Mandatory climate disclosures | ISSB, IFRS

Part 1: Prepare for the new ISSB Standard - timing is everything

The International Sustainability Standards Board (ISSB) was formed in 2021 under the International Financial Reporting Standards (IFRS) Foundation. The ISSB launched its first exposure draft for sustainability disclosures for consultation in March 2022 and is currently working on the final version of the standard which is due for release in the last week of June 2023. This final version addresses the comments and concerns from the associated consultation process.

With significant changes ahead, this article is the first in a series to discuss the features of the incoming standard and what your business can do to prepare for its introduction.

What can business expect?

The aim of the ISSB is to deliver sustainability information at sufficient quality and detail to support investors and policy makers to understand the risks and opportunities that sustainability aspects represent for a company. The first part of sustainability information tackled by the ISSB is greenhouse gas emissions and climate risk. Energy, greenhouse gas and physical risk information will need to be reported to align with financial information so that investors can unpack risks and opportunities and to assess enterprise value. The ISSB requires that a reporting entity discloses sustainability related financial information in its general purpose financial reporting.

The ISSB has spent significant time ensuring that it aligns and works with current reporting frameworks that have been adopted by companies and are currently being used by investors to support their analyses, notably TCFD[1], SBTi[2] and the TPI[3].

The content of the ISSB is broad and far reaching. It includes consideration of:

• Governance: the processes, controls and procedures in place to monitor and manage sustainability related risks and opportunities.

• Strategy: the approach the company has taken to addressing the risks and opportunities posed by sustainability considerations to their business model and strategy over the short, medium and long term.

• Risk management: including descriptions of the entity used to identify, assess and manage risks.

• Metrics and targets: information used to assess, manage and monitor company performance in sustainability over time.

Notable here is the final item: ISSB is not only about reporting on your emissions and energy consumption; it is about reporting your targets, your plans and resources for delivering these, and how you are progressing in achieving your objectives.

In Australia the Australian Accounting Standards Board (AASB) is working on how to best use the ISSB to ensure that Australian companies deliver information sets that meet the needs of financial institutions, and align with international programs and requirements. Should the AASB adopt the ISSB framework to guide its sustainability risk disclosures, the ISSB will become the basis for how auditors assess the sustainability risks facing a company. This means that any company that is audited under the Australian standard could be required to disclose their sustainability risk in line with ISSB.

A new complex disclosure of corporate risk requiring alignment of sustainability and financial disclosures

The ISSB is more than a reporting framework, it is a complex disclosure of corporate risk, and it is a call to action. It requires companies to align their sustainability disclosures with their financial disclosures – potentially as single report. Companies, more than ever, need to improve the rigour of their sustainability reporting framework to ensure their energy and emissions reporting can be generated in a timely manner, and to financial information quality. Given ISSB is also a lot more far-reaching than NGER, we are concerned that both NGER reporting companies and non-NGER reporting companies might find themselves under prepared for this new framework.  

Challenges and steps to take now

The initial challenges we see for companies are:

• Aligning reporting boundaries with financial control. NGER requires an operational control approach, whereas ISSB requires that sustainability information be reported in line with financial control, which can be markedly different from operational control. For example a company might have assessed that it doesn't have operational control for an asset under NGER, however, it has a 30% financial ownership and will be required to disclose part of the emissions from that asset under ISSB.

• Specific requirements around market based as opposed to location based assessment of emissions from the consumption of electricity (scope 2 emissions). This is easier to achieve through monthly rather than annual reporting.

• Inclusion of scope 3 emissions.

• ISSB is not about reporting an energy and greenhouse gas inventory; it is about reporting on your transition to the company you plan to be in 2050, and the impact that this transition, and physical climate risk, will have on the financial performance of your company.

Companies need to review the ISSB and work out what it means for them. Indications are that the first reporting year to align with the requirements of the ISSB will be FY24/25.

That leaves 13 months for companies to prepare themselves.

We can help

For decades, Energetics has supported ASX100 with their climate and energy reporting requirements. We understand large, complex organisations and the need to ensure reports are robust. We can advise on the preparations you can make today ahead of tougher reporting tomorrow.