As sustainability becomes a core business consideration, the IFRS Foundation has previously introduced the International Sustainability Standards Board (ISSB) Standards, including IFRS S1 and S2, to set a global baseline for sustainability-related disclosures. These standards aim to help companies communicate material sustainability-related financial information to investors. While many jurisdictions are beginning to incorporate these standards into their regulatory frameworks, a growing number of companies are voluntarily applying the ISSB Standards to meet investor demand for consistent and comparable sustainability disclosures. The IFRS Foundation has now published a guide on voluntary applications to support these companies.

This article is written by Iman Zalinyan ([email protected])  and Leene Timmermann ([email protected]). Iman and Leene are both part of RSM Netherlands Business Consulting Services with a specific focus on sustainability and strategy. 

Why Voluntarily Apply ISSB Standards?

Voluntarily applying the ISSB Standards, especially in the absence of regulatory requirements, offers companies several advantages. Chief among these is the ability to provide decision-useful information that is globally comparable. Investors around the world are increasingly seeking sustainability-related data, and companies that voluntarily align their disclosures with IFRS S1 and S2 can gain a competitive edge in attracting capital. Such data is also increasingly requested by customers and value chain partners due to their shifting priorities or their own voluntary or mandatory reporting needs. In addition to improved investor confidence, companies can benefit from enhanced transparency as well as a clearer understanding of their sustainability risks and opportunities.  

Applying the ISSB Standards enables companies to demonstrate leadership in sustainability reporting. The voluntary application can serve as a passport to meet future global requirements as more jurisdictions move to adopt the ISSB Standards as part of their regulatory frameworks.

Key Components of the ISSB Standards

The ISSB Standards consist of two standards: IFRS S1 and S2. Companies must fulfil all requirements of both standards to claim compliance.

IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information This standard provides a comprehensive framework for companies to disclose material sustainability-related information across all industries. It covers non-climate-related sustainability risks and opportunities, allowing companies to build investor-focused disclosures.

IFRS S2: Climate-related Disclosures IFRS S2 focuses specifically on climate-related risks and opportunities. It builds on the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations and is designed to provide consistent and comparable climate-related disclosures, addressing key topics like greenhouse gas emissions, scenario analysis, and climate-related risks.

Transition Reliefs and Proportionality Mechanisms

To ease the transition for companies voluntarily applying the ISSB Standards, the IFRS Foundation has built in several transition reliefs and proportionality mechanisms. These tools allow companies of varying sizes and levels of reporting maturity to phase in their compliance with the standards. The IFRS Foundation’s new publication highlights these provisions and their potential to form stepping stones towards full compliance. Most importantly, companies can still be fully compliant while using these provisions to the extent specified by the standards. For transition reliefs, this means, importantly, not to use them beyond the specified period of relief.  

Transition reliefs relate to:

  1. Climate-first reporting: Companies can focus on disclosing only climate-related risks and opportunities in the first year of reporting under IFRS S1 and S2. Full disclosure of other sustainability-related risks and opportunities is required starting from the second year.
  2. The timing of reporting: In the first annual reporting period, companies are permitted to publish their sustainability-related financial disclosures after rather than along with the related financial statements.
  3. Comparative disclosures: In the first year of application, companies are not required to provide comparative information from prior years. This gives companies time to develop comprehensive reporting systems before full comparative disclosures are required in the second year.
  4. Greenhouse Gas Protocol: While the use of the GHG Protocol: A Corporate Accounting and Reporting Standard (2004) is usually required, companies which already use a different method to measure greenhouse gas emissions are permitted to continue using it during the first reporting year.
  5. Scope 3 emissions: IFRS S2 includes a temporary relief for companies not ready to disclose Scope 3 greenhouse gas emissions in their first year of reporting. This phased approach helps companies gradually align their climate-related disclosures with investor expectations.

Additional proportionality mechanisms take companies’ state of readiness into account and help balance it with investor needs for transparency and comparability. Concepts like “reasonable and supportable information that is available at the reporting date without undue cost or effort” and “the skills, capabilities and resources available to the entity” ease the way for smaller or less ESG-experienced companies. For example, companies may be allowed to use qualitative instead of quantitative disclosures where appropriate, helping them align their reporting with investor needs even if some data is not yet fully developed.

Communicating Progress and Partial Application

One of the key elements of voluntary application is transparency about the extent of compliance. Companies that are not yet able to fully comply with all the ISSB Standards can still communicate their progress by clearly outlining what parts of the standards have been applied and what areas are still in development. To facilitate this, the IFRS Foundation provides short examples of such statements. This transparency supports investor confidence by allowing stakeholders to assess the quality and completeness of the disclosures being made. Assurance by a third party could be possible and would strengthen both users’ confidence and understanding of the information presented.

Forward Thinking

The IFRS S1 and S2 Standards provide a strong framework for companies to disclose sustainability-related financial information in a way that is globally consistent and investor-focused. By voluntarily applying these standards, companies can align themselves with the evolving expectations of the global capital markets while preparing for potential regulatory requirements. The transition reliefs and proportionality mechanisms built into the standards form solid stepping stones for companies to reach early compliance. Making the choice for voluntary partial reporting further enables companies to establish their reporting systems at their own pace. By taking this path, companies are not bound to the temporary relief period of one year of many provisions. Instead, they can prioritise building reliable systems, expanding them at their own pace and making the step to full compliance once they are certain in their ability to fulfill requirements without excessive effort and costs. 

As the sustainability landscape continues to evolve, the voluntary application of ISSB Standards offers companies a practical and strategic way to meet investor demands and improve their sustainability performance. Between guidance on transition reliefs, proportionality measures and interoperability with different reporting frameworks, companies have a range of resources to demonstrate leadership in sustainability reporting and position themselves for long-term success.

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