Part of the IFRS Foundation’s response to the pressing issue of sustainability reporting is to set up a new board called the International Sustainability Standards Board (ISSB). The primary function of this board is to develop a global benchmark for sustainability disclosure standards, as discussed previously.
A key part of the process in developing these new standards was to set up a working group to provide recommendations to the ISSB. This working group has concluded its work, looking at both climate-related discussions alongside more general sustainability disclosures. These prototypes will be used to form the basis of the new standards that the board will be looking to develop.
General requirements prototype
The General Requirements for Disclosure of Sustainability-related Financial Information Prototype has a similar function to IAS 1, Presentation of Financial Statements, which sets out the overall requirements for financial statements. The prototype sets out the overall requirements for disclosing relevant information.
This involves the following key points.
- Materiality: this will be as key for sustainability disclosures as it is for financial reporting standards. It means that sustainability information would be material if its omission or misstatement would influence the decision making of the users.
- General disclosure: it is proposed that each sustainability matter should focus on four aspects: governance, strategy, risk management and metrics/targets. This method has been followed in the Prototype 2, which has looked specifically at potential disclosures relating to climate-related risks.
- Use of other standards: given it will take time to develop specific standards for different specific areas of sustainability, companies should consider the principles of the General Requirements Prototype in producing disclosures. The wording is similar to that used in IAS 8, Accounting policies, Changes in Accounting Estimates and Errors, in relation to entities developing accounting policies for areas not specifically covered by a standard. This shows that the ISSB is looking to develop the sustainability disclosure standards in a similar fashion to the IFRS Standards to aid comparability.
- Reporting channel: a particular location for the disclosures is not specified, but they have to be disclosed as part of an entity’s general purpose financial reporting. It would be produced at the same time as the financial statements and for the same period, but without prescription on where it would go in a company’s annual report.
This is a good response to many who fear changes in standards could be too generic
Climate-related disclosures prototype
The Climate-related Disclosures Prototype is the first look at how a specific area of sustainability could be assessed. It would require entities to provide information for the users to assess the impact of climate-related risks on governance, strategy, risk management, and metrics and targets.
These disclosures would mean that the entity would be required to discuss the processes and controls in place to manage and monitor climate-related risks, and the impact such risks have on the entity’s business model.
This discussion would involve an analysis of the resilience of the company’s strategy to climate-related risks and an explanation of the metrics used by management in assessing these items.
From a financial point of view, this would include estimates of the impact on the entity’s financial position, performance and cashflows at the end of the period, and into the short, medium and long-term future. It is also proposed that the entity reports on its progress towards the targets set in relation to climate-related issues.
A very interesting element of the climate prototype is found in the appendix to the document. Normally that’s a place that only the most diligent of readers will be looking, but it contains the most specific element of the document. In the appendix is a list of industry-based disclosure requirements, which outlines the topics, disclosure metric and relevant accounting metric.
This is a very detailed list covering a wider range of industries. Some of these are quite general across most industries, looking at the energy usage in terms of the amounts of renewable energy utilised. Other more specific examples include:
- Clothing and apparel industry: a suggested metric is the percentage of raw materials that have been third-party certified to an environmental and/or social sustainability standard.
- Automotive industry: a suggested metric is the number of zero-emission vehicles, hybrid vehicles and plug-in hybrid vehicles sold.
The list goes into a huge range of industries, with real thought put into the specific impact that each will have on climate-related issues. If this were to be implemented, it would clearly have a strong impact on how companies would report their compliance and activity.
This would be a huge change in the disclosures made by many and appears to be a good response to many who fear that changes in standards could potentially be too generic and inadequate.