Society responds to ISSB Sustainability Reporting proposals

The IR Society welcomed the publication of the ISSB Exposure Drafts IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, which is based on those developed by the Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB), and called for as much harmonisation and convergence with existing and emerging standards and frameworks in reporting as possible. The Society also noted that international collaboration in the development of any global baseline for sustainability reporting will be essential for the creation of a disclosure system that can be implemented globally with a consistent approach across markets, thereby optimising reporting efficiency for companies falling under multiple reporting regimes. The Society called for flexibility around the location of sustainability-related financial disclosure, provided the core information is still required to be included within the annual report and accounts, and suggested that any sustainability-related disclosure requirements should recognise that reporting entities may not to be able to obtain complete and accurate, or even estimated, data from entities in the value chain that are beyond the reporting entity’s control.

The Investor Relations Society

5th Floor, 30 Coleman Street

London, EC2R 5AL

 

Emmanuel Faber (ISSB Chair) and Sue Lloyd (ISSB Vice-Chair)

International Sustainability Standards Board (ISSB)

Columbus Building

7 Westferry Circus,

Canary Wharf,

London,

E14 4HD

By email: commentletters@ifrs.org

 

29 July 2022

Dear Chair Faber and Vice-Chair Lloyd,

IFRS S1 – UK Investor Relations Society comment letter

Thank you for giving us the opportunity to comment on the International Sustainability Standards Board’s (ISSB) Exposure Drafts IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (‘IFRS S1’) and IFRS S2 Climate-related Disclosures (‘IFRS S2’), together, ‘the Standards’. This response is made on behalf of the UK’s Investor Relations Society (‘the IR Society’) on IFRS S1.

The IR Society represents members working for publicly listed companies and consultancies to assist them in the development of effective two-way communication with the markets and to create a level playing field for all investors. It has over 850 members, drawn mainly from the UK, including the majority of the UK FTSE 100 and many of the FTSE 250 constituents, but also including some companies listed overseas.

The IR Society’s mission is to promote best practice in investor relations; to support the professional development of its members; to represent their views to regulatory bodies, the investment community and Government; and to act as a forum for issuers and the investment community.

Overall/general comments

Support for global baseline

We welcome your initiative to provide an international set of sustainability reporting standards. The IR Society believes that any global baseline for sustainability reporting requirements should apply as broadly as possible and that regulators should seek to create as much harmonisation and convergence with existing and emerging standards and frameworks in reporting as possible.  We therefore support the decision of the ISSB to base its draft Standards on those developed by the Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB).

International collaboration in the development of that global baseline is essential for the creation of a disclosure system that can be implemented globally with a consistent approach across markets, thereby optimising reporting efficiency for companies falling under multiple reporting regimes. We support the ISSB’s Memorandum of Understanding with the GRI, as it is important that the ISSB undertakes technical work with other standard setters to align definitions and ensure consistency, especially as there are differing views of materiality.

We also note that the Corporate Sustainability Reporting Directive (CSRD) will require UK companies generating Euros 150 million turnover or more in the EU to make equivalent disclosures to those required by the European Sustainability Reporting Standards (ESRSs). EFRAG’s current proposed draft ESRSs are not fully interoperable with the ISSB standards, and we therefore have concerns that this could drive a required separate level of disclosure. It is important to ensure that there is alignment between these various differing reporting regimes to help corporates comply without disproportionate burden or cost.   

We are therefore supportive of the working group recently established by the ISSB involving jurisdictions actively engaged in developing sustainability disclosure standards (including the UK and EU) and are pleased to see the establishment of relevant advisory and consultative bodies by the ISSB, for example the Sustainability Standards Advisory Forum.

Support for IFRS S1 and ISSB Work Programme

There is increasing acceptance of the interconnection and interdependence across the range of sustainability-related risks that companies face (including the need to ensure a just transition to a low carbon economy) so it makes sense to think about these holistically. We are therefore in favour of the ISSB issuing the general sustainability reporting requirements (IFRS S1), rather than initially focussing solely on climate disclosure.  We also await with interest the ISSB’s impending consultation on its workplan for developing other IFRS Sustainability Reporting Exposure Drafts.

