This article provides an overview of the establishment of the ISSB and contains highlights of the prototype standards.
On 3 November 2021, the IFRS Foundation Trustees (Trustees) announced the following:
In addition, the Trustees announced that the ISSB will be based in a number of different locations including Frankfurt, where the Board will be based and Montreal which will house key supporting functions respectively. Following the consolidation with VRF, there will also be an office in San Francisco, and a London office will provide technical support and platforms for market engagement and deeper cooperation with regional stakeholders.
This multi-location Board signifies the Trustees’ desire to be inclusive and get views from across the world as they address the need for globally consistent sustainability reporting standards.
The objective of the ISSB in the words of the IFRS Foundation is:
‘The formation of the new ISSB is to develop—in the public interest—a comprehensive global baseline of high-quality sustainability disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.’
The ISSB standards will provide a comprehensive global baseline of sustainability disclosures related to enterprise value*. The standards are expected to be developed in such a way that they can be mandated and, if desired, combined with jurisdiction-specific requirements aimed at meeting the information needs of broader stakeholder groups beyond investors.
The ISSB standards won’t be mandatory for reporting unless they are adopted by jurisdictional authorities but may be used voluntarily by companies where this is permitted by local laws/regulations.
*Enterprise value is defined in the General prototype standards as the market capitalisation of an entity plus the market value of the entity’s net debt. It is determined by capital market participants, based on their estimation of the amount, timing and certainty of future cash flows spanning the short, medium, and long term. Enterprise value reflects users’ assessments of future cash flows, including the value attributed to those cash flows by users.
Read our previous article on the ISSB and download the ISSB briefing deck.
The Trustees set up, (with the support and oversight from The International Organisation of Securities Commissions (IOSCO), and The International Public Sector Accounting Standards Board (IPSASB)), the Technical Readiness Working Group (TRWG), to give the new board a running start and help with the rapid development of ISSB standards.
The TRWG was designed to integrate and build on the work of current and relevant initiatives focused on meeting investors’ information needs, with the purpose of providing technical recommendations for consideration by the ISSB.
The members of the TRWG are:
The TRWG’s first deliverable was the prototype standards, details of which are included below.
The summary of work performed by the TRWG, as well as future work plans, can be found here.
This is the first time that ‘prototype standards’ have been released by the Trustees. The prototype standards have been issued to:
The ISSB will consider recommendations and determine its next steps, including the issuance of exposure drafts for standards informed by the TRWG’s work, subject to the independent due process of the ISSB. The hope is that the exposure drafts will be issued in H1 2022, with final standards expected to be issued by the end of 2022. The issuing of prototype standards gives stakeholders both an early indication of the ISSB’s direction and time to consider the contents.
There are two prototype standards;
The General prototype is based on the financial reporting standard IAS 1, ‘Presentation of Financial statements’, and provides a general structure for the disclosure of material sustainability non-financial information.
This general structure is based on the TCFD’s four core pillars, Governance, Strategy, Risk Management and Metrics and Targets. The TCFD recommended disclosures either have been, or are soon to be adopted by a number of jurisdictions.
It is expected that future ISSB standards will be structured in accordance with these four pillars, that is, in the same manner in which the General and Climate prototype standards are structured. The thematic Climate prototype is tailored to ‘climate-related risks and opportunities, whereas the general prototype is generic and designed to deal with broader 'sustainability’ issues. For example, note the differences in disclosure requirements related to the ‘Governance’ pillar. In the General prototype, the disclosure requirement is:
Under the Climate prototype, the disclosure requirement is:
The adoption of the four pillar approach for all future standards will benefit preparers as they will have a consistent disclosure structure.
As noted above, the General prototype was developed to reflect the financial reporting standard IAS 1, ‘Presentation of Financial Statements’. The General prototype sets out the overall requirements of disclosure of sustainability-related non-financial information.
The objective of the General prototype is to provide information about the significant sustainability-related risks and opportunities to which the reporting entity is exposed. The General prototype makes it clear that the information should help primary users of general purpose financial reporting decide whether to provide resources to the entity. It does this by giving users a clearer understanding of the entity’s future cash flows and the enterprise value assessment.
General purpose financial reporting (‘reporting’) is defined within the General prototype as, encompassing, but not restricted to, an entity's general purpose financial statements and sustainability-related financial disclosures.
