ISSB Update January 2023

Research and standard-setting

General Sustainability-related Disclosures (Agenda Paper 3) and Climate-related Disclosures (Agenda Paper 4)

The ISSB met on 17–19 January 2023 to redeliberate some of the proposals in its exposure drafts IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (draft IFRS S1) and IFRS S2 Climate-related Disclosures (draft IFRS S2). The ISSB discussed:

• the proposed objective for disclosing metrics and targets in draft IFRS S1 and draft IFRS S2 (Agenda Paper 3A);
• the proposed requirements in draft IFRS S1 for an entity to disclose its judgements, assumptions and estimates (Agenda Paper 3B);
• the concept of ‘reasonable and supportable information that is available at the reporting date without undue cost or effort’ and whether and how to introduce this concept in IFRS S1 and IFRS S2 (Agenda Papers 3C and 4D);
• the proposed requirement in draft IFRS S1 for an entity to disclose information about sustainability-related opportunities in circumstances when that information may be commercially sensitive (Agenda Paper 3D);
• the proposed requirements in draft IFRS S1 and draft IFRS S2 for an entity to disclose current and anticipated financial effects of sustainability-related risks and opportunities (Agenda Papers 3E and 4E);
  
• the proposed requirements in draft IFRS S1 on connected information (Agenda Papers 3E and 4E);
• the proposed requirement in draft IFRS S2 for an entity to use scenario analysis to assess its climate resilience (Agenda Paper 4A);
• the proposed requirement in draft IFRS S2 for an entity to disclose its greenhouse gas emissions and a potential reporting relief (Agenda Paper 4B); and
• the proposed requirement in draft IFRS S2 for an entity to disclose its climate-related targets (Agenda Paper 4C).

Metrics and targets objective (Agenda Paper 3A)

The ISSB discussed the proposed objective of the metrics and targets disclosures in draft IFRS S1 and draft IFRS S2. The ISSB tentatively decided to clarify that the objective is to require an entity to disclose information about both:

1. the metrics the entity uses to measure, monitor and manage sustainability-related risks and opportunities (even if those metrics are not required by IFRS Sustainability Disclosure Standards); and
2. the metrics required by IFRS Sustainability Disclosure Standards (even if the entity does not use these metrics).

All 13 of the ISSB members present agreed with this decision. One member was absent.

Disclosure of judgements, assumptions and estimates (Agenda Paper 3B)

The ISSB discussed the proposed requirements in draft IFRS S1 for an entity to disclose the judgements, assumptions and estimates it makes in applying IFRS Sustainability Disclosure Standards.

The ISSB tentatively decided:

1. to introduce a requirement for an entity to disclose the judgements it has made that have had the most significant effects on its disclosures about its sustainability-related risks and opportunities.
   All 13 of the ISSB members present agreed with this decision. One member was absent.
2. to amend paragraph 55 of draft IFRS S1 to require an entity to identify the sources of guidance it has used in preparing its sustainability-related financial disclosures, in the absence of an IFRS Sustainability Disclosure Standard. This requirement would include identifying the industry or industries specified in industry-based sources of guidance used by the entity (such as IFRS Sustainability Disclosure Standards, SASB Standards or other industry-based sources of guidance).
   All 13 of the ISSB members present agreed with this decision. One member was absent.
3. to clarify that the disclosure requirements on estimation uncertainty relating to metrics in paragraph 79 of draft IFRS S1 also apply to current and anticipated effects of sustainability-related risks and opportunities on the entity’s financial position, financial performance and cash flows. This estimation uncertainty includes estimation uncertainty that has a significant risk of resulting in a material adjustment within the next financial year to the carrying amounts of assets and liabilities reported in the entity’s financial statements.
   All 13 of the ISSB members present agreed with these decisions. One member was absent.
4. to clarify that the words ‘to the extent possible’ in paragraph 80 of draft IFRS S1 mean 'to the extent possible considering the requirements of IFRS Accounting Standards or other relevant generally accepted accounting principles'.
   Twelve of the 13 ISSB members present agreed with this decision. One member was absent.
5. to require an entity to disclose information about significant differences between the financial data and assumptions the entity uses to prepare its sustainability-related financial disclosures and the financial data and assumptions the entity uses to prepare its financial statements.
   All 13 of the ISSB members present agreed with these decisions. One member was absent.
6. to provide guidance on the disclosure of judgements, assumptions and estimates that an entity is required to make in applying IFRS Sustainability Disclosure Standards, including:
   1. examples that would be included in the illustrative guidance on IFRS S1; and
   2. educational materials that would be provided in the future.

All 13 of the ISSB members present agreed with this decision. One member was absent.

Reasonable and supportable information that is available at the reporting date without undue cost or effort (Agenda Paper 3C and 4D)

The ISSB discussed the challenges entities could encounter in applying proposed disclosure requirements in draft IFRS S1 and draft IFRS S2 that involve a high level of measurement or outcome uncertainty.