Degree of flexible implementation

We believe the ISSB’s direction of travel is broadly the right one, although we believe there is a need to acknowledge the very significant workload implications for reporting entities in terms of the resources (time, effort, systems and coordination) that will be required across all areas and aspects of the reporting entity’s’ operations, given sustainability-related risks and opportunities extend across businesses. This burden is likely to be especially marked for reporting entities that are at the beginning of their sustainability reporting journey and that may also currently lack the required skills and expertise. This could to some extent be mitigated by:

  • the requirements being high level/principles-based, with the detail (for example, metrics) being contained in (non-mandatory) supporting guidance (see ‘Balance between principles and prescription’ below); and
  • more supporting application guidance on certain aspects (see below), with the development of best practice being facilitated by establishing a forum to facilitate liaison between preparers and users (see below); and
  • phased implementation by the ISSB, which could be important in the context of balancing practicalities and resources required against the need for quality, comparable reporting, for example, more challenging aspects such as scenario analysis could be brought in later (and phasing also when the standards are adopted at jurisdictional level, perhaps with the largest corporates brought in first to generate best practice (as was the case with TCFD reporting in the UK)); and/or
  • especially where such phasing is impracticable (for example, if climate goals necessitate earlier implementation), there is a need for an appropriately flexible enforcement regime at jurisdictional level that accepts that compliance with these standards will potentially be a journey for reporting entities and there will (at least initially) be a lack of comparability/divergence of practice between reporting entities as best practice evolves along with the development of better technology, metrics etc.

As mentioned above, there is scope for more detailed non-mandatory application guidance (including practical examples) on some aspects of the proposed Standard (for example in relation to ‘trade-offs’ – see Q6(a) below), to support consistent application and help corporates deal with the magnitude of the task facing them. We also acknowledge that further work is needed to ensure that the SASB standards are appropriately internationalised, and we note SASB’s ongoing research project to identify the topics and metrics across industry standards that are not currently globally applicable.

The development of application guidance and best practice could be facilitated by establishing a Sustainability Reporting ‘Lab’ - like the UK FRC’s Financial Reporting Lab (https://www.frc.org.uk/financial-reporting-lab) - where corporates and investors can come together in a ‘safe space’ to share ideas and innovate about the best way to meet information needs. (See also Q7b and our response to IFRS S2 (Climate).)

Balance between principles and prescription

We believe there is a balance to be struck between, on the one hand, the need for disclosure requirements to be high level/principles-based and the benefit that many companies might perceive in being offered a clear template to follow. The advantages of the high level/principles-based approach include that it would:

  • allow continuity of approach among entities that are already identifying and reporting on their sustainability-related risks and opportunities; and
  • ensure the Standards ‘stand the test of time’, especially in relation to metrics/targets that will constantly evolve.

On the other hand, there is a potential benefit in clear guidance to assist corporates that are beginning their sustainability reporting journey. However, it is also important to remember that, while methodologies and knowledge continue to develop, it could be counter-productive to set granular mandatory disclosure requirements, and it is important not to turn sustainability reporting into a box-ticking, compliance exercise.

In our view, the right balance can be struck with high level, principles-based sustainability-related financial disclosure requirements that are underpinned by more detailed non-mandatory guidance (including practical examples), to help corporates comply without disproportionate burden or cost.

In our view, the ISSB has sought to find a balance within the Exposure Drafts, with the high level disclosure requirements in the Exposure Drafts underpinned by the supporting non-mandatory Illustrative Guidance for IFRS S1 and, for example, the Illustrative Guidance for the cross-industry metrics in IFRS S2. However, in our view, the Standard should make it clearer that the disclosure topics and associated metrics in the Appendices to the IFRS Sustainability Standards (for example, Appendix B in IFRS S2) are incorporated on a non-mandatory basis, because mandating these disclosure topics and accompanying metrics would be overly prescriptive as companies should determine themselves which topics and metrics are most relevant to their business. Similarly, the Exposure Drafts refer to other sources that include “the disclosure topics in the industry-based Sustainability Accounting Standards Board (SASB) Standards, the ISSB’s non-mandatory guidance (such as the CDSB Framework application guidance for water- and biodiversity-related disclosures), the most recent pronouncements of other standard-setting bodies whose requirements are designed to meet the needs of users of general purpose financial reporting, and the sustainability-related risks and opportunities identified by entities that operate in the same industries or geographies (para 51)”, which should also be applicable on a non-mandatory basis.

Primary users

As stated in our introductory remarks, the Investor Relations Society primarily exists to serve the interests of its members who are typically working for publicly listed companies, or for their advisers, to assist them in their communications with investors and the wider markets. In that context, whilst we fully recognise that wider stakeholders (such as employees, suppliers, customers, governments, regulators, other NGOs and local communities) will be interested in an entity’s sustainability-related risks and opportunities, we support the approach that the ISSB has taken in defining the primary users as investors and lenders, as we agree they are a sensible proxy for an entity’s wider stakeholders, otherwise they risk becoming too unwieldly and diverse (see also our answer at Q2(a) below). This disclosure of sustainability-related financial information will enable investors to assess more rigorously the sustainability-related risks and opportunities affecting the enterprise value of their current and potential investee companies, allowing them to integrate this into their investment decision-making by providing them with key decision data and enabling them to hold companies to account.

Materiality

We agree with the ISSB’s definition of materiality in this context, which focuses on sustainability-related financial information affecting enterprise value (the “outside in” approach), rather than requiring double materiality that would include the second “inside out” pillar dealing with an entity’s impacts on economies, society and the environment, as used in the GRI standards. The IR Society believes the global baseline for sustainability reporting requirements established by the ISSB should form the first building block for sustainability reporting, with any additional jurisdictionally-specific and/or wider stakeholder or “impact” reporting built on top of those ISSB requirements under the ‘building blocks’ approach advocated by the ISSB. Please also Q8 below.  

In our experience, materiality in the context of sustainability issues is often dynamic, i.e. changes over time, so sustainability risks and opportunities may also change over time and new risks or opportunities can emerge. Therefore, organisations need to keep a ‘watching brief’ over what is a material sustainability risk, and further supporting guidance on this would be useful. This reinforces the point we make above (see ‘Support for global baseline’) that the ISSB needs be aligned with other standard setters regarding definitions.

Reporting entity/control

We suggest the ISSB’s sustainability-related financial disclosure requirements should recognise that it can be difficult and may not always be possible for reporting entities to control or obtain complete and accurate, or even estimated, data relating to all sustainability-related risks and opportunities from entities in the value chains that are beyond the reporting entity’s effective control, either operationally or through equity ownership. Similarly, it can be very difficult to control or obtain this data from others in the value chain such as suppliers/customers. We therefore suggest permitting such reporting entities to explain why they don’t have effective control and/or why they have been unable to obtain the data where estimates are disclosed. This is particularly likely to be an issue in the shorter term, when the necessary data flows have yet to be embedded in systems or reflected in contracts/commercial relationships. In addition, in our view the definition of ‘value chain’ is not entirely clear and needs clarification. (See also Q5 below.)

Location of disclosure

In our view, reporting entities should be given the flexibility to choose whether to include all their sustainability-related financial disclosure within the annual report and accounts, or also to publish it in a standalone document(s) provided the core information is still required to be included within the annual report and accounts, so that it remains the single source for all key disclosures. Therefore, we support the approach taken by the ISSB in paragraphs 72-78 (see also Q10a below). We are already aware of practical variations between large companies or those in particular sectors who wish to publish more detailed sustainability-related information, for example with their Sustainability reporting spread across the annual report and accounts, a Climate Report and a third separate broader Sustainability or ESG Report, compared with other companies, often smaller ones, where it is all in the Annual Report. (See also Q10 below.) 

Answers to specific questions

1. Overall Approach

(a) Does the Exposure Draft state clearly that an entity would be required to identify and disclose material information about all of the sustainability-related risks and opportunities to which the entity is exposed, even if such risks and opportunities are not addressed by a specific IFRS Sustainability Disclosure Standard? Why or why not? If not, how could such a requirement be made clearer?

As mentioned in our general comments above, we welcome your initiative to provide an international set of sustainability reporting standards, and we support the decision of the ISSB to base its draft Standards on those developed by the Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB).

We note the Exposure Draft states that an entity would be required to identify and disclose material information about all the significant sustainability-related risks and opportunities to which the entity is exposed, even if such risks and opportunities are not addressed by a specific IFRS Sustainability Disclosure Standard (our emphasis). In our view, not all risks/opportunities should be required to be disclosed, as it is not practicable to expect entities to consider/disclose every conceivable risk or opportunity related to every sustainability matter. We therefore support the proposal in the Exposure Draft of requiring disclosure of material information about significant risks/opportunities. However, there is an opportunity for more specificity around some of the language used in the Exposure Drafts to enable corporates to interpret/implement the requirements more easily (and we note this will also facilitate the jurisdictional endorsement/enforcement and assurance/audit of the Standards), for example, the term ‘significant’ needs to be clearer/better defined.  

(b) Do you agree that the proposed requirements set out in the Exposure Draft meet its proposed objective (paragraph 1)? Why or why not?

See our answer to Q1a above.

(c) Is it clear how the proposed requirements in the Exposure Draft would be applied together with other IFRS Sustainability Disclosure Standards, including the [draft] IFRS S2 Climate-related Disclosures? Why or why not? If not, what aspects of the proposals are unclear?

We agree with other respondents that more clarity is needed on the interaction between the two Standards. For example, there is currently some duplication of requirements under the two Standards that should be removed, and it could be made clearer how/where interrelated disclosures should be made under IFRS S1 and other Standard(s).

(d) Do you agree that the requirements proposed in the Exposure Draft would provide a suitable basis for auditors and regulators to determine whether an entity has complied with the proposals? If not, what approach do you suggest and why?

We broadly agree that the requirements proposed in the Exposure Draft would provide a suitable basis for auditors and regulators to determine whether an entity has complied with the proposals. However, please see our comments at Q1a above regarding the definition of significant ‘sustainability-related financial information’ needing to be clearer and at Q5(b) below regarding the definition/scope of an entity’s ‘value chain’, which could be challenging for assurance and enforcement.

2. Objective (paragraphs 1–7)

The Exposure Draft focuses on information about significant sustainability-related risks and opportunities that can reasonably be expected to have an effect on an entity’s enterprise value.

(a) Is the proposed objective of disclosing sustainability-related financial information clear? Why or why not?

We support the focus on the primary users of general purpose financial reporting. The Investor Relations Society primarily exists to serve the interests of its corporate clients and adviser members in their communications with investors and the wider markets. Whilst we recognise that wider stakeholders (such as employees) will be interested in an entity’s sustainability-related risks and opportunities, we support the approach that the ISSB has taken in defining the primary users as investors and lenders, as we agree they are a sensible proxy for an entity’s wider stakeholders.

(b) Is the definition of ‘sustainability-related financial information’ clear (see Appendix A)? Why or why not? If not, do you have any suggestions for improving the definition to make it clearer?

Please see our comment at Q1(a) above.

3. Scope (paragraphs 8–10)

Do you agree that the proposals in the Exposure Draft could be used by entities that prepare their general purpose financial statements in accordance with any jurisdiction’s GAAP (rather than only those prepared in accordance with IFRS Accounting Standards)? If not, why not?

We agree with the ISSB’s approach that the Exposure Drafts could be applied by entities preparing their general purpose financial statements with any jurisdiction’s GAAP, rather than limiting it to, for example, those reporting under IFRS.

4. Core Content (paragraphs 11–35)

(a) Are the disclosure objectives for governance, strategy, risk management and metrics and targets clear and appropriately defined? Why or why not?

Whilst extensive, these disclosure objectives seem fairly clear.

(b) Are the disclosure requirements for governance, strategy, risk management and metrics and targets appropriate to their stated disclosure objective? Why or why not?