Users are defined in the General prototype as being ‘existing and potential investors, lenders and other creditors’. The General prototype notes that users will potentially be making decisions about matters such as:
The General prototype also makes it clear that the sustainability-related financial information should be prepared consistently from period-to-period and presented together with comparative disclosures regarding the previous period. If the inputs used to calculate a metric are refined in the current year, based on additional information being obtained that was not previously available, an entity should provide restated comparative figures unless it is impracticable to do so. The reason for those changes should also be disclosed.
The prototype also emphasises the need to consider consistency of financial data and assumptions with information reported in financial statements.
Although consistency with financial information is a consideration, the prototype itself is agnostic to what accounting framework is applied. For example, the General prototype could equally be used with IFRS standards or a local form of GAAP.
By writing the scope of the General prototype in contemplation of including accounting frameworks other than IFRS, it appears that the intent is to allow for the widest possible application of the standards, even beyond companies that are not required to utilise IFRS. For example, this can include private companies applying a local form of GAAP or territories not applying IFRS as their primary accounting framework.
Having a truly global set of standards will require many jurisdictions to mandate the ISSB sustainability standards.
The General prototype provides a hierarchy for the application of standards. Therefore, if there is another IFRS Sustainability Disclosure Standard which is more specific and includes disclosure requirements for specific sustainability-related matters and associated cross-industry, industry-based and activity metrics and targets, then that specific standard should be followed. See the Climate prototype summary as an example of this.
A notable inclusion within the scope of this prototype is that ‘Sustainability matters that do not affect the reporting entity’s enterprise value are outside the scope of general purpose financial reporting.’ This is in line with this General prototype’s objective that reporting should be a complete depiction of sustainability risks and opportunities to help users assess enterprise value. Users would do this by predicting the value, timing, and certainty of the entity’s future cash flows over the short, medium, and long term.
Sustainability-related information is defined as material within the General prototype if omitting, misstating, or obscuring that information could reasonably be expected to influence decisions that the primary users of general purpose financial reports make on the basis of those reports.
This is consistent with the definition of materiality within IFRS. Specifically, IAS 1 paragraph 7.
According to the General prototype, to determine whether an item is material, entities should consider the following factors:
The General prototype does not specify uniform quantitative thresholds or any predetermination of materiality, and therefore judgement will be needed. Furthermore, as materiality may change over time, these judgements may need to be reassessed.
The General prototype does acknowledge that there is an expectation that the users have reasonable knowledge, review the information diligently and may also need to seek an expert’s advice to understand complex sustainability related matters.
The definition of materiality is in the context of enterprise value within the General prototype and is consistent with the TCFD guidance on metrics and targets. It links to the ISSB’s purpose to provide enterprise value standards for sustainability reporting.
The IFRS Foundation expects that national bodies or governments looking for broader societal reporting would use the ISSB’s sustainability disclosure standards as the foundation on which to build broader societal reporting.
Reporting entity boundary
The General prototype proposes that a reporting entity's boundary is the same for its financial statements and sustainability-related financial disclosures. However, the issue of a reporting entity’s boundary can be complex. For example, in IFRS reporting, determining the boundary of the reporting entity is driven by the information needs of the primary users of the reporting entity’s financial statements [IFRS Conceptual Framework 3.14].
The matter is made more judgemental by the requirement for entities to also disclose material information about significant sustainability-related risks and opportunities arising from activities, interactions, and relationships with parties outside the reporting entity’s boundary that affect users’ assessment of enterprise value.
As an example, the General prototype standard considers an entity whose principal supplier uses a manufacturing process that requires substantial modification to comply with environmental regulations. The General prototype suggests that additional disclosure about the sustainability risks and opportunities related to this supplier could be deemed material to the users of its reporting. However, from an IFRS reporting perspective, the supplier would not be considered part of the reporting entity.
The reporting boundary definition is challenging when information about entities which are affiliated with the entity but not part of the group is used for reporting. This becomes problematic by the additional provision in the General prototype which states: ‘An entity shall disclose material information about significant sustainability-related risks and opportunities arising from activities, interactions and relationships with parties outside the reporting entity’s boundary that affect users’ assessment of enterprise value.’
We expect that the application of the reporting boundary will be a key question for the ISSB when feedback is sought during the ISSB’s due process on these prototype standards. For example, many entities have complex organisational structures and are involved in various forms of investments such as joint arrangements and associates.
The General prototype presents examples of potential areas for inclusion of sustainability disclosure so that users can understand any connections, dependencies, and trade-offs with other information in an entity’s reporting. These examples include situations where there are metrics and targets that support one or more of the disclosure requirements of the pillars. An entity might link together areas where it has had to restructure the business due to sustainability-related risks such as a carbon emission tax, which in turn has led to opportunities for the business to reskill and redeploy its workforce.
Other key areas
Other key areas covered within this General prototype include, but are not limited to:
The General prototype makes it clear that sustainability-related financial disclosures should be for the same reporting period as the financial statements. Therefore, the disclosures should be provided at least every 12 months and at the same time as the financial statements. There is also guidance on the production of interim disclosures, and explanation that such disclosure would be an update on the latest complete set of annual disclosures, with a focus on new information, events, and circumstances.
It is clear within the General prototype that the disclosures of sustainability-related financial information should be included as part of the entity's reporting. Depending on the existence of local regulation, there are various possible locations for entities to include their sustainability-related financial information within their reporting. The General prototype also lays out that disclosures can be cross-referenced to another report; however, this must be available to the same users on the same terms and at the same time.
Sources of estimation and outcome uncertainty: this General prototype notes that the use of reasonable estimates is an essential part of preparing sustainability-related metrics. It states that the use of estimates does not undermine the usefulness of information, as long as the estimates are clearly and accurately described and explained. Preparers should also consider whether there are any future events that currently do not have a financial impact, that are material for disclosure. In particular, those events where there are a range of outcomes to be assessed. For example, a local government may announce that a carbon tax will be substantively enacted in the year 2025. As the tax will only be enacted in the future, it would not have a current financial impact for an entity. However, it could be material to disclose to the users of general purpose financial reporting.
Errors have the same definition within the General prototype as within IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors ’ [paragraph 5] namely; ‘omissions from, and misstatements in, the entity’s sustainability-related financial disclosures from failure to use or misuse of reliable information available at the time when general purpose financial reporting was authorised for issue and could reasonably be expected to have been obtained and taken into account in the preparation of sustainability related financial disclosures’. Similar to IAS 8, any material, prior-period errors should be corrected retrospectively, by no later than the next general purpose financial report authorised for issue.
There is a disclosure requirement in the General prototype whereby if, and only if, an entity complies with all the relevant requirements of the IFRS Sustainability Disclosure Standards, they should include an explicit and unqualified statement of compliance to that effect.
As explained above, in addition to releasing the General prototype, the ISSB released a Climate prototype. This prototype takes the concepts set out in the General prototype and applies them to climate-related risks.
The objective of the disclosure requirements contained in the Climate prototype is to require an entity to disclose the climate-related risks and opportunities that it is facing. This should enable users of an entity's reporting to:
The scope of the Climate prototype is illustrated in the following diagram:
The risks and opportunities referred to in the diagram above can be defined as follows:
As noted above, the general structure of the prototype standards is based on the four core TCFD pillars of: Governance, Strategy, Risk Management and Metrics and Targets. Each of these pillars covered in the Climate prototype is considered further below.
Stakeholders and other users of climate-related reporting information are interested in identifying and understanding:
The Climate prototype states that an entity should disclose information that enables users of reporting to understand the governance processes, controls and procedures used to monitor and manage climate-related risks and opportunities.
To achieve this objective, the Climate prototype provides a list of detailed disclosure requirements that should be addressed. The overarching requirement is that there should be a description of the governance body or bodies (which can include a board, committee or equivalent body charged with governance) with oversight of climate-related risks and opportunities, and of management’s role with respect to climate-related risks and opportunities.
To understand how climate-related matters may impact an entity’s business, strategy and financial planning over the short, medium, and long term, entities need to disclose information to inform investors and other stakeholders about the entity’s future performance. This will also assist stakeholders in their assessment of the enterprise value of the entity.
The Climate prototype states that an entity would need to disclose information that enables users of reporting to understand:
Within the Climate prototype, there is detailed guidance about how the above disclosure requirements can be addressed, including disclosure requirements relating to scenario analysis.
For example, entities should disclose an analysis of the resilience of the entity’s strategy to significant climate-related risks. The disclosure should include whether the entity has used scenario analysis and the sources and time horizons of the scenarios, including discussing why such scenarios are relevant.
**A transition plan is an aspect of an entity’s overall strategy that lays out a set of targets and actions supporting its transition toward a lower-carbon economy, including actions such as reducing its greenhouse gas emissions.
