This summer, IFRS published its new global standards for sustainability reporting – an event that indirectly affects sustainability reporting for a number of Swedish companies. We will go through what is included, what the consequences are and what role the ISSB standards play in the European sustainability journey. Let's walk the path where the abbreviations are scattered like stones, and we will turn them all over!
This story begins at the climate conference in Glasgow in 2021. A number of G20 leaders, together with the International Organisation of Securities Commissions (IOSCO), wanted sustainability reporting to be harmonised and called for a common reporting standard that would do just that. And just like that, the ISSB was born.
ISSB stands for International Sustainability Standards Board and is, just as it sounds, a standardisation body for sustainability that was established under and by IFRS (International Financial Reporting Standards). There will be many abbreviations, so let's clarify this right away: IFRS is the non-profit organisation that created the standardisation board, ISSB. A board that, in turn, has published two reporting standards, IFRS S1 and IFRS S2. Here we go!
IFRS S1 and IFRS S2
We are writing about this because the parent organisation has published and updated two standards, IFRS S1 and IFRS S2. The standard does not apply directly in Sweden, but Swedish companies will be indirectly affected as ESRS (European Sustainability Reporting Standard) will take into account the work carried out by ISSB to the greatest extent possible.
The purpose of both is for companies to provide information about their sustainability-related risks and opportunities that is useful for general financial reports when making decisions regarding the provision of resources to the company, such as financing. The goal has been to develop standards that can be used in financial markets. IFRS wants sustainability reporting to be helpful in determining a company's value and thus be useful to investors. It should be noted that IFRS therefore emphasises the economic aspects of sustainability and wants to highlight how a company's impact on the environment can affect its ability to, for example, repay loans.
This involves requiring companies to provide information on all sustainability-related risks and opportunities that can be expected to affect the company's cash flows, its access to financing or capital costs in the short, medium or long term.
IFRS S1 can be said to be the framework standard that sets out the basic requirements and disclosures for sustainability reporting, while IFRS S2 is a specific standard that requires companies to report on their climate-related risks and opportunities. The frameworks are based on a number of themes, which differ between IFRS S1 and IFRS S2. To read more about what applies to each standard, just click on the links!
Coordination – the key to success!
The ISSB's reporting standards do not exist in a vacuum. Both on a European and broader international front, there have been a number of different standards for financial reporting linked to sustainability. This can be said to be one of the initial driving forces behind the attempt to build a standard that could be incorporated without companies having to completely revise the way they reported on their sustainability.
As early as 2022, both the CDSB (Climate Disclosure Standards Board) and the VRF (Value Reporting Foundation) were consolidated to become part of the IFRS (the body that develops the ISSB). At the same time, the ISSB received the full support of the World Economic Forum and the TCFD (Task Force on Climate-related Financial Disclosure). As a result, several leading sustainability reporting frameworks, including the Greenhouse Gas Protocol (with the famous scopes 1, 2 and 3) and the Carbon Disclosure Project, have had to adapt to IFRS standards.
One of the leading existing frameworks for sustainability reporting, GRI (Global Reporting Initiative), has welcomed the Board's standard. Both GRI and IFRS have undertaken to work together to ensure complementary and interoperable standards. This is despite the fact that both will continue to exist in parallel. Their agreement can be said to signal that there is a consensus that a global and consistent standard is needed for the management of sustainability data. In other words, companies' reporting must meet the information needs of all stakeholders. And the number of stakeholders is only growing.
Consequences going forward
The updated IFRS can be seen as a step towards a more unified approach to sustainability reporting. There have been many drafts and many frameworks attempting to achieve the same goal, but the ISSB is a major step forward. Therefore, transparency should perhaps be placed at the top of a hierarchical order of future consequences. By requiring companies to report on their sustainability-related risks and opportunities, investors and other stakeholders will have more comprehensive and detailed information about how sustainability factors affect companies' financial performance and future prospects.
The introduction of a global standard thus harmonises and standardises reporting across different jurisdictions. This makes it easier for investors to compare companies from different countries and see how sustainability performance affects companies' finances. The ISSB has been designed by both consolidating and building on existing frameworks and organisations, which means that much of the duplication of work previously associated with sustainability reporting will disappear with the ISSB. This will save companies with operations in several different countries a great deal of time and money. To prevent unnecessary fragmentation in legislation for companies with international operations, the European standards will also contribute to the convergence of sustainability reporting standards globally. This will be achieved by the design of the ESRS supporting the efforts of the ISSB.
A consequence going forward can also be said to arise from the ISSB's time perspective. Unlike many other standards, companies will now be required to report on how sustainability factors may affect their finances over different time horizons, making it possible to assess long-term sustainability and profitability. This has the potential to give investors confidence in their decisions to provide capital to companies. This may also lead to increased investment in sustainable projects and initiatives. The fact that the ISSB has strong support from international organisations and regulatory authorities such as both IOSCO and the G20 is an indicator that more and more organisations and jurisdictions may implement IFRS standards as part of their reporting requirements in the future.
Strategy breeds profitability
A company that reports according to ISSB will, as things stand, be at the forefront. IFRS includes reporting according to all three SCOPEs, distinguishes between risks and opportunities, extends the time perspective and, through its international recognition, does not become toothless in certain countries. Investors, lenders and other stakeholders are therefore likely to perceive a company that shows good results in its sustainability reporting as a strategic choice. And, as you already know, strategically sound companies are often also profitable companies.
