Introduction
The IFRS Foundation has released a new comprehensive guide aimed at assisting companies in identifying and disclosing material sustainability-related risks and opportunities that could impact cash flows, access to finance, or cost of capital in the short, medium, or long term. This effort is part of the International Sustainability Standards Board’s (ISSB) commitment to facilitating the smooth implementation of ISSB Standards across the world.
Structure of the guide
The guide is divided into three chapters, each providing detailed insights into key aspects of materiality and sustainability disclosures.
Chapter 1: Defining Material Information in ISSB Standards
The first chapter focuses on breaking down the definition of ‘material information’ as applied within the ISSB Standards. It clarifies the critical components of materiality, guiding companies on how to make informed materiality judgements in the context of sustainability reporting.
Chapter 2: Sustainability-Related Risks and Opportunities
The second chapter explores sustainability-related risks and opportunities that could potentially influence an entity’s future prospects. It explains how these risks and opportunities are framed within ISSB Standards and provides examples to help entities better understand the factors that should be considered when identifying these risks and opportunities.
Chapter 3: Identifying and Disclosing Material Information
Building on the preceding chapters, Chapter 3 has a look at the processes required for identifying and disclosing material sustainability-related information. It presents a practical example of how an entity might go about disclosing this material information and discusses the use of guidance referenced in the ISSB Standards to support these disclosures.
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Integration with Existing Practices
A key feature of the guide is its alignment with the existing processes that companies may already use to make materiality assessments when preparing financial statements under the IFRS Accounting Standards. The guide lays out a method similar to the four-step approach described in the International Accounting Standards Board’s IFRS Practice Statement 2: Making Materiality Judgements. Thus, while the ISSB Standards are compatible with any generally accepted accounting principles, companies already using IFRS—spanning over 140 jurisdictions—will be particularly well positioned to apply these concepts effectively.
Connecting Financial and Sustainability Disclosures
The guide also emphasizes considerations that can help companies create greater connectivity between sustainability-related financial disclosures and their standard financial statements. When applying ISSB Standards, an entity is required to provide information in a manner that enables primary users to understand the connections between disclosures provided across its sustainability-related financial disclosures and its related financial statements. This is referred to as part of ‘connectivity considerations’.
Connecting ISSB with the European Sustainability Reporting Standards (ESRS) and GRI
Moreover, for organizations seeking to address the needs of a broader range of stakeholders, the guide provides guidance on how to align ISSB Standards with other popular frameworks, such as the European Sustainability Reporting Standards (ESRS) or Global Reporting Initiative (GRI) Standards. This aspect of compatibility is referred to as ‘interoperability considerations’. Entities reporting under both ESRS and ISSB frameworks can benefit from using this guide in tandem with the EFRAG guidance on ESRS reporting.
Conclusion
The new guide from the IFRS Foundation is a good resource for organizations that are required to report under ISSB standards. The guide can enhance their understanding of sustainability-related materiality and enhance their disclosure processes, while also aligning these efforts with broader financial reporting practices.
About NordESG
NordESG is an advisory firm helping corporates develop, articulate and execute their ESG and sustainability strategies. Our work includes sustainability performance reporting support under various ESG frameworks, strategy development or conducting materiality assessments. By doing so, we help businesses meet their disclosure compliance requirements like CSRD but also help them proactively communicate their strategy to other stakeholders like investors, customers and local communities in which they operate. Our work is focused mainly on Europe and North America.
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