The International Sustainability Standards Board (ISSB) has taken a significant step forward in promoting sustainability in capital markets worldwide. The issuance of the ISSB standards, IFRS S1 and IFRS S2, marks the beginning of a new era of sustainability-related disclosures. These standards aim to enhance trust and confidence in company disclosures regarding sustainability, providing valuable information for investment decisions.

The Importance of Sustainability Disclosure Standards

Sustainability disclosure standards play a crucial role in ensuring transparency and accountability in sustainable finance. By establishing a common language for companies to communicate their sustainability-related risks and opportunities, these standards facilitate informed decision-making. Moreover, they enable investors to assess the potential impact of climate-related risks and opportunities on a company’s prospects. The ISSB’s IFRS S1 and IFRS S2 are designed to address these critical aspects.

The Development of IFRS S1 and IFRS S2

The ISSB developed IFRS S1 and IFRS S2 based on extensive market feedback and in response to calls from influential organizations such as the G20, the Financial Stability Board, and the International Organization of Securities Commissions (IOSCO). The aim was to establish a comprehensive global baseline of sustainability-related disclosures, meeting the demand for consistent understanding of how sustainability factors affect companies’ prospects.

The ISSB closely collaborated with the business and investor community to ensure the standards are proportionate and result in robust, comparable, and verifiable disclosures. The development process spanned over 18 months and culminated in the launch of the ISSB standards at the IFRS Foundation’s annual conference.

IFRS S1: Enabling Effective Communication of Sustainability Risks and Opportunities

IFRS S1 is a crucial component of the ISSB’s sustainability disclosure standards. It provides a set of disclosure requirements that empower companies to communicate sustainability-related risks and opportunities to investors effectively. The standards cover short, medium, and long-term perspectives, enabling companies to provide comprehensive insights into their sustainability performance.

Key Features of IFRS S1

IFRS S1 incorporates the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), ensuring alignment with globally recognized best practices. The standards focus on the disclosure of material information related to sustainability, enabling companies to communicate their approach to managing risks and capitalizing on opportunities.

The key features of IFRS S1 include:

1. Materiality: Emphasizing the disclosure of material information to provide investors with relevant insights into a company’s sustainability risks and opportunities.

2. Comprehensiveness: Enabling companies to disclose sustainability-related risks and opportunities over different time horizons, ensuring a holistic understanding of their sustainability performance.

3. Comparability: Facilitating the comparison of sustainability disclosures between companies, industries, and regions to promote transparency and accountability.

4. Verifiability: Ensuring the reliability and credibility of sustainability disclosures through robust reporting mechanisms and verification procedures.

IFRS S2: Climate-Related Disclosures for Comprehensive Insight

IFRS S2 is a complementary standard to IFRS S1, focusing specifically on climate-related disclosures. It provides companies with a framework to communicate the effect of climate-related risks and opportunities on their prospects. By incorporating climate-related information into their reporting, companies can provide investors with a more comprehensive understanding of their sustainability performance.

Climate-Related Disclosures in IFRS S2

IFRS S2 is designed to be used alongside IFRS S1 and provides specific requirements for climate-related disclosures. These disclosures enable companies to outline the impact of climate-related risks and opportunities on their business strategies, financial performance, and resilience.

The climate-related disclosures in IFRS S2 cover a range of aspects, including:

1. Governance: Disclosing the governance structures and processes related to climate-related risks and opportunities, highlighting board oversight and management responsibilities.

2. Strategy: Communicating the company’s climate-related risks and opportunities, outlining how these factors are integrated into their overall strategic decision-making process.

3. Risk Management: Describing the company’s approach to identifying, assessing, and managing climate-related risks, including physical, transitional, and liability risks.

4. Metrics and Targets: Reporting on specific metrics and targets related to climate-related risks and opportunities, providing investors with measurable indicators of a company’s progress.

The Launch of ISSB Standards

The ISSB Standards, comprising IFRS S1 and IFRS S2, were officially launched by Emmanuel Faber, the ISSB Chair, at the IFRS Foundation’s annual conference. The launch was accompanied by a series of events hosted by stock exchanges worldwide, demonstrating the global interest and demand for sustainability-related disclosures.

The stock exchanges in Frankfurt, Johannesburg, Lagos, London, New York, and Santiago de Chile, along with the ASEAN Capital Markets Forum in Singapore, hosted launch events to promote the adoption and implementation of the ISSB Standards.

Wilson Chan, CEO and Founder of Permutable AI said, “The issuance of the ISSB’s sustainability disclosure standards, IFRS S1 and IFRS S2, is a significant leap forward in promoting sustainability in capital markets worldwide. These standards mark the beginning of a new era of transparency and accountability in sustainability-related disclosures, providing valuable information for investment decisions.”

Sustainability disclosure standards are vital in enabling companies to communicate their sustainability-related risks and opportunities effectively. They establish a common language and framework that facilitate informed decision-making and allow investors to assess the impact of climate-related risks on a company’s prospects. The development of IFRS S1 and IFRS S2 by the ISSB, in collaboration with influential organizations such as the G20 and IOSCO, ensures a comprehensive global baseline of disclosures.

At Permutable AI, we recognize the importance of sustainability disclosure standards in driving sustainable finance. We commend the ISSB’s efforts in developing these standards, which have incorporated best practices recommended by the TCFD. IFRS S1 and IFRS S2 provide companies with a robust framework for disclosing material sustainability information, ensuring comprehensiveness, comparability, and verifiability.”

Conclusion

The issuance of the ISSB’s inaugural standards, IFRS S1 and IFRS S2, represents a significant milestone in the journey towards sustainability in capital markets. These standards provide a common language for companies to disclose their sustainability-related risks and opportunities, enabling investors to make informed decisions. By incorporating the recommendations of the TCFD, the ISSB has ensured alignment with globally recognized best practices.

The development of IFRS S1 and IFRS S2 involved extensive collaboration with key stakeholders, including the business and investor community. This collaborative approach guarantees that the standards are proportionate, relevant, and conducive to investment decision-making. The launch of the ISSB Standards signifies the growing demand for comprehensive and consistent sustainability disclosures in the global capital markets.

For more information on the ISSB Standards, you can visit the official IFRS website.

Disclaimer: This article is for informational purposes only and should not be considered as financial or investment advice.