluntary adoption of the ISSB Standards ensures that companies provide the kind of robust, decision-useful information that investors need.
Preparing for Regulatory Adoption
While the voluntary adoption of ISSB Standards is being driven by investor demand, it also prepares companies for a future where these standards are likely to become regulatory requirements in many jurisdictions.
The IFRS Foundation has collaborated with global sustainability frameworks, including the Global Reporting Initiative (GRI) and the CDP (formerly Carbon Disclosure Project), to ensure that companies can meet both investor and regulatory requirements by using the ISSB Standards.
The guide also points to the ISSB's collaboration with the GRI to deliver full interoperability, starting with the GRI 101 Biodiversity Standard and the ISSB’s project on biodiversity, ecosystems, and ecosystem services.
This collaboration ensures that companies can apply the ISSB Standards alongside other globally recognized sustainability frameworks, further enhancing the quality and comparability of their disclosures.
Related Article: GRI and IFRS Join Forces for Seamless Sustainability Reporting
Voluntary Adoption as a Strategic Advantage
For companies aiming to lead in sustainability reporting, voluntarily applying the ISSB Standards offers a strategic advantage. It allows businesses to meet the growing expectations of investors while preparing for future regulatory developments.
By following the guidance in the new IFRS publication, companies can navigate the transition smoothly, making use of reliefs and proportionality mechanisms to tailor their disclosures to their current capabilities.
Ultimately, the voluntary adoption of IFRS S1 and IFRS S2 positions companies to provide decision-useful information that aligns with global best practices, ensuring they remain competitive and attractive to investors.
As more jurisdictions move toward adopting these standards, companies that have already implemented them will be well ahead of the curve, benefiting from enhanced transparency and credibility in the eyes of the investment community.
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