On February 16, 2023, the International Sustainability Standards Board (ISSB) voted unanimously to mandate global climate and sustainability disclosure rules by next year, driven by the urgency to obtain this information. The regulations will apply to annual periods starting on or after January 1, 2024, with an option for earlier adoption, which companies must disclose.
Additionally, the ISSB confirmed that the two standards, S1 (General Sustainability-related Disclosures) and S2 (Climate-related Disclosures), are now final rules and will not be re-exposed despite some modifications made in response to the approximately 1.4 thousand comment letters received during the review process. The board noted that all alterations were consistent with the feedback received.
The rules will be issued by the end of June, the board has said.
The ISSB has achieved a significant milestone with the completion of its first two environmental, social, and governance (ESG) standards, which were developed in under a year and represent a noteworthy accomplishment for the board.
“It is a big moment,” ISSB Chair Emmanuel Faber said during discussions. “It was a short moment, shorter than maybe we had initially planned in the agenda and I think the reason it was is because that paper described very accurately the absolutely incredible work that has been happening before [and] the immense effort and talent that was put in by our staff,” he said. “You are behind that success that moves us into this incredible place a year after we launched our EDs to move to the finalization of the standards. We know why the foundation was chosen, we know why we were told we needed to start with climate and you guys have delivered – I’m incredibly proud and happy.”
The provisions of the new standards could have significant implications for U.S. multinational corporations and other entities that use International Financial Reporting Standards (IFRSs) to prepare their financial statements. However, whether the disclosure rules will be mandatory will ultimately be determined by individual jurisdictions or countries. The ISSB intends to encourage global adoption of the standards, citing the International Organization of Securities Commissions (IOSCO)’s intention to review and potentially endorse them.
The disclosure requirements outlined in the standards will establish a general framework for reporting material sustainability-related concerns, as well as specific guidelines for climate-related information, including extreme weather events and greenhouse gas emissions (GHG). Companies will be obliged to report on the risks and opportunities associated with climate issues, including the financial implications for their performance, prospects, business model, and strategy.
Relief Rules Will be Included
The ISSB justified the accelerated implementation date by highlighting that many financial statement preparers are already familiar with the guidance, which is based on established standards and frameworks that were recommended by the Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD recommendations are now being adopted into legal and regulatory reporting requirements by various jurisdictions worldwide, including Canada, the EU, Hong Kong, Japan, Singapore, Switzerland, the U.K., and the U.S., according to documents from the meeting.
To facilitate the adoption process, the ISSB has agreed to provide temporary relief for companies that may struggle to comply with the disclosure requirements. These measures include:
- Transitional relief for companies to defer sustainability-related financial disclosures to a later date than the financial statements;
- Relief for companies to exempt from the requirement to apply the GHG Protocol Corporate Standard, in certain situations;
- A temporary exemption for companies to postpone the disclosure of Scope 3 GHG emissions for at least one year when implementing the climate standard for the first time;
- No requirement for comparative information disclosure in the initial annual reporting period when applying the standards.
Focus Shifts to Implementation + Future Standards
The ISSB is now shifting its focus towards developing additional guidance and training materials to support the implementation of the standards, according to staff members. The board will establish groups to facilitate the implementation of the rules and conduct a post-implementation review (PIR) at a later stage to assess whether the standards functioned as intended.
The board is also looking ahead to future standard-setting priorities and plans to continue soliciting feedback on its future work during the second quarter of this year.