Whilst extensive, the requirements seem appropriate to the stated objectives.

5. Reporting Entity (paragraphs 37–41)

The Exposure Draft proposals (para 2) would require an entity to disclose material information about all of the significant sustainability-related risks and opportunities to which it is exposed. Such risks and opportunities relate to activities, interactions and relationships and use of resources along its value chain such as:

  • its employment practices and those of its suppliers, wastage related to the packaging of the products it sells, or events that could disrupt its supply chain;
  • the assets it controls (such as a production facility that relies on scarce water resources);
  • investments it controls, including investments in associates and joint ventures (such as financing a greenhouse gas-emitting activity through a joint venture); and
  • sources of finance.

Para 41 provides that ‘Other IFRS Sustainability Disclosure Standards will specify how an entity is required to disclose or measure its significant sustainability-related risks and opportunities, including those related to its associates, joint ventures and other financed investments, and those related to its value chain.’

The Exposure Draft also proposes that an entity disclose the financial statements to which sustainability-related financial disclosures relate.

(a) Do you agree that the sustainability-related financial information should be required to be provided for the same reporting entity as the related financial statements? If not, why?

We support this proposal as it facilitates integrated analysis by investors.

(b) Is the requirement to disclose information about sustainability-related risks and opportunities related to activities, interactions and relationships, and to the use of resources along its value chain, clear and capable of consistent application? Why or why not? If not, what further requirements or guidance would be necessary and why?

We note that the Basis for Conclusions (BFC) document on General Requirements, paragraphs BC49-53, covers the ‘Reporting Entity’, and the principle is sustainability-related financial disclosures be as close as possible in boundaries to the financial statements; i.e. that “an entity be required to disclose sustainability-related financial information for the same reporting entity for which it prepares its general purpose financial statements.” The BFC points out that while JVs and affiliates are not part of the reporting entity, “just as financial statements recognise these investments and report aspects of the performance of associates and joint ventures, sustainability-related financial information related to those investments is relevant to the users of general-purpose financial reporting in assessing the enterprise value of the reporting entity.

It is important to note that there can be practical issues around control, and therefore it can be very difficult for reporting entities to obtain the data (such as emissions data) from other entities in the value chain including associates, joint ventures, unconsolidated subsidiaries or affiliates, and suppliers/customers. For example, they could be relevant for reporting on water- and/or pollution-related risks.

Therefore, we suggest IFRS S1 should recognise that it can be difficult and may not always be possible for reporting entities to obtain complete and accurate, or even estimated, data on all sustainability-related risks and opportunities from such affiliates, JVs and franchisees that are beyond the reporting entity’s effective control, either operationally or through equity ownership, and thus permit such reporting entities under these circumstances to explain why they don’t have effective control and/or why they have been unable to obtain the data. This may be more of an issue in the shorter term, when the necessary data flows have yet to be embedded in systems or reflected in contracts/commercial relationships.

In addition, in our view the definition of ‘value chain’ is not entirely clear and needs clarification.The proposals require entities to report on relevant matters across their value chains, but the value chain is a very broad concept, going beyond the reporting entity, and therefore more guidance is needed to help entities understand how far up and down the value chain they need to look to identify relevant information.

(c) Do you agree with the proposed requirement for identifying the related financial statements? Why or why not?

We agree with this proposal because such linkages are likely to be helpful to investors that are trying to take an integrated approach to their investment decisions.

6. Connected Information (paragraphs 42–44)

The Exposure Draft proposes that an entity be required to provide users of general purpose financial reporting with information that enables them to assess the connections between (a) various sustainability-related risks and opportunities; (b) the governance, strategy and risk management related to those risks and opportunities, along with metrics and targets; and (c) sustainability-related risks and opportunities and other information in general purpose financial reporting, including the financial statements.

(a) Is the requirement clear on the need for connectivity between various sustainability-related risks and opportunities? Why or why not?

