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At the 2023 IFRS Sustainability Symposium, Emmanuel Faber, chair of the International Sustainability Standards Board (ISSB), announced that IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) would be published in the second quarter of 2023, with an effective date of January 1, 2024. The ISSB is responsible for setting standards, but it is up to jurisdictions to adopt these standards in their respective markets.
Roughly a week later, speaking to a meeting of the G20 finance ministers and central bank governors, Erkki Liikanen, trustee chair of the IFRS Foundation, said “We will continue our close cooperation with the Financial Stability Board, IOSCO [the International Organization of Securities Commissions] and others to support the widespread adoption of ISSB Standards once they are issued later this year.”
The corporate reporting landscape is shifting fast, and report preparers must adapt to the changing environment. While sustainability reporting is currently voluntary for Canadian companies, this may soon change for publicly listed entities.
Tips from the IFRS Foundation to get ahead of the curve
The first way for companies to prepare is to “evaluate internal systems and processes for collecting, aggregating and validating sustainability-related information across the company and its value chain.” For instance, a reporting company can identify data that is already being reported to external bodies, data that is being collected but is not reported to external bodies, and financially material information that is not yet being collected.
Companies can reference the Sustainability Accounting Standards Board (SASB) standards, which are now part of the IFRS Foundation, to learn which industry-specific performance metrics are material to providers of capital.
A data gap analysis also involves having conversations with key stakeholders (both investors and non-investors) to understand their information wants and needs and determine how existing systems and processes can be expanded to fill any gaps. Consideration should also be given to data reliability. For example, is there board oversight for the collection, aggregation, and reporting of material sustainability-related information? What personnel are accountable for the data?
Knowing where the company currently stands in terms of data collection, aggregation, and validation and identifying where it wants to be will help decision-makers determine the most efficient path forward.
The IFRS Foundation further suggests “consider[ing] the sustainability-related risks and opportunities that affect the business.” While this may seem easy at first glance, it is important to note that broad sustainability-related issues such as climate change are likely to affect different industries in different ways.
By considering sustainability-risks and opportunities for your business in advance, the anticipated adoption of IFRS S1 and IFRS S2 will cease to be a burden or compliance exercise and become an opportunity to drive strategic and integrative thinking and generate greater enterprise value over the long-term.
Lastly, the IFRS Foundation recommends that companies “review the ISSB’s proposed standards and supporting materials.” The exposure drafts for IFRS S1 and IFRS S2 are available on the IFRS Foundation’s website and offer a good glimpse of what the proposed standards might look like when they’re published later this year.
The supporting materials, which include the SASB standards, the Climate Disclosure Standards Board (CDSB) Framework, and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), are also available online. The CDSB Framework is industry-agnostic and its scope is limited to environmental information. What draws it together with the SASB standards and the TCFD recommendations is that they all serve the same audience: providers of capital. They also have a common approach to materiality—namely, that of enterprise value creation.
The structure of IFRS S1 and IFRS S2 will be based on the TCFD recommendations, so it would be prudent to implement these recommendations. It would also be prudent to adopt the SASB standards because, as the IFRS Foundation has explained, IFRS S1 will require companies to consider the SASB standards if specific ISSB standards are absent.
Why the standards are relevant to all companies
Because of the ISSB’s focus on investors, there is a commonly held misconception that its standards aren’t relevant to private companies. This is not true. By measuring, tracking, and managing key performance metrics, private companies can reduce costs, generate revenue, mitigate risk, and transform their business model to better prepare for the business landscape of the future.
Reporting financially material sustainability information should be framed as an opportunity to generate competitive advantage and communicate to stakeholders how the business is creating value. Managing risk and capturing opportunities is as valuable to private companies as it is to publicly listed entities. And if your company is publicly listed—watch out, as mandatory sustainability reporting in accordance with the IFRS disclosure standards is likely just around the corner.
Get on board
Many companies are just getting into the sustainability reporting space now. If your business is one of them, adopting the SASB standards and implementing the TCFD recommendations will put you on the right track.
Douglas Stuart, CPA, CA, is an assistant teaching professor at the Peter B. Gustavson School of Business at the University of Victoria, and a CPABC faculty ambassador who advocates for the CPA profession in his daily work with students. Douglas co-authored “Doughnut Economics and the Push for Regenerative, Distributive Systems” for the Sept/Oct 2021 issue of CPABC in Focus.
The full version of this article was published in the May/June 2023 issue of CPABC in Focus.