Quantitative scenario analysis is one of the more challenging areas of TCFD. The information used in scenario analysis is often different from estimates and judgements used in financial reporting, because it is prepared for a different purpose (namely to identify remote but potentially very significant risks over the short, medium, and long term). That is, scenarios are hypothetical impacts of a particular climate scenario and this may not align with the company’s best estimates or market participant assumptions regarding the impact of climate change. Accordingly, there is sometimes confusion about what these scenarios represent when compared to financial reporting information.
How to incorporate scenarios into the final ISSB standards is likely to be an area of significant debate during the due process to finalise the standards as it is not something many companies currently undertake.
In order for users of reporting to assess an entity’s overall risk profile, and its risk management activities and processes, the Climate prototype requires an explanation of how the entity identifies, assesses, manages, and mitigates climate-related risks. In addition, entities need to clarify whether those processes are incorporated into the entity’s existing risk management processes.
To address the disclosure need, the Climate prototype includes the following disclosure requirements:
In disclosing the above information, entities should also address the overall risk management objective.
There has been a growing demand for climate-related information that is decision-useful. Stakeholders have been demanding disclosure of consistent, comparable, transparent, and reliable risk information. PwC’s 2021 Global ESG investor survey provides additional insights on investors’ perspectives.
Metrics and Targets
In addition to understanding what the climate-related risks and opportunities of an entity are, users of general purpose financial reporting also want to understand how an entity monitors and adapts its performance in relation to these identified risks and opportunities. Metrics and targets are key to address this area of focus. Disclosure of quantitative metrics and targets can be used to measure an entity’s performance against significant climate-related risks and opportunities.
The Climate prototype requires the following disclosure:
The following has been included by the TRWG as recommendations for the ISSB’s consideration with regards to ‘Metrics and Targets’:
The Climate prototype states that the cross-industry metrics that should be disclosed are:
The cross-industry metrics contained in the Climate prototype are consistent with the cross-industry, climate-related metric categories included in the TCFD framework. The TCFD has highlighted these categories as they believe these are important factors in measuring climate-related risks and opportunities. Furthermore, these metrics form the basis for estimating the climate-related financial impact of these climate-related risks and opportunities.
For users to understand and assess an entity’s targets and whether its strategic goals are being achieved, an entity should not only disclose what its climate-related targets are, but should also disclose:
This is not an exhaustive list.
Industry disclosure requirements
To meet the requirements relating to industry-based metrics, an entity should use the tables set out in Appendix B - ‘Industry disclosure requirements’, of the Climate prototype, which contains a summary of the industry-based disclosure requirements. The summary is organised by sector and industry, and for each industry, the disclosure topic(s) related to climate risks or opportunities are identified.
The disclosure topics and associated metrics within Appendix B of the Climate prototype are listed by industry-based activities. The Climate prototype makes it clear that an entity should only disclose the metrics which are relevant to its activities and in line with its business model for specific climate-related risks or opportunities.
Needless to say, if the entity has activities which span across more than one industry, the entity may have to provide individual disclosures about the industries across which it spans.
The industries and metrics included in Appendix B of the Climate prototype largely leverage the existing SASB industry standards that companies might already be familiar with.
IFRS is generally industry agnostic, therefore including industry metrics is a significant change from how financial statement metrics are developed. Defining industries and dealing with consistency between similar industries is likely to be challenging. The SASB standards go a long way to help with this determination. However, we are aware that the format and structure of the standards is not always consistent and some of their metrics will be challenging to apply globally.
The summaries included above are only highlights of the General and Climate prototypes. The ISSB will consider the TRWG’s recommendations and determine its next steps, including the issuance of exposure drafts for standards informed by the TRWG’s work, subject to the independent due process of the ISSB.
Whilst the creation of the ISSB is likely to be a transformational event for sustainability reporting, there is still much to be done. Meaningful engagement as standards are developed is vital. Both preparers and users of reporting should get involved and respond to the proposals in the potential exposure drafts. The issue of the ISSB standards by the end of 2022 will provide the foundation for global, consistent, comparable and high quality sustainability reporting standards.
As entities adopt global baseline standards for reporting, and the quality of data, processes and controls improves, we expect a corresponding increase in investors’ confidence level. Examples from the market also show that providing transparent, relevant, and reliable ESG information in external reporting improves trust with stakeholders, including investors.
Director and Leader Accounting Consulting Services, PwC Switzerland
Tel: +41 58 792 26 54
Director, ESG Reporting and Capital Markets & Accounting Advisory Services , PwC Switzerland
Tel: +41 58 792 2340