Consideration of sustainability-related risks and opportunities needs to be fully integrated and embedded within the business in order for reporting on those risks/opportunities to be successful/meaningful, and therefore we agree it will be important (in fact, essential) to have connectivity between sustainability-related risks and opportunities and the governance, strategy and risk management related to those risks and opportunities, along with their associated metrics and targets. We also agree there should be connectivity/consistency between sustainability-related risks and opportunities and other information in general purpose financial reporting, including the financial statements (see Q6(b) below). See also our general comments above on ‘location of information’ and at Q10 below regarding the clear need for consistency between sustainability reporting and all other information/disclosure in the annual report (which is especially important where sustainability disclosures are contained in a standalone document, with appropriate cross-referencing).

However, the wording in paragraph 42 requires clarification to make it clear that reporting entities are not required to disclose the connectivity between all sustainability-related risks and opportunities. We note that paragraph 42 provides that “an entity shall 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” [our emphasis] and paragraph 43 provides that “an entity shall provide information that enables users of general purpose financial reporting to assess the connections between various sustainability-related risks and opportunities”. Whilst we acknowledge some sustainability risks are interrelated ( for example, it may be appropriate to consider climate and biodiversity together where there is a significant and material interrelationship between certain climate- and biodiversity-related risks and opportunities), requiring such linkage to be disclosed between all the various different sustainability-related risks and opportunities is impracticable because it could become circular, and the required disclosures would expand substantially. We therefore suggest that consideration and disclosure of linkage between different sustainability-related risks and opportunities should be required where the connection/interrelationship between them is significant and material to enterprise value.

We also encourage the ISSB to consider providing further guidance and clarification on ‘trade-offs’: in the proposals, preparers are expected to explain the relationships and trade-offs that may arise between various sustainability-related risks and opportunities. In the absence of further direction, preparers may assess trade-offs in very different ways.

(b) Do you agree with the proposed requirements to identify and explain the connections between sustainability-related risks and opportunities and information in general purpose financial reporting, including the financial statements? Why or why not? If not, what do you propose and why?

We agree it is important for there to be connectivity between sustainability-related risks and opportunities and other information in general purpose financial reporting, including the financial statements, so that the annual report tells a cohesive story.

In our view, the linkage of information to management commentary or an equivalent framework would provide essential context. Therefore, the ISSB should consider how these Standards relate to the future direction of the International Integrated Reporting Framework under the IFRS Foundation and the IASB’s project on Management Commentary.

7. Fair Presentation (paragraphs 45–55)

(a) Is the proposal to present fairly the sustainability-related risks and opportunities to which the entity is exposed, including the aggregation of information, clear? Why or why not?

(b) Do you agree with the sources of guidance to identify sustainability-related risks and opportunities and related disclosures? If not, what sources should the entity be required to consider and why? Please explain how any alternative sources are consistent with the proposed objective of disclosing sustainability-related financial information in the Exposure Draft.

As mentioned in our general comments above regarding the ‘Balance between principles and prescription’, in our view mandating the disclosure topics in the Appendices to the IFRS Sustainability Standards (for example, Appendix B in IFRS S2) would be overly prescriptive as companies should determine themselves which topics are most relevant to their business. The Standards should therefore make it clearer (at paragraphs 50-55) that the disclosure topics are incorporated on a non-mandatory basis. Similarly, we would suggest non-mandatory application for the other sources referred to in the Exposure Draft that include “the disclosure topics in the industry-based Sustainability Accounting Standards Board (SASB) Standards, the ISSB’s non-mandatory guidance (such as the CDSB Framework application guidance for water- and biodiversity-related disclosures), the most recent pronouncements of other standard-setting bodies whose requirements are designed to meet the needs of users of general purpose financial reporting, and the sustainability-related risks and opportunities identified by entities that operate in the same industries or geographies (para 51)”.

8. Materiality (paragraphs 56– 62)

(a) Is the definition and application of materiality clear in the context of sustainability-related financial information? Why or why not?

