Written By Erik Coates, Radha Curpen and Sharon Singh
On June 26, 2023, the International Sustainability Standards Board (ISSB) released the final versions of its first two global sustainability disclosure standards for financial reporting (the ISSB Standards). The ISSB aims to position the ISSB Standards as the global baseline for voluntary sustainability reporting. Canada and British Columbia have indicated strong support for the ISSB Standards, but have refrained from outlining whether they will adopt them, and if they do, to what extent and when. The Canadian Sustainability Standards Board (CSSB), which became fully operational following the release of the ISSB Standards, will guide the implementation of the ISSB Standards in Canada.
The International Financial Reporting Standards (IFRS) announced the formation of the ISSB on November 3, 2021 at COP 26. The ISSB was formed by the consolidation of the Climate Disclosure Standards Board (CDSB), established by the Carbon Disclosure Project (CDP), and the Value Reporting Framework, formed by the consolidation of the Sustainability Accounting Standards Board (SASB) and Integrated Reporting. The ISSB is strongly informed by the Task Force on Climate-Related Financial Disclosures (TCFD) and the SASB industry-specific disclosure standards. ISSB is also harmonized with the Global Reporting Initiative (GRI). Entities who currently report against TCFD, SASB and/or GRI should be prepared to report against the ISSB.
The ISSB Standards follow a building blocks approach. Other requirements can be added on top of them by implementing jurisdictions and/or by reporting entities if they choose to provide more disclosures.
The two ISSB Standards released on June 26, 2023 are:
- IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1)—which sets out the overall requirements for an entity to disclose sustainability-related financial information about all its sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects, and to provide the market with a complete set of sustainability-related financial disclosures; and
- IFRS S2 Climate-related Disclosures (IFRS S2)—which sets out the overall requirements for climate-related financial information.
To comply with IFRS S1, an entity must disclose material information on all its significant sustainability-related risks and opportunities. IFRS 1 also sets out what other existing sustainability standards should be considered as part of compliance with IFRS 1 and which standards may be considered for specific topics. To comply with IFRS S2, an entity would disclose material information on its significant climate-related risks and opportunities. Entities also have to provide both quantitative data-based and qualitative narrative-driven disclosures. To be compliant with the ISSB Standards, entities must only report against other sustainability standards on topics for which the ISSB Standards are silent.
The ISSB Standards will come into force in January 2024. Entities that choose to report against the ISSB Standards will need to report on their activities beginning in January 2024 for that year and release sustainability reports based on the ISSB Standards in 2025.
The ISSB issued one-year relief periods for various reporting requirements. In the first year of reporting, entities need only to disclose risks and opportunities regarding climate-related information. Sustainability reporting beyond climate-related information will be required starting January 2025.
For the first year of reporting, entities will not need to:
- disclose sustainability-related risks and opportunities beyond climate-related information;
- provide annual sustainability-related disclosures at the same time as the related financial statements;
- provide comparative information;
- use the Greenhouse Gas Protocol to measure scope 1 (direct emissions from owned or controlled sources) scope 2 (indirect emissions from the generation of purchased energy) and scope 3 emissions, if they are currently using a different approach; or
- disclose Scope 3 greenhouse gas emissions (all indirect emissions, not included in scope 2 that occur in the value chain of the entity, including both upstream and downstream emissions).
Regulators, such as the Canadian Securities Administrators (CSA), are waiting for the US Securities Exchange Commission (SEC) to release its new environmental, social and governance (ESG) reporting requirements in the fall of 2023 before announcing how they will adopt the ISSB Standards.
The ISSB is working with regulators globally to ensure that the ISSB Standards become the global baseline for sustainability disclosures. For example, the United Nations-supported Principles for Responsible Investment is calling on international policymakers to mandate ISSB disclosures by 2025. Further, the International Organization of Securities Commissions is supportive of the ISSB Standards and will release a final approval following a review.
The ISSB also plans to consult on and release additional standards for biodiversity, ecosystems and ecosystem services, human capital, human rights and integration in reporting.
Disclosure Required by ISSB Standards
If an entity chooses to report according to the ISSB Standards, it will have certain required disclosures. The required disclosures for both IFRS 1 and IFRS 2 are organized under the same four pillars as TCFD—governance, strategy, risk management, metrics and targets.
IFRS 1 clarifies that entities must disclose both metrics and targets required by the ISSB Standards and any additional metrics or targets the entity uses to evaluate sustainability-related risks and opportunities not included in IFRS 1. Similarly, entities must disclose their progress toward any previously established metrics and targets required by relevant laws or regulations.
IFRS 1 has an exemption for commercially sensitive information. Entities can omit information on sustainability-related opportunities, if the information is deemed commercially sensitive.
