The International Sustainability Standards Board (ISSB) released their first two sustainability disclosure standards this week, known as, IFRS Sustainability Disclosure Standards. Creatively referred to as S1 and S2.
These standards aim to enhance transparency and comparability in reporting sustainability information, providing investors and stakeholders with consistent and reliable data.
What does this mean and how should your organisation react. But first, a quick view from us on how of what these standards actually mean.
BACKGROUND
The International Accounting Standards Board (IASB) established the International Sustainability Standards Board (ISSB) in response to the growing importance of sustainability reporting. The recent announcement from the ISSB regarding the introduction of the S1 and S2 disclosure standards is important and a big step towards defining these disclosure standards. These standards are designed to improve transparency and comparability in sustainability reporting. The standards also define disclosure responsibilities on organisations.
Sustainability reporting is the practice of disclosing information about an organisation’s environmental, social, and governance (ESG) performance. It goes beyond traditional financial reporting by considering the impacts of an organisation’s activities on the planet, society, and long-term sustainability. Sustainability reporting helps stakeholders understand how organisations manage non-financial aspects and make informed decisions based on their values.
S1 focuses on general disclosures that organisations should provide to communicate their sustainability-related governance, strategy, and risk management practices. It requires organisations to disclose their purpose, values, and long-term sustainability goals. S1 emphasises the importance of governance structure, risk management frameworks and the sustainability related-opportunities in achieving these objectives.
CHALLENGES
Meeting the new S1 and S2 disclosure standards introduced by the International Sustainability Standards Board (ISSB) under the International Financial Reporting Standards (IFRS) presents various challenges for businesses. These challenges arise from the need to gather and disclose relevant data, establish suitable reporting frameworks, and align sustainability practices with the new standards.
The following are key challenges that businesses may encounter:
DATA COLLECTION AND MEASUREMENT
One of the primary challenges is collecting and measuring the required sustainability data. Organisations may need to implement new data collection processes, invest in advanced measurement technologies, or enhance existing data management systems. This can be particularly challenging if historical data is not readily available or if data collection requires collaboration with external stakeholders, such as suppliers or customers.
DATA QUALITY AND ACCURACY
Ensuring the quality and accuracy of sustainability data is another significant challenge. Businesses need robust data verification processes to validate the accuracy of the information reported. This may involve implementing internal controls, engaging external auditors, or adopting recognised verification methodologies. Maintaining data integrity and avoiding misreporting or greenwashing is crucial for building trust among stakeholders.
INTERNAL SYSTEMS AND PROCESSES
Businesses may need to reevaluate their internal systems and processes to effectively capture and report sustainability-related information. Integrating sustainability considerations into existing financial reporting frameworks and aligning internal data collection and reporting systems can be complex. This challenge requires organisational commitment, cross-functional collaboration, and possibly the adoption of new software or tools to streamline data collection and reporting.
RESOURCE ALLOCATION
Complying with the new disclosure standards may require dedicating additional resources, both human and financial, to sustainability reporting efforts. Businesses may need to invest in training employees or hiring professionals with expertise in sustainability reporting and data management. Allocating sufficient resources to ensure accurate and timely reporting can strain budgets, especially for smaller organisations with limited resources.
STANDARDISATION AND COMPARABILITY
The introduction of S1 and S2 aims to improve comparability and consistency in sustainability reporting. However, achieving standardisation across different industries, regions, and organisational sizes can be challenging. Developing common metrics and methodologies for measuring sustainability indicators requires collaboration among stakeholders, including regulators, standard-setting bodies, and industry associations.
DATA AVAILABILITY AND DISCLOSURE BY SUPPLY CHAIN PARTNERS
Businesses that rely on extensive supply chains may face challenges in obtaining the necessary sustainability data from their suppliers. It can be difficult to ensure consistent disclosure and data availability throughout the entire supply chain, especially if suppliers are located in different regions or have varying reporting capabilities. Collaborative efforts and engagement with suppliers will be crucial to address this challenge effectively.
EVOLVING REGULATORY ENVIRONMENT
The landscape of sustainability reporting and regulation is continuously evolving. Businesses must stay updated on changes in regulations, frameworks, and reporting requirements to ensure ongoing compliance. This requires proactive monitoring, adapting reporting processes to meet new requirements, and managing potential regulatory changes effectively.
Addressing these challenges requires a proactive and strategic approach. Businesses can consider developing a clear sustainability reporting strategy, investing in data management systems, engaging with stakeholders, collaborating with industry peers, and seeking external expertise when needed. By embracing the new standards and overcoming these challenges, organisations can enhance their sustainability reporting practices and contribute to a more transparent and sustainable future
WHAT NEXT?
While the future for sustainability reporting will be complex, there are several trends that the release of these new standards indicates.
EXPANSION OF REPORTING TOPICS
The ISSB could expand the scope of sustainability reporting to cover additional topics beyond the ones addressed in the S1 and S2 standards. As sustainability continues to evolve, emerging issues such as circular economy practices, human rights, supply chain transparency, and technological advancements may be considered for future reporting standards.
INTEGRATION WITH FINANCIAL REPORTING
The integration of sustainability reporting with financial reporting is an ongoing area of interest. The S2 standard is topic-based and focussed on climate-related disclosures. With other topics, like nature-related disclosures (think TNFD), there are very likely to be new sustainability-related topics introduced under the guidance of the ISSB. This integration could enhance the understanding of a company's overall value creation and long-term prospects, particularly as this may relate to the impact and use of planetary resources.
REGIONAL AND INDUSTRY-SPECIFIC GUIDANCE
As indicated by the Australian Account Standards Board (AASB) and the New Zealand Accounting Standards Board (NZASB) there will be regional adoption of these new S1 and S2 standards, with consultation and standards alignment already underway. Industry-specific guidance is also occurring as there is need to address the diverse requirements and challenges faced by organisations in different sectors. Tailored reporting frameworks can ensure that sustainability reporting aligns with specific regional or industry practices while maintaining global comparability and consistency.
ASSURANCE AND VERIFICATION
The assurance and verification of sustainability information are crucial for ensuring the reliability and credibility of reported data. It seems highly likely the ISSB and other standards bodies will explore the development of assurance guidelines or best practices to enhance the assurance process for sustainability reports. This could involve setting new standards for independent third-party audits or introducing certification processes.
ALIGNMENT WITH GLOBAL INITIATIVES
The ISSB may deepen its collaboration with other global initiatives and organisations working towards sustainability, such as the Task Force on Climate-related Financial Disclosures (TCFD) or the United Nations Sustainable Development Goals (SDGs). Aligning reporting frameworks and metrics with these initiatives can promote consistency and harmonisation in global sustainability reporting efforts.
TECHNOLOGICAL ADVANCEMENTS
The ISSB might explore the role of technology in enhancing sustainability reporting. This could involve leveraging advancements in data analytics, artificial intelligence, and blockchain to improve data collection, verification, and reporting processes. Embracing technological innovations can increase the efficiency, accuracy, and transparency of sustainability reporting.
It is important to note that these potential areas of focus will be informed by the official announcements of the ISSB and related standards bodies. The Big Zero continues to monitor and engage with industry leaders so we can keep you updated with new developments and their implications on sustainability reporting.