The ISSB tentatively decided to introduce the concept of ‘reasonable and supportable information that is available at the reporting date without undue cost or effort’ into IFRS S1 and IFRS S2, to help an entity to apply specific requirements in the Standards when:

1. identifying sustainability-related and climate-related risks and opportunities (IFRS S1 and IFRS S2);
2. applying value-chain-related requirements, specifically, those regarding:
   1. the scope of the entity’s value chain (IFRS S1 and IFRS S2); and
   2. the entity’s measurement of its Scope 3 greenhouse gas emissions (IFRS S2);
3. determining anticipated effects on an entity’s financial performance, financial position and cash flows (IFRS S1 and IFRS S2);
4. applying climate-related scenario analysis (IFRS S2); and
5. calculating the amount and percentage of assets or business activities (IFRS S2):
   1. vulnerable to transition risks;
   2. vulnerable to physical risks; and
   3. aligned with climate-related opportunities.

All 13 of the ISSB members present agreed with these decisions. One member was absent.

Commercially sensitive information about opportunities (Agenda Paper 3D)

The ISSB discussed feedback on the proposed requirements for an entity to disclose information about its sustainability-related opportunities—specifically, the feedback that some of this information could be commercially sensitive.

The ISSB tentatively decided to introduce an exemption in IFRS S1 that, in limited circumstances, would permit an entity to exclude information from its disclosure of its sustainability-related opportunities, when that information is commercially sensitive. An entity would be permitted to apply this exemption only if:

1. the entity has a specific reason for not disclosing information, such that keeping the information from being publicly available would provide the entity with an economic benefit that would translate to a competitive advantage;
2. the entity’s disclosure of the information could ‘be expected to prejudice seriously’ the economic benefits the entity is able to realise in pursuing the opportunity; and
3. the entity determines it is not possible to disclose the information in a manner or at a level of aggregation that would resolve the entity’s concerns about commercial sensitivity.

When applying the exemption, by item of information omitted, an entity would be required:

1. to disclose the fact that it has used the exemption; and
2. to reassess, at each reporting date, whether the information still qualifies for the exemption.

The ISSB also tentatively decided to specify that this exemption would:

1. not be applicable to information that is already publicly available;
2. not permit an entity to use commercial sensitivity as a justification for broad non-disclosure; and
3. not permit an entity to omit information about risks from its disclosures.

This exemption would apply in relation to commercially sensitive information about sustainability-related opportunities unless stated otherwise by IFRS Sustainability Disclosure Standards and would be available in limited circumstances only when the information is not publicly available.

All 13 of the ISSB members present agreed with these decisions. One member was absent.

Current and anticipated financial effects and connected information (Agenda Paper 3E and 4E)

The ISSB continued discussions from its November 2022 meeting on:

• the proposed requirements in draft IFRS S1 and draft IFRS S2 for an entity to disclose the current and anticipated financial effects of sustainability-related risks and opportunities; and
• the proposed requirements in draft IFRS S1 for an entity to provide information that enables users of general purpose financial reporting to assess the connections between various sustainability-related risks and opportunities, and to assess how information about these risks and opportunities is linked to information in the general purpose financial statements.

The ISSB tentatively decided:

1. to amend draft IFRS S1 and draft IFRS S2 to clarify that if the information in an entity’s financial statements has been affected or is expected to be affected by sustainability-related risks and opportunities, the entity would be required to explain the connections between those risks and opportunities and their current and anticipated financial effects. In explaining these connections, the entity would be required to avoid unnecessary duplication and would be permitted to provide information by cross-reference to the general-purpose financial statements. An entity can provide information by cross-reference subject to the specified conditions.
   All 14 ISSB members agreed with these decisions.
2. to amend draft IFRS S1 and draft IFRS S2:
   1. to clarify that an entity would be required to provide quantitative and qualitative information about the current and anticipated effects of sustainability-related risks and opportunities on the entity’s financial position, financial performance and cash flows. If the entity were unable to provide quantitative information, it would be required to provide qualitative information.
      All 14 ISSB members agreed with these decisions.
   2. to clarify that an entity would be required to determine whether it is able to provide quantitative information about the financial effects of a particular sustainability-related risk or opportunity, taking into consideration:
      1. whether the financial effects of that sustainability-related risk or opportunity are separately identifiable;
      2. whether a high level of outcome or measurement uncertainty is involved in quantifying the financial effects of that sustainability-related risk or opportunity;
      3. in case of the anticipated financial effects only, whether the entity has the skills, capabilities and resources to provide quantitative information about those effects (addressing the need for scalability and proportionality).
         Thirteen of 14 ISSB members agreed with these decisions.
   3. to clarify that if an entity is unable to provide quantitative information about the financial effects of a particular sustainability-related risk or opportunity, the entity is required to:
      1. explain why it is unable to provide quantitative information about the financial effects of that sustainability-related risk or opportunity;
      2. provide qualitative information about the financial effects of that sustainability-related risk or opportunity, including identifying line items, totals and subtotals within financial statements that are likely to be affected by that sustainability-related risk or opportunity; and
      3. provide quantitative information about sustainability-related risks and opportunities―including that particular sustainability-related risk or opportunity―at the lowest possible level of aggregation at which the entity is able to provide that information.
         All 14 ISSB members agreed with these decisions.

