A new era for climate-related information disclosure: The ISSB published 2 exposure drafts on sustainability reporting standards for public consultation

What is the issue?

On 31st March 2022, the newly established International Sustainability Standards Board (ISSB) published two draft IFRS sustainability Disclosure Standard (ISDS) for public consultation. Previously, companies and stakeholders have struggled with the myriad of sustainability standards, frameworks, and metrics. International investors with global investment portfolios are increasingly calling for high quality, transparent, reliable, and comparable reporting by companies on climate and other environmental, social and governance (ESG) matters.

Background of ISSB

At the UN Climate Change Conference (COP26) in November 2021, the International Financial Reporting Standards Foundation (IFRS Foundation) Trustees announced the creation of the International Sustainability Standards Board (ISSB). The ISSB’s remit is to issue standards that deliver a comprehensive global baseline of high-quality sustainability disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.

The IFRS Foundation also created the Technical Readiness Working Group (TRWG), which comprises Climate Disclosure Standards Board (CDSB), (International Accounting Standards Board (IASB), the Task Force on Climate-Related Financial Disclosures (TCFD), the Value Reporting Foundation (VRF) 1, and the World Economic Forum (WEF) – also known as the ‘Group of five’.

Coinciding with the announcement about the formation of the ISSB at COP26, two prototypes and a summary document developed by TRWG were published, which build up the foundation for the two draft Standards.

Importantly, the ISSB planned to release the 2 EDs for public consultation in the second half of 2022. The issuance of the two Exposure Drafts in March 2022 advances the overall timeline, which implies that the establishment of global sustainability reporting guidelines may be accelerated.

Exhibit 1 The timeline of ISSB development 

Issb publishes isds draft for comments

Architecture of the Standards

The architect of the ISSB sustainability standards comprise of presentation standards, thematic standards as well as industry-specific standards. Each of these standards will be set out using the four pillars used in the recommendations by the Task Force for Climate-related Financial Disclosures (TCFD): Governance, Strategy, Risk Management, and Metrics and Targets. The two exposure drafts have been published are:

  • Exposure Draft Proposed IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information; and
  • Exposure Draft Proposed IFRS S2 Climate-related Disclosures.

Exhibit 2 The architect of the IFRS Sustainability Disclosure Standards (ISDS)

Issb publishes isds draft for comments

Standards focused on matters critical to the way an entity operates.

In the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information Exposure Draft (IFRS S1 ED), it points out that:

  • It provides guidance on the disclosure of material information about sustainability-related risks and opportunities, and their related metrics and targets. It also requires a company to disclose:
    • Information of itself;
    • Information across its value chain, including supply and distribution channels.
  • Its structure is based on the four pillars used in the recommendations by the Task Force for Climate-related Financial Disclosures (TCFD): Governance, Strategy, Risk Management, and Metrics and Targets;
  • IFRS S1 ED is designed to be the equivalent of the IFRS Conceptual Framework, IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, IFRS S1 ED sets out requirements on fair presentation, comparative information, use of financial data and assumptions, source of estimation and outcome uncertainty, as well as a statement of compliance;
  • It also provides a hierarchy of the guidance to be used if an ISSB Standard is not yet in place for a material ESG topic (e.g., to report on risks other than climate). Specifically, it requires entities to consider other investor-focused sustainability frameworks, including the SASB’s industry-based standards and the CDSB non-mandatory requirements on water- and biodiversity-related disclosures to identify the risks about which disclosures should be provided and to develop appropriate disclosures;
  • IFRS S1 ED proposes a company’s sustainability disclosures would form part of a company’s general purpose financial reporting, thus, would need to be published at the same time as its financial statements. In addition, how a company’s sustainability-related financial information is related to information in its financial statements should also be disclosed.

In the IFRS S2 Climate-related Disclosures Exposure Draft (IFRS S2 ED), it points out that:

  • Disclosure of Scope 1, 2 and 3 absolute emissions and intensity will pose significant challenge, especially for Scope 3;
  • The ED proposes compute emissions using the GHG Protocol (or alike). This computation method is different from that currently used in China issued by the National Development and Reform Commission (NDRC);
  • Joint ventures, associates, unconsolidated entities, and affiliates report GHG emissions separately. However, differences between the reporting entity and its joint venture / associates could pose implementation challenges. These differences include:
    • Difference in ‘approach’ – the reporting entity will be using an enterprise-value approach while the investee could be using a societal-value approach;
    • Difference in GHG emissions computation method – investees may not be using a GHG Protocol-alike method;
    • Difference in policy choice for each investee – some investees could be using the financial control model while others may be using the operational control model;
    • Non-co-terminus period ends – investees may have different period ends;
    • IFRS has a project on “Presentation of Financial Statements” that requires integral associates to be presented separately from strategic associates. If sustainability and financial reports are to remain connected, will these two types of associates also be reported separately?
  • Scenario analysis is required and alignment to Paris Agreement-like protocol would require building models and use of data. Data sourcing and integrity could be challenging.
  • If ISDS is used to prepare sustainability report, then the must be issued at the same time with their corresponding financial statements. This could be a significant challenge for those companies having to issue interim and quarterly reports, where systems, process and control may require significant upgrading.

