Roughly two months on, there are differing opinions on whether the 2021 United Nations climate change conference (COP26) adequately addressed the pressing issues facing our planet. However, there was at least one significant announcement that will have a profound impact on how companies do business for years to come.
The International Financial Reporting Standards Foundation (IFRS) used the conference as a launching pad for its International Sustainability Standards Board (ISSB), an initiative that aims to develop high-quality standards for sustainability disclosure in accountancy.
The decision to create the ISSB was prompted by consultation feedback, which found international investors were calling for transparent and reliable reporting by companies on matters relating to the environment.
IFRS sustainability disclosure standards
The IFRS aims to release a draft of the standards by the end of the first quarter of 2022. The standards will be based on the groundwork put in place by the Technical Readiness Working Group (TRWG), which was set up in March 2021 as a response to calls for greater consistency in how sustainability factored into the decisions made by companies.
To coincide with the announcement about ISSB at COP26, the TRWG also published two prototypes which the ISSB said it will consider in its program:
- The climate prototype, which sets out the requirements for the identification and disclosure of specific climate-related financial information.
- The general requirements prototype, which requires an entity to disclose a complete depiction of its sustainability risks and opportunities.
The United Kingdom has already said it expects to put ISSB at the centre of its own sustainability reporting requirements.
Current emphasis on reporting
In the past couple of years, carbon and energy reporting (CER) has been a mandatory disclosure for quoted companies, large unquoted companies and large limited liability partnerships (LLPs) as part of their year-end narrative reports.
As climate matters continue to be a ‘hot topic’, the UK government consulted on introducing mandatory climate-related financial disclosures in line with the task force on climate-related financial disclosures (TCFD). These are being applied firstly for premium listed companies (for accounting periods beginning on or after 1 January 2021), and will be further extended to certain publicly quoted companies and very large unquoted companies (for accounting periods commencing on or after 6 April 2022).
Those that will be in scope are:
- All UK companies that are currently required to produce a non-financial information statement, including those that have more than 500 employees and are either traded companies, banking companies or insurance companies
- UK registered companies with securities admitted to AIM, with more than 500 employees
- UK registered companies, which are not included in the above categories, that have more than 500 employees and a turnover of more than £500 million
- LLPs which have more than 500 employees and a turnover of more than £500 million.
The in-scope companies will be required to include details of:
- Governance arrangements for assessing and managing climate-related risks and opportunities
- Processes for accessing and managing climate-related risks and opportunities
- How these processes are integrated into the overall risk management process
- The climate-related risks and opportunities arising in connection with the operations, and the time periods by reference to which those risks and opportunities are assessed
- The impacts of the principal climate-related risks and opportunities on the business model and strategy
- The analysis of the resilience of the business model and strategy, taking into consideration different climate-related scenarios
- The targets used to manage climate-related risks and to realise climate-related opportunities
- The key performance indicators (KPIs) used to assess progress against targets.
Clearly, these are aimed at very large entities, although from past experience, it would not be a surprise if these climate-related financial disclosures were extended to those that are in scope of CER.
The bigger picture
It is important to consider the reporting in the broader context of society and business. Sustainability reporting standards have several benefits, the most obvious one being the benefit to the environment. Another benefit will be that the standards will provide guidance to firms which, until now, have not had a baseline to compare their sustainability efforts to.
Reporting standards can also help streamline business operations, provide risk-management benefits and lead to the necessary collation of more data which can then be fed into the decision-making process.
What is next?
Things are moving quickly and work is already well underway to release the standards over the course of 2022.
The ISSB represents an opportunity in a fast-changing world, where the climate will drive major shifts in the coming years. Firms should move diligently and build on the momentum resulting from the formation of the ISSB at COP26.