IFRS ushers in a new age of standardised financial disclosures via ISSB ESG reports. Here's all you need to know

Imagine you're starting a new company. You come up with a fabulous idea, scrounge up the capital and things are finally taking off. But now, it's time to make the financial documents. Everyone wants to be sustainable and save the planet, including you. But the field is still relatively new, and without a standardised way of declaring your company's impacts, it's mighty difficult (and frustrating) to complete this endeavour.

If you relate, there is an extremely bright solution right on the horizon. And if you squint enough at the light, you might see the silhouette of some letters shrouded in the brilliance — ISSB.

After years of work, the International Sustainability Standards Board (ISSB) finally released the two standards for declaration of energy, social and governance (ESG) related financial information on June 26, 2023.

The ISSB was formed a couple years back by the International Financial Reporting Standards (IFRS), a widely used accounting standard for disclosure of financials by firms internationally. While India does not follow these standards exactly, much of our accounting methodology continues to be based on IFRS. Laws are a-changing, and more and more jurisfictions are required to add sustainability disclosures alongside their general finance reports.

As per the new notification, the new ISSB reports are divided into two sections: the IFRS S1, dealing primarily in the company's "sustainability-related risks and opportunities", while IFRS S2 pertains to "climate-related risks and opportunities", such as the company's estimated greenhouse gas emissions.

S1 expects the disclosure of "all sustainability-related risks and opportunities that could reasonably be expected to affect the entity's cash flows, its access to finance, or cost of capital over the short, medium, or long term." This could include the company's sustainability targets and progress, sustainability risks on their business decisions, models, value chains and overalls financials, and even the resiliency of their business model against such hazards.

Meanwhile, S2 is further subcategorised into climate-related physical (effects due to change in climate patterns) and transition risks (effects due to our ongoing transition into a lower-carbon economy). S2 demands the company present and analyse scenarios, including how they plan to respond to such risks.

While S1 might have pertained to the overarching sustainability notion, S2 requires the disclosure of factors that pertain very specifically to the impact on the planet, such as the company's greenhouse emission from all scopes, internal carbon pricing practices, GHG reduction targets, planned usage of carbon credits as well as how the firm plans to incorporate climate-related factors in remuneration policies.

According to the ISSB, these new standards will come into force by January 1 of next year. In order to ease the transition period, companies have the option to only comply with IFRS S2 for the first annual reporting period. In addition, they are exempt from disclosing Scope 3 GHG emissions and providing comparative information in some aspects.

ISSB hopes that the introduction of these reports will help standardise disclosures for all international markets, reduce duplicative reporting, make understanding such reports easier, and even slash greenwashing to a significant extent. With major boards such as the Financial Conduct Authority and World Business Council for Sustainable Development welcoming this move, the stage has been set for businesses to accelerate the normalisation of disclosing their sustainable impacts.

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