The inaugural IFRS Sustainability Disclosure Standards were issued this week. IFRS S1 and IFRS S2 are intended to provide a global baseline of sustainability-related disclosures for use by investors, lenders and insurance underwriters in assessing and pricing risks.
The focus on these entities is deliberate, there impact is huge as their involvement will ensure that the Standards are cascaded to their stakeholders / value chains. Ex. For a bank to price its risks for reporting purposes, they must understand the risks residing in their loan books.
The basis of the standards is simple, in order to make better economic decisions, you need better information. Further, this information needs to be presented in a common language so that you understand it regardless of the region you are operating from.
IFRS S1 requires companies to identify and communicate in a standardized format, the sustainability risks and opportunities they face over three horizons - the short, medium, and long term.
IFRS S2 outlines specific climate-related disclosures. IFRS S2 is designed to be used together with IFRS S1.
So what are some things that you need to know about the ISSB’s new standards? Here are 5:
- The Standards are global in nature - They standardize sustainability / climate change reporting for global use. They therefore present a single, global baseline of sustainability disclosures for use by the capital markets. Any national requirements will be built on top of this baseline.
- Connection with Financial Statements - The ISSB Standards is designed to be provided alongside financial statements as part of the same reporting package.
- Global support - ISSB builds on the work of the Task Force on Climate Related Disclosures (TCFD) Framework which was a creation of the G20. ISSB's work has the support of investors, policy makers and market regulators.
- Provides decision-useful, material information - Focusing on specific decision makers means that the Standards concerns itself with information that is material, proportionate and decision-useful.
- Building on and consolidating existing frameworks - IFRS S1 and IFRS S2 consolidates 5 key frameworks:
- The TCFD recommendations (Kenyan financial institutions are already using the TCFD Framework in their reporting),
- SASB Standards,
- CDSB Framework,
- Integrated Reporting Framework and
- World Economic Forum metrics.
The Global Reporting Initiative (GRI) has partnered with ISSB to make the Standards interoperable.
The consolidation and collaboration is important because it means that companies that have put in investments to report using these other frameworks do not lose that benefit and it also simplifies the reporting ecosystem drastically.
The standards will take effect on 1 January 2024. Companies are encouraged to be early adopters of the same so that they can build their capacity to fulfill the requirements of the Standards.
Speaking of capacity building, join us at the Zero Carbon Village where we unite lawyers and business leaders on a mission to empower their organizations to embark on a transformational path towards achieving net-zero emissions.
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