International standards for sustainability reporting appear likely to focus on the key elements of governance, strategy, risk management, and metrics and targets, according to prototype documents posted Wednesday by the IFRS Foundation.
The historic news announced Wednesday that the new International Sustainability Standards Board (ISSB) is being formed overshadowed the technical preparation that already has been performed to get the board off to a successful start.
The ISSB will have an opportunity to use two prototype documents prepared by the Technical Readiness Working Group to quickly assemble proposed standards for consultation and due process activities. The prototypes provide a vision for what might be in the ISSB's standards, and IFRS Foundation Trustees Chair Erkki Liikanen said it's possible that final standards will be available by the second half of next year.
One of the two prototype documents focuses on climate-related disclosures that could be required, and the other sets out general sustainability disclosures. The climate-related disclosures prototype uses the framework of The Task Force on Climate-related Financial Disclosures (TCFD). The prototype proposes that entities would be required to consider climate-related risks, including but not restricted to physical risks from climate change and risks associated with the transition to a low-carbon economy. Climate-related opportunities that are available and considered by the entity also would be included.
The climate-related disclosures prototype suggests requiring an entity to provide information that enables users of general-purpose financial reporting to assess:
- Governance: This would include governance processes, and controls and procedures the entity uses to monitor and manage climate-related risks and opportunities.
- Strategy: This would include the climate-related risks and opportunities that could enhance, threaten, or change the entity's business model and strategy over the short, medium, and long term, including:
- Whether and how information about climate-related risks and opportunities inform management's strategy and decision-making;
- The current and expected effects of climate-related risks and opportunities on the entity's business model;
- The impact of climate-related risks on the entity's financial position, performance, and cash flows, both at the end of the reporting period and the expected effects over the short, medium, and long term; and
- The resilience of the entity's strategy to climate-related risks.
- Risk management: This includes how climate-related risks are identified, assessed, managed, and mitigated by the entity.
- Metrics and targets: The metrics and targets used to manage and monitor the entity's performance in relation to climate-related risks and opportunities over time.
The prototype for general requirements would build on components of the frameworks and standards previously created by international sustainability and integrated reporting bodies. The prototype also incorporates content from IAS 1, Presentation of Financial Statements, and aligns with the recommendations of the TCFD.
As described in the prototype, the standards would address sustainability matters that affect assessment of enterprise value by investors and other participants in the world's capital markets who would be the intended users of IFRS sustainability disclosures.
According to the prototype, general requirements would include:
- A requirement to disclose a complete, neutral, and accurate depiction of an entity's significant sustainability risks and opportunities.
- A definition of materiality, aligned with the Conceptual Framework for Financial Reporting, focused on the information that serves the needs of users and drives enterprise value.
- A consistent approach for the disclosure of information about significant sustainability-related risks and opportunities built on a consideration of an entity's governance, strategy, and risk management, and supported by metrics and targets.
- Further requirements and guidance that support the provision of comparable and connected information.
Although the announcement was just made Wednesday, the IFRS Foundation Trustees are at an advanced stage of choosing a chair and vice-chair. Filling the remaining seats on the board will be the next task, but the prototypes created by the Technical Readiness Working Group have provided a comprehensive baseline for the ISSB to work from when its seats are filled.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is FM magazine's editorial director.