The ISSB standards are expected to be the global baseline for sustainability reporting. Depending on local jurisdictions, there could be additional requirements built on this baseline. These could potentially be very significant for companies; hence it is important for them to engage with the ISSB as they look for comments on the proposed standards. At the same time, they will need to evaluate the impact of these standards on their corporate reporting.

The EDs will be open for comment for 120 days until 29th July 2022. There is likely to be significant interest in the ISSB’s exposure drafts. In addition to responding via comment letters submitted to the ISSB, an alternative method to respond through an electronic survey would also be available. When issued, the ISSB’s standards will make a significant step in responding to investors' needs for sustainability information for them to assess enterprise value and make investment decisions.

PwC’s view on the significant impact of the ISDS EDs on companies

  1. For companies, significant effort would need to be made for companies to disclose the absolute emissions and intensity of Scope 3 emission for their value chain;
  2. ISDS currently refers to the Greenhouse Gas Protocol - Enterprise Accounting and Reporting Standards on GHG computation. However, the computation method under the GHG Protocol and that currently used in local territories may differ. For example, some companies use ISO 14640 or the GHG computation method issued by the Chinese National Development and Reform Commission (NDRC);
  3. Joint ventures and associates are required at this stage to disclose separately GHG emissions information for Scope 1 and Scope 2. It may be challenging to obtain this information from investments that the reporting entity that currently do not control;
  4. The EDs require enterprises to undertake climate scenario analysis that conform with Paris Agreement-aligned transition pathway. In order to do so, companies would need to use modelling methods as well as obtain relevant data for key inputs. Significant assumptions would also need to be made. Many companies would need to build up the capability to undertake this;
  5. If ISDS is used to prepare sustainability report, then the must be issued at the same time with their corresponding financial statements. This could be a significant challenge for those companies having where systems, process and controls may require significant upgrading;
  6. Last but not least, the industry-specific metrics included in Appendix B of the Climate-related disclosure ED are extremely detailed. Companies should review whether they could be implemented (or are applicable) in their jurisdictions.

PwC’s suggestion on what companies need to do

Establish the Sustainability-related Governance Structure

  • Establish and define a sustainability governance structure, as well as the roles and responsivities of each committees and departments.
  • Make sure the Board engagement and form cross-functional or designated working groups to coordinate the planning and implementation of ISSB disclosure requirement.

Develop a holistic sustainability strategy and mid-to long -term action plan 

  • Set up strategic development priorities, strategic objectives, including integrated management recommendation on risk, disclosure, and sustainability management system.
  • Respond to multi-stakeholders needs, incorporate sustainability considerations into long-term business strategy.

Formulate the Climate risk management framework

  • Analyse the alignment of climate risk management with existing business operations and integrate climate risk considerations into existing operating process, covering front, middle and back office.
  • Build resources and capabilities on talents, data, and technology in risk management.

Climate-related disclosure

  • Identify and select the climate targets and metrics to keep track on climate information based on your sectors, priorities, and favours (from investors and key stakeholders).
  • Plan and implement respective measures and disclose the achievement in climate risk management on a regular basis.
  • For companies that provide financial reports that are more frequent than annual reports (e.g., semi-annual, or quarterly), applying the IFRS Sustainability Standards means that their sustainability reports need to be reported with the same frequency. Therefore, enterprises should adopt appropriate systems, procedures, and internal control schemes to ensure the rigor of relevant information disclosure.

[1] The Value Reporting Foundation (VRF) is comprised by the SASB Standards and Integrated Reporting (IIRC) in 2020.

[2] One is the General Requirements for Disclosure of Sustainability-related Financial Information Prototype, and the other is Climate-related Disclosures Prototype

Contact us

Amy Cai

Sustainability Managing Partner, PwC China

Tel: +[86] (21) 2323 3698

Qing Ni

Sustainability Markets Leader, Climate and Sustainability Leader, PwC China

Tel: +[86] (10) 6533 2599

Yvonne Kam

Partner, PwC China

Tel: +[86] (21) 2323 3267

Kanus Yue

Sustainability Disclosure & Consulting Lead Partner, PwC China

Tel: +[86] (20) 3819 2399

Tingcun Han

Partner, PwC China

Tel: +[86] (10) 6533 7307

Cyrus Cheung

Partner, PwC Hong Kong

Tel: +[852] 2289 1709