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.
Turning this advice into action, nonetheless, 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.
ISSB, ESRS: Different rules, common goals
Considering the recurring criticism around the divergent interpretations, non-comparability and questionable relevance for investors, International Financial Reporting Standards (IFRS), the European Commission (EC), and the European Financial Reporting Advisory Group (EFRAG) appointed as technical advisor to the EC, are continuing to take active action to remedy the situation.
While the final maximized version of interoperability between IFRS/ISSB and EFRAG/ESRS remains to be seen, both standards are pursuing the shared goal of working closely toward setting up a global, interoperable baseline for improved ESG-related disclosures.
However, there are some fundamental differences between the two frameworks. The fundamental difference between ISSB and ESRS, and the EU approach to reporting in general, is the approach of single materiality versus double materiality. Where ISSB is only recommending financially material standards, the EU approach is to look at disclosing items that are relevant to the world/society and financially. This aligns more with GRI’s (Global Reporting Initiative) approach of having all companies report to the same standards.
Both are expected to take effect in 2024 and both standard-setting organizations are ramping up their final activities.
ISSB’s Finalization: What it Means and What it Takes
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.
ISSB: IFRS S1 and IFRS S2 ushering in a new era of sustainability-related disclosures in capital markets worldwide
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.
‘Today represents the outcome of more than 18 months of intense work to deliver an inaugural set of sustainability disclosure standards for the global capital markets. The ISSB Standards have been designed to help companies tell their sustainability story in a robust, comparable, and verifiable manner. We have consulted closely with the market to ensure the Standards are proportionate and will result in disclosures that are relevant for investment decision-making’ - Emmanuel Faber, ISSB Chair, summed up the release of new standards.
Access standards using the new IFRS Sustainability Standards Navigator available at the link.
IOSCO to endorse the ISSB standards globally
Before the S1/S2 release, the International Organization for Securities Commissions (IOSCO) greatly welcomed the ISSB’s decision to enter into the finalisation phase of its inaugural corporate sustainability reporting standards. Also mentioning the audit standard setters the International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IESBA) aiming to have assurance standards available before the end of 2024, the Chairman of IOSCO, Jean-Paul Servais said: 'Together, these standards will meet an urgent need in financial markets to get away from the current fragmented situation when it comes to sustainability disclosures.'
ISSB seeks feedback on its priorities for the next two years
The collaboration and dialogue must go on. Understanding its importance, earlier the ISSB also launched a public consultation to seek broad public input on the strategic direction and overall balance of its future work programme as well as sustainability-related matters the ISSB could take up by publishing a request for information.
By 1 September 2023, the ISSB will be gathering views and comments on:
- the strategic direction and balance of ISSB activities;
- the suitability of proposed criteria for assessing the priority of sustainability-related matters (including topics, industries and activities) that could be added to the ISSB’s work plan; and
- a proposed list of sustainability-related matters (including topics, industries, and activities) that could be added to the ISSB’s work plan.
Respond to the Request for Information at the link.
World Economic Forum and ISSB Form Partnership to Provide Guidance on ISSB Reporting
On June 6, 2023, the World Economic Forum (WEF) announced the formation of the Forum ISSB Preparers Group in partnership with the ISSB aiming to share insights for those adopting the ISSB sustainability reporting standards.
Having extensive expertise in sustainability reporting, the Preparers Group will collate information on best practices and practical examples from companies applying the ISSB Standards and share these with ISSB and other companies. Their feedback to the ISSB on the application and feasibility of the standards envisaged to provide insights into “corporate reporting transformations,” and contribute to the development of guidance material.
The collaboration between WEF and ISSB is supported by a Memorandum of Understanding (MoU) and builds on the WEF’s Stakeholder Metrics initiative published in September 2020.
Remaining focused on digitising the ESG data landscape in EU and global financial sectors, including the development and maintenance of international standards, guidelines, and regulations as parts of the ESG regulatory framework, at BR-AG we will be following up on the outcomes of such powerful cooperation to discover valuable insights as well.
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Rising to ESG Data & Disclosure Challenges
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Final consultation on ESRSs
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.
Technology is needed to advance ESG Reporting
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.
Rising to the ESG Reporting and Data Management challenges requires technology that permits advanced data collection, high-quality processes, controls over those processes, and sound governance that ties it all together. It may be a lot of work, but innovative tech solutions, like our ATOME Platform, combined with extensive expert know-how and advisory services are designed to bridge the gaps you have and meet the greater scrutiny and expectations of regulators, investors, and stakeholders alike.
Supporting modelling and designing interconnectedness between the ESG standards/requirements, ATOME can facilitate advanced concepts understanding for setting up internal data governance, extent mappings and change management. We are here to assist you not only with ESG reporting, data collection, and management but also to support the building and managing of ESG /sustainability data management frameworks and Green Data Hubs maximizing the potential of your digital ESG data in analytics.
Speak to our experts to discover how we can support your efforts in these areas:
