Insights for companies from recent ISSB publications on materiality and voluntary application of the ISSB Standards

The International Sustainability Standards Board’s Sustainability Disclosure Standards (“ISSB Standards”), comprised of IFRS S1 and IFRS S2, are now one of the widely accepted standards used by companies to report on their sustainability-related, including climate-related, financial information—referred to as a company’s sustainability-related risks and opportunities. (We previously wrote about the ISSB Standards, and how they differ from the Task Force on Climate-Related Financial Disclosures (TCFD) Recommendations, here.)

In many jurisdictions, including the UK, the ISSB Standards are (or are soon expected to be) the blueprint on which new mandatory disclosure regulations for large companies are based. But this is not the limit of their reach: many mid-cap companies falling below regulatory size thresholds are choosing to align with the ISSB Standards voluntarily, some in the pursuit of best practice, others because their investors and other key stakeholders require it.

Towards the end of last year, the ISSB released some guidance to help companies that are voluntarily applying the ISSB Standards navigate a path toward meeting all the requirements (aka  “compliance”), plus some guidance on how to determine which sustainability risks and opportunities are material. In this briefing, we look at some of the insights for companies from both pieces of guidance.

Path to voluntary compliance

The ISSB recognises that in light of differences between companies—for example, in terms of reporting maturity, available data, their processes and industry risks—there will be different paths to compliance, especially where it is voluntary. A company might proceed in phases as it builds or updates its processes and controls, develops capabilities and gathers data.

The ISSB Standards, however, are intended to allow companies of all sizes, stages of development and levels of sustainability maturity to apply them. This is reflected in the transitional reliefs and proportionality mechanisms built into the standards, and the ability of companies to communicate their progress toward compliance. Each of these is explored below.

• Transitional reliefs - allowing a phased introduction of requirements for defined periods (e.g., for the company’s first reporting period), transitional reliefs are a way for companies to develop their disclosure capabilities. Reliefs in IFRS S1 and S2 include providing climate-related disclosures only (as opposed to broader sustainability-related disclosures), reporting sustainability-related financial disclosures after a company’s financial reporting (rather than at the same time) and reporting only Scope 1 and 2 greenhouse gas emissions (leaving out the more challenging Scope 3).
• Proportionality mechanisms - designed to simplify what is required, these mechanisms instruct companies to use the “reasonable and supportable information that is available…without undue cost or effort” reflecting the “skills, capabilities and resources that are available” (see IFRS S1 paragraph 37). One example is regarding disclosure of quantitative information about the anticipated financial effects of a sustainability-related risk or opportunity; in this case, so long as certain criteria are satisfied, a company can provide qualitative information only.
• Communication - companies aligning with the ISSB Standards in their entirety – albeit utilising the built-in transitional reliefs and proportionality mechanisms as necessary – can make an “explicit and unreserved” statement of compliance, as required by paragraph 72 of IFRS S1. Where a company is unable to align fully, it should communicate an honest assessment of its progress, for example: “This report has been prepared, to the extent possible for this year, applying the ISSB Standards. Disclosures that have been omitted are described herein along with the reasons why they have not been reported. The Company intends to reach full compliance when sufficient data becomes available, expected by 2026.”

Materiality

Under the ISSB Standards, a company must disclose material information about the sustainability-related (including climate-related) risks and opportunities that could reasonably be expected to affect its cash flows, its access to finance or cost of capital over the short, medium or long term (referred to as its “prospects”). Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions of existing and potential investors, lenders and other creditors (together, “primary users” of general-purpose financial reports). The ISSB’s recent guidance clarifies the following points.

• Financial materiality - materiality for the purpose of the ISSB Standards is financial materiality - it focusses on sustainability risks and opportunities that affect the company itself. This is in contrast to  regimes (including the EU’s Corporate Sustainability Reporting Directive (CSRD) and its corresponding European Sustainability Reporting Standards (ESRS)) that use a double materiality approach and look also at a company’s external sustainability impacts. However, the ISSB Standards do require a company to look at (and possibly disclose) its external impacts to the extent those may give rise to sustainability-related risks or opportunities that could reasonably be expected to affect its prospects and the related information about those impacts is material to primary users.
• Requirement for “material information” - under the ISSB Standards, a company must disclose information—about the sustainability-related risks and opportunities that could reasonably be expected to affect its prospects—which is material. Any material information that qualifies, regardless of which sustainability-related risk or opportunity it relates to, must be disclosed. This means that there need not be, as there is with certain other sustainability standards such as the ESRS, an initial assessment of “material matters” or “material sustainability risks and opportunities”. Under the ISSB Standards, materiality is not used to in relation to the significance or importance of a sustainability-related risk or opportunity. Rather, the definition of “material information” is used as a filter to assess whether information about any sustainability-related risk or opportunity would need to be provided by a company to meet the requirements set out in ISSB Standards.
• Process to get to material information - the ISSB outlines a four-step process a company might follow to identify and disclose material information about the sustainability-related risks and opportunities it has identified: (1) Identify information about sustainability-related risks and opportunities that has the potential to be material; (2) Assess whether the potentially material information is in fact material; (3) Organise the information within draft disclosures; (4) Review the draft disclosures. Step 2—the heart of the process—requires companies to apply judgment, taking into consideration its facts and circumstances, and think through questions it may encounter when making materiality judgments relating to qualitative/quantitative factors, possible future events with uncertain outcomes and changed circumstances and assumptions.

Looking ahead

Looking ahead in the UK (as we previously wrote about), we expect that the ISSB Standards will be the basis for forthcoming UK Sustainability Reporting Standards. We await imminent further announcement from the UK government on this, following publication in December by the UK Sustainability Disclosure Technical Advisory Committee (TAC) of their technical assessment and endorsement recommendations paper on the ISSB Standards.

For further guidance and tailored advice on anything discussed in this briefing, including applying the ISSB Standards, please get in touch with Kerry Stares or your usual Charles Russell Speechlys contact.