The Exposure Draft provides that “The assessment of materiality shall be made in the context of the information necessary for users of general purpose financial reporting to assess enterprise value” and Enterprise value is defined as “the total value of an entity. It is the sum of the value of the entity’s equity (market capitalisation) and the value of the entity’s net debt”. We agree with the ISSB’s definition of materiality, which focuses on sustainability-related financial information affecting enterprise value (the “outside in” approach), rather than requiring double materiality that would include the second “inside out” pillar dealing with an entity’s impacts on economies, society and the environment, as used in the GRI standards. The IR Society believes the global baseline for sustainability reporting requirements established by the ISSB should form the first building block for sustainability reporting, with any additional jurisdictionally-specific and/or wider stakeholder reporting built on top of those ISSB requirements under the ‘building blocks’ approach advocated by the ISSB. Therefore, in our view, the ISSB’s requirements to disclose information relevant to the users of general purpose financial reporting in assessing the enterprise value of the reporting entity is the first building block, and it will be the choice of individual jurisdictions whether, in addition to mandating the ISSB standards, they also mandate additional impact materiality reporting (for example, under the GRI reporting framework) if they wish reporting entities to provide such wider reporting for investors and other stakeholders on corporate impacts on economies, society and the environment.

(b) Do you consider that the proposed definition and application of materiality will capture the breadth of sustainability-related risks and opportunities relevant to the enterprise value of a specific entity, including over time? Why or why not?

In our experience, materiality in the context of sustainability issues is often dynamic, i.e. changes over time, so sustainability risks and opportunities may also change over time and new risks or opportunities can emerge. Therefore, organisations need to keep a ‘watching brief’ over what is a material sustainability risk, and further supporting guidance on this would be useful. This also reinforces the point we make above (see ‘Support for global baseline’) that the ISSB needs be aligned with other standard setters regarding definitions.

(c) Is the Exposure Draft and related Illustrative Guidance useful for identifying material sustainability-related financial information? Why or why not? If not, what additional guidance is needed and why?

Please see our comment at Q8(b) above regarding the need for further guidance on ‘dynamic’ materiality.

(d) Do you agree with the proposal to relieve an entity from disclosing information otherwise required by the Exposure Draft if local laws or regulations prohibit the entity from disclosing that information? Why or why not? If not, why?

We support this proposal.

9. Frequency of Reporting (paragraphs 66–71)

Do you agree with the proposal that the sustainability-related financial disclosures would be required to be provided at the same time as the financial statements to which they relate? Why or why not?

As we mention in our comments at Q10 below, key information on sustainability-related financial disclosures affecting enterprise value should be included within the annual report and accounts to ensure it remains a cohesive and comprehensive narrative. We therefore agree with the proposal that such key sustainability-related financial disclosures would be required to be provided at the same time and for the same period as the financial statements to which they relate, which would promote an integrated approach by investors. We note that companies are using a growing proportion of sustainability related information in their reporting and results day announcements anyway, so it is logical that it should be produced at the same time. For completeness however, if reporting entities choose to expand on the key sustainability-related financial disclosures made in the annual report and accounts by publishing more detailed sustainability-related information (for example, Sustainability or ESG Reports), any such additional reports should not be required to published at the same time.

10. Location of Information (paragraphs 72–78)

(a) Do you agree with the proposals about the location of sustainability-related financial disclosures? Why or why not?

As mentioned in our general comments above, in our view, the annual report and accounts (ARA) should remain the single source for all key disclosures. However, reporting entities should also be given the flexibility to choose between including all of their sustainability-related financial disclosure within the ARA (which may suit many smaller reporting entities), or also to publish it in a standalone document(s). The latter is already the approach of many larger reporting entities or those in particular sectors who wish to publish more detailed sustainability-related information. For example, the ESG/Sustainability Report is a potential place to expand on sustainability-related financial disclosures made in the ARA, and we are aware of some companies that also issue a separate climate report (in addition to an ESG/Sustainability Report and their ARA). The proviso should be in our view that the core information is still required to be included within the ARA. This should ensure that the ARA remains a cohesive and comprehensive narrative, with appropriate cross-referencing to the sustainability-related financial disclosure elsewhere, but allows larger companies to publish more detailed information without over expanding their ARA.

(b) Are you aware of any jurisdiction-specific requirements that would make it difficult for an entity to provide the information required by the Exposure Draft despite the proposals on location?

We are not aware of any jurisdiction-specific requirements that would make it difficult for an entity to provide the required information.

(c) Do you agree with the proposal that information required by IFRS Sustainability Disclosure Standards can be included by cross-reference provided that the information is available to users of general purpose financial reporting on the same terms and at the same time as the information to which it is cross-referenced? Why or why not?

See our answer at Q10a above. In our view, the annual report and accounts should remain the single source for all key disclosures, and therefore all core sustainability-related financial information should still be required to be included within the annual report and accounts to ensure that the ARA remains a cohesive and comprehensive narrative.

(d) Is it clear that entities are not required to make separate disclosures on each aspect of governance, strategy and risk management for individual sustainability-related risks and opportunities, but are encouraged to make integrated disclosures, especially where the relevant sustainability issues are managed through the same approach and/or in an integrated way? Why or why not?

Yes, paragraph 78 makes it clear that entities should avoid duplication and, for example, integrate governance information rather than making separate governance disclosures for each risk/opportunity. Similarly in Appendix C, which sets out the characteristics of useful information, paragraph C26 also states that disclosures should be clear and concise, which includes avoiding unnecessary duplication of information.

11. Comparative information, sources of estimation and outcome uncertainty, and errors (paragraphs 63–65, 79–83 and 84–90)

(a) Have these general features been adapted appropriately into the proposals? If not, what should be changed?

We support the inclusion of the helpful acknowledgement in paragraph 79 of the Exposure Draft that the “use of reasonable estimates is an essential part of preparing sustainability-related metrics”, and that this “does not undermine the usefulness of the information if the estimates are accurately described and explained”.

We also support the proposed requirement in paragraph 83 to disclose information about assumptions made about the future, and other sources of significant uncertainty, related to the information disclosed about the possible effects of sustainability-related risks or opportunities, when there is significant outcome uncertainty. Reporting entities should outline the assumptions they are making, for example, to make it clear where they are relying on technology that is not yet available or commercial.

Regarding comparative information, we note there is a requirement to disclose prior year comparatives but we are aware that in certain circumstances it is not possible or practicable to do so (for example, where the method of reporting has changed. We are therefore supportive of the approach set out in paragraph 65: “Sometimes, it is impracticable to adjust comparative information for one or more prior periods to achieve comparability with the current period. For example, data might not have been collected in the prior period(s) in a way that allows either retrospective application of a new definition of a metric or target or retrospective restatement to correct a prior period error, and it may be impracticable to recreate the information. When it is impracticable to adjust comparative information for one or more prior periods, an entity shall disclose that fact.”.

(b) Do you agree that if an entity has a better measure of a metric reported in the prior year that it should disclose the revised metric in its comparatives?

Yes, given that this area is in flux and new improved metrics may emerge over time, we agree that (except when this would be impracticable) entities should disclose revised metrics in its comparatives if better measures are identified.

(c) Do you agree with the proposal that financial data and assumptions within sustainability-related financial disclosures be consistent with corresponding financial data and assumptions used in the entity’s financial statements to the extent possible? Are you aware of any circumstances for which this requirement will not be able to be applied?

We agree, although the Standard should explicitly acknowledge that some sustainability-related financial disclosures and assumptions may not qualify for recognition or require disclosure in the financial statements.

12. Statement of Compliance (paragraphs 91–92)

The Exposure Draft proposes that for an entity to claim compliance with IFRS Sustainability Disclosure Standards, it would be required to comply with the proposals in the Exposure Draft and all of the requirements of applicable IFRS Sustainability Disclosure Standards. Furthermore, the entity would be required to include an explicit and unqualified statement that it has complied with all of these requirements.

The Exposure Draft proposes a relief for an entity. It would not be required to disclose information otherwise required by an IFRS Sustainability Disclosure Standard if local laws or regulations prohibit the entity from disclosing that information. An entity using that relief is not prevented from asserting compliance with IFRS Sustainability Disclosure Standards.