In making these decisions, the ISSB noted that an entity would:

1. apply judgement in applying the requirements on current and anticipated financial effects;
2. provide more useful information to primary users of financial statements by making that information more specific; and
3. identify sustainability-related risks and opportunities as a starting point in identifying useful information about current and anticipated financial effects of those risks and opportunities.

The ISSB tentatively decided:

1. to amend draft IFRS S1 and draft IFRS S2:
   1. to use consistent language to refer to the reporting period for which sustainability-related financial disclosures are prepared and to refer to the financial statements for that reporting period; and
   2. to consistently use the phrase ‘short, medium and long term’ instead of ‘over time’.
      All 14 ISSB members agreed with these decisions.
2. to amend draft IFRS S1 and draft IFRS S2 to clarify:
   1. the relationship between resilience assessment requirements and the requirements for the entity to disclose current and anticipated financial effects. This clarification would emphasise that these requirements can be applied independently but the resilience assessment can inform the disclosure of current and anticipated financial effects.
   2. that an entity would not be required to carry out a resilience assessment to determine current and anticipated financial effects of sustainability-related risks and opportunities.
      All 14 ISSB members agreed with these decisions.

Using scenario analysis to assess climate resilience (Agenda Paper 4A)

The ISSB discussed the proposed requirement in draft IFRS S2 for an entity to disclose its resilience to climate-related changes or uncertainties.

The ISSB tentatively decided to require an entity to prepare these disclosures using a method of climate-related scenario analysis that requires it to consider all reasonable and supportable information available at the reporting date without undue cost or effort. Such information could include information about past events, current conditions and forecasts of future economic conditions.

Thirteen of 14 ISSB members agreed with this decision.

The ISSB also tentatively decided to require an entity, when selecting a method of climate-related scenario analysis that is commensurate with its circumstances, to take into consideration:

1. the degree to which the entity is exposed to climate-related risks and opportunities; and
2. the entity’s available skills, capabilities and resources for conducting climate-related scenario analysis.

All 14 ISSB members agreed with this decision.

The ISSB emphasised that application guidance would build on materials published by the Task Force on Climate-related Financial Disclosures (TCFD), putting entities on a path to develop their capabilities and strengthen their disclosures over time.

Greenhouse gas emissions—Reporting period relief (Agenda Paper 4B)

The ISSB continued discussions from its December 2022 meeting on the proposed requirement in paragraph 21(a) of draft IFRS S2 for an entity to disclose its greenhouse gas (GHG) emissions.

The ISSB tentatively decided to provide relief that would allow an entity to measure its GHG emissions using information for reporting periods that are different from the entity’s own reporting period when that information arises from entities in its value chain with reporting periods that are different from the entity’s own, only if:

1. the entity measured and disclosed its GHG emissions using the most recent data available without undue cost or effort;
2. the length of the reporting periods of the entities in the entity’s value chain was the same as the length of the entity’s reporting period; and
3. the entity disclosed, if relevant to its GHG emissions information, the effects of significant events and changes that occurred between:
   1. the reporting dates of the entities in the entity’s value chain; and
   2. the date of the entity’s own general purpose financial reporting.

The ISSB noted it would monitor whether this relief could be relevant for disclosures beyond climate.

All 14 ISSB members agreed with this decision.

Climate-related targets—Latest international agreement on climate change (Agenda Paper 4C)

The ISSB discussed the proposed requirement in paragraph 23 of draft IFRS S2 for an entity to disclose its climate-related targets.

The ISSB tentatively decided to amend the proposed requirement in paragraph 23(e) to require an entity to disclose how any climate-related targets it has set have been informed by the latest international agreement on climate change, including how such targets have been informed by the jurisdictional commitments that arise from that agreement. The ISSB tentatively decided that the basis for conclusions on IFRS S2 would explain what this requirement will enable users of general purpose financial reporting to understand. 

These tentative decisions would not affect the other requirement in paragraph 23(e) for an entity to disclose whether its climate-related targets were validated by a third party.

All 14 ISSB members agreed with these decisions.

Next steps

The ISSB will continue to redeliberate the proposals in draft IFRS S1 and draft IFRS S2 with the aim of making final decisions about the content, including the effective date for IFRS S1 and IFRS S2, and beginning the process of balloting the Standards.