IFRS 2 requires, as a starting point, that all entities disclose absolute Scope 3 greenhouse gas emissions, unless not material. In support of this, IFRS 2 calls for the disclosure of financed emissions. IFRS 2 mandates the use of “climate-related scenario analysis.” This includes, information about the inputs used in the analysis, key assumptions made, and, the reporting period during which the financial analysis took place. IFRS 2 differentiates between "climate-related scenario analysis" and the requirement to conduct a “resilience assessment.” A resilience assessment extrapolates what the outcomes of the "climate-related scenario analysis" may have on the entity's business model and strategy. IFRS 2 also requires that an entity disclose its transition plan, if it has one, along with the assumptions used to develop it.
Lastly, IFRS 2 includes supplemental guidance on sector-specific disclosure metrics, derived from the SASB industry-specific disclosure standards.
The ISSB's disclosure regime is based on an assessment of financial materiality. For the ISSB Standards, information is material "if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports, which include financial statements and sustainability-related financial disclosures and which provide information about a specific reporting entity."
Entities are also required to explain the relationships and trade-offs between various sustainability-related risks and opportunities. When possible, they are to provide quantitative information about current and anticipated financial effects.
The ISSB expects disclosures pursuant to the ISSB Standards be reported along with an entity's financial statements. This highlights a focus by global regulators and investors on connecting financial and sustainability-related information.
Potential Considerations for the ISSB Standards Adoption in Canada
The CSSB became fully operational following the release of the ISSB Standards. It is charged with supporting the update and adoption of the ISSB Standards in Canada, highlighting key issues for the Canadian context and facilitating interoperability between the ISSB Standards and any forthcoming CSSB standards.
The development of the CSA's proposed climate disclosure regulation, National Instrument 51-107 Disclosure of Climate-related Matters (NI 51-107), has been paused since 2022. The CSA published a press release following the publication of the ISSB Standards in which they noted that they intend to adopt disclosure standards based on the ISSB Standards, modified to the Canadian context. Canadian regulators with the assistance of the CSSB will work to implement these standards—potentially by incorporating the ISSB Standards into the final version of NI 51-107.
How other jurisdictions incorporate the ISSB Standards may influence its adoption by Canadian legislators. The SEC incorporation of the ISSB Standards will be an important factor for their adoption by Canadian securities regulators. If the SEC climate disclosure rules do not follow the ISSB Standards, Canadian regulators would have to decide the extent to which they want to follow the ISSB Standards or the SEC rules.
Canadian regulators will have to address the requirements relating to Scope 3 emissions. The current version of NI 51-107 has a "comply or explain" approach. This means that entities must either provide Scope 3 emissions information or explain why they are absent. The ISSB Standards and the draft SEC rules require disclosure of Scope 3 emissions information.
The timing of the publications of disclosure are another matter Canadian regulators will need to address as the ISSB requires publication of sustainability disclosures along with an entity's annual report. The current version of NI 51-107 only requires such timely disclosure if such information was included in an entity's MD&A. The recent endorsement by the International Organization of Securities Commissions of the IFRS 1 and IFRS 2, and call on its 130 member jurisdictions "to consider ways in which they might adopt, apply or otherwise be informed by the ISSB" standards will be another consideration for Canadian regulators.
Entities should consider reviewing the ISSB Standards to determine what information they may be required to report should the ISSB Standards become mandatory. Entities that already voluntarily disclose sustainability information should consider reporting in accordance with the ISSB Standards, given their prominence in the sustainability reporting space. These entities should carefully review the overlap between the standard against which they currently report and the ISSB Standards to ensure consistent information and to avoid gaps in disclosure. Entities should approach sustainability reporting with the rigor they have in financial reporting and should be prepared to implement disclosure controls for their sustainability reporting.
If an entity wishes to report against the ISSB Standards once they come into force, it will need to begin tracking all of the disclosure requirements of the ISSB Standards by January 1, 2024 to be able to issue its first report by 2025. Reports based on the ISSB Standards will not need to be released simultaneously with financial disclosures until 2026 (i.e., this requirement comes into force in 2025).
In the coming months we can expect to see a rise in entities voluntarily reporting against the ISSB Standards and we expect them to be adopted as mandatory standards by various jurisdictions. We also expect further updates from the ISSB on their planned further standards for biodiversity, ecosystems and ecosystem services, human capital, human rights and integration in reporting.
Bennett Jones has extensive knowledge and experience in ESG and can help your business address any questions regarding the ISSB Standards, sustainability standards and ESG disclosures. If you want to learn more, please contact the authors or a member of our ESG Strategy and Solutions group.