Recently, the International Sustainability Standards Board (ISSB) released its initial two reporting standards, creating a common language for reporting on climate risks and opportunities for business.
It was created to respond to widespread stakeholder demands for more consistent and reliable information about companies’ sustainability plans and performance amid mounting decarbonisation promises, regulation and climate change impacts.
The first, International Financial Reporting Standards (IFRS) S1, is a general standard requiring a company to disclose material information about sustainability-related risks and opportunities. This includes their governance, strategy, risk management and performance, along with industry-specific information.
The second, IFRS S2, is a standard that establishes the specific requirements for climate-related physical risks, transition risks and opportunities.
There have been voluntary standards in place for over two decades which have more recently been influenced by the 2015 Paris Agreement on Climate Change and the introduction of the United Nations Sustainable Development Goals (SDGs).
However, two years ago, at Cop26 in Glasgow, the IFRS Foundation announced the ISSB Standards.
At the time Erkki Liikanen, Chair of the IFRS Foundation Trustees, said:
“Sustainability, and particularly climate change, is the defining issue of our time. If investors are going to be able to properly assess related opportunities and risks, they will need “high-quality, transparent and globally comparable sustainability disclosures that are compatible with the financial statements.’’
There is a growing body of evidence that shows delivering on ESG objectives also helps to improve a company’s financial performance. Plus, more standardised data will also help organisations to assess their own performance in the pursuit of shared goals like those laid out by the Paris Agreement on Climate Change and UN SDGs.
Not meeting those goals comes with a moral cost, but also an economic one. Recent modelling1 shows that the costs to Australia from not meeting the Paris Agreement target is $1.19 trillion.
ISSB Chair Emmanuel Faber has acknowledged the standards “have been designed to help companies tell their sustainability story in a robust, comparable and verifiable manner”, adding that their publication “is just the starting point as we consult on our future priorities, beyond climate”.
In the new ISSB environment, the Australian Government has opened a second consultation period on climate-related financial disclosure via the Treasury. They're focused on coverage, content, framework and liability and whether they are fit for purpose. This consultation remains open until July 21.
SUMMARY OF THE ISSB STANDARDS
Mandatory ESG reporting will be a requirement for Australia's largest listed and unlisted companies (more than 500 employees, AUD$500 million+ in revenue and more than AUD$1 billion+ in assets) and financial institutions with annual reporting periods beginning on or after 1 January 2024.
The Australian Accounting Standards Board (AASB) is developing sustainability standards for the Australian market, likely to be in close alignment with the ISSB Standards.
It’s also worth noting the standards are likely to be adopted globally to ensure investor confidence, therefore it’s in the interests of all organisations to adopt the reporting framework.
As a consequence of these changes, mandatory reporters will be required to gain data to accurately calculate their scope 3 emissions – i.e. those emissions that occur up and down their supply chain beyond those they directly control or made by their energy providers.
For some organisations, scope 3 emissions can be the source of the bulk of the carbon footprint, so those working to reduce their footprint may see the opportunity to drive down their calculated emissions via their suppliers.
Therefore, non-mandated and non-reporting entities may have their hands forced into measuring and reporting carbon footprints to maintain their contracts and position in the supply chain. Communications and corporate affairs professionals should be familiarising themselves with the standards and the implications for both internal and external communications.
The ISSB Standards may not be suitable for all companies. However, it is advised that those with exposure to capital markets should look to reassess reporting in line with the new ISSB standards.
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