The International Sustainability Standards Board (ISSB), at its meeting in Montreal on 16 February, has agreed to apply IFRS(International Financial Reporting Standards) S1(General Requirements for Disclosure of Sustainability-related Financial Information) and S2 (Climate-related Disclosures) from January 2024. The decision on the effective date was made in response to strong demand from investors for comprehensive, consistent and comparable sustainability-related disclosures from companies around the world.
In the absence of specific ISSB standards, it was also decided to refer to the European Sustainability Reporting Standard (ESRS) in the appendix to S1, the ISSB’s general requirements standard, as a guide for companies to consider when identifying metrics and disclosures that meet investors’ information needs.
The ISSB also announced with the European Commission and EFRAG last December that they are working together towards the common goal of maximising the interoperability of their standards and alignment on key climate change disclosures.
Following this agreement and resolution, this article outlines a comparison between the two, based on the document on interoperability between ESRS and IFRS/ISSB that accompanies the draft ESRS.
(Noted: Neither has been formally adopted and changes affecting interoperability cannot be ruled out at this stage).
IFRS S1 and ESRS 1/ESRS 2
Both standards focus on sustainability risks and opportunities and use the same concepts of comparability and connectivity over time. However, the ESRS also requires comparability with other companies. In terms of materiality, the ESRS applies the principle of double materiality to a broader group of stakeholders and the IFRS materiality assessment is explicitly included as part of the double materiality assessment in ESRS1 (General Requirements).
The ESRS covers the entities defined in the CSRD with regard to the scope of entities to be reported. In addition, the ESRS and the IFRS use the same materiality assessment-based definition of the information to be included in the report. This means that the information to be included in the report should be selected as those items that are assessed to be material and influential for the business.
Both standards provide disclosure of information about risks and opportunities. Specifically, they require the undertaking to disclose the effects of risks and opportunities on its business model and value chain as well as where risks and opportunities are concentrated in the undertaking’s value chain.
It also requires the undertaking to disclose the effects of risks and opportunities on the undertaking’s strategy and decision-making as well as how it responds to these effects.
Moreover, they require the undertaking to disclose the progress of prior periods plans and the trade-offs between risks and opportunities.
The ESRS is presented as part of the management report and does not require separate disclosure from the financial statements. However, it does require the inclusion of value chain information and the ESRS indicates that reporting information should be expanded to include value chain information if the information is prepared to meet qualitative characteristics. The ESRS also explicitly require that business partners – associates and joint ventures – are treated as actors in the value chain and include clear definitions of upstream and downstream actors.
Identifying sustainability-related risks and opportunities and disclosures
ESRS has a list of mandatory datapoints (Appendix C of ESRS 2), including ESRS 2 (General Disclosures) and ESRS E1(Climate change) and ESRS S1-1(Policies related to own workforce)/S1-9 (Diversity indicators) to be applied always, irrespective of the outcome of the materiality assessment.
ESRS 1 has explicit guidance on the quality of entity-specific metrics and the scope of entity-specific disclosures under IFRS is broader than in ESRS, as currently only one topical IFRS exists.
IFRS is therefore referring to industry-based SASB standards, non-mandatory guidance, and most recent pronouncements of other standard-setting bodies in the absence of an IFRS Sustainability Disclosure Standard. In absence of specific requirements in the standards, both IFRS S1 and ESRS1 allow to refer to other pronouncements. This is in particular valid for ESRS 1 in the first years of application and until the ESRS sector-specific standards will be applicable.
The ESRS requires information to be disclosed in terms of double materiality, which includes an IFRS materiality assessment. Both standards also require that material information received after the reporting period but before the report is issued be taken into account. While the IFRS does not require the provision of information other than materiality, the ESRS considers that the materiality assessment process leads to the identification of disclosures for reporting material matters. The development of a ‘mapping’ to cover investor materiality will also be considered once the IFRS requirements have been finalised.
Location of information
First, with respect to the requirement for interim financial reporting, IFRS requires entities to prepare an interim financial report, whereas there is no such requirement in ESRS. Secondly, regarding the requirement for a sustainability statement, ESRS requires companies to include a sustainability statement in their annual report, whereas IFRS does not have a specific requirement. Recognition of information derived from local law (a generally accepted standard), both ESRS1 and IFRS1 permit the inclusion of information derived from local law in sustainability reports. With respect to the structure of the report, the structure of IFRS reports is left to the undertaking’s judgement, while ESRS Sustainability Statements have to be structured in four parts (Governance, Strategy, Impact management and Metrics/Targets).
IFRS S2 and ESRS E1
All IFRS S2 Governance disclosures are covered in ESRS 1 and 2. ESRS E1 includes a list of sustainability matters to be addressed by the undertaking’s administrative, management and supervisory bodies (ESRS 2, GOV 2, §24(c)) and a statement on sustainability due diligence (ESRS 2, DR GOV 4), which includes.
All IFRS S2 disclosures are covered in ESRS; the main additions to ESRS E1 are Reference to alignment with limiting global warming to 1.5°C (i.e. transition plan) and EU Taxonomy-alignment ratios (Green CapEx and OpEx) .
ESRS E1 requires the disclosure of the potential financial effects from material gross climate-related risks over time whereas IFRS S2 requires the disclosure of the effects of gross climate-related risks.
All IFRS S2 disclosures are covered in ESRS 2, which provides a clearer concept of the due diligence process and more detailed guidance on the identification and assessment of physical and transition risks.
Metrics and Targets
Similar to the strategy, all IFRS S2 disclosures are covered in ESRS. Key additions to ESRS E1 include: more details and examples on potential financial effects from physical and transition risks, compatibility between internal carbon prices and those used in financial statements and financial planning, specific target on GHG emission reduction and remuneration tied to this target in ESRS, and a range of identified targets, including 2030 and 2050 targets, preferably at five-year intervals.
Despite this interoperability between IFRS/ISSB and ESRS, it remains to be seen what will happen with the formal exposure documents for both standards.
As the ESRS is expected to be adopted a few months later, at the end of June, and the IFRS/ISSB is expected to be effective from January 2024, as mentioned at the beginning of this article, we will continue to follow and outline the developments of both standards.