ESG Framework Consolidation: IFRS Sustainability Disclosure Standards
Last fall, the Value Reporting Foundation (VRF; houses the SASB Standards) announced plans to consolidate with the International Financial Reporting Standards (IFRS) Foundation in June 2022 and to create a new set of global sustainability disclosure standards in response to increasing calls from investors for more comparable, consistent and useful ESG disclosures. This follows IFRS’s consolidation with the Climate Disclosure Standards Board (CDSB), completed in February of this year. Given the IFRS’s role in setting standards for financial accounting, its consolidation with VRF should further legitimize ESG disclosures in the eyes of investors and other providers of capital. The new standards will be known as the IFRS Sustainability Disclosure Standards and are being created by the newly formed International Sustainability Standards Board (ISSB).
In March, the IFRS Foundation released previews of their draft IFRS Sustainability Disclosure Standards, including the following:
Draft general sustainability disclosure standards, which are industry-specific and will be based on and likely replace the industry-specific SASB Standards
Draft climate-related disclosure standards, which are industry-specific and will build upon and replace the Taskforce on Climate-related Financial Disclosures (TCFD) Recommendations
A summary of the draft IFRS Standards can be found here. Per this summary, companies using the standards will be expected to disclose their financially material sustainability risks and opportunities in their mainstream financial filings (e.g., Form 10-K, proxy statements, etc.) alongside financial information (rather than only in separate annual ESG reports). The draft standards will be subject to public comments until July 29, after which the IFRS will update the standards accordingly. Then later this year, the IFRS Foundation will solicit additional public feedback on their plan to replace the SASB Standards with the IFRS General Sustainability Disclosure Standards. Ultimately, the IFRS aims to release its final standards in late 2022.
What This Means for Public Companies
Public-facing companies should consider using both the general and the climate-related IFRS Standards in their 2022 Form 10-K and/or their 2022 annual ESG report (to be filed in 2023 and include 2022 data). The general IFRS Standards are significantly aligned with the SEC’s proposed climate disclosure rules.
In the meantime, public companies should continue to use the SASB Standards and TCFD recommendations to guide their ESG disclosures. Disclosure efforts now will help companies implement the IFRS Standards in the future.
What This Means for Private Companies
Currently, there is little adoption of the SASB Standards among private companies. However, private equity investors are increasingly demanding their investee companies use the TCFD recommendations to disclose their financially-material climate-related risks and opportunities. In the short term, private companies should also produce TCFD disclosures to prepare for the forthcoming IFRS Climate-related Disclosure Standards. Starting in 2023, private companies will likely be expected to disclose using the IFRS Climate-related Disclosure Standards in their mainstream financial reports.
Conclusion
The consolidation of disclosure frameworks under the proposed IFRS Standards represents an exciting evolution in ESG reporting. Having fewer, highly credible frameworks will help investors make more simplified like-for-like comparisons of information and allow companies to prioritize their reporting efforts appropriately. Verdani will share more about ESG frameworks in our upcoming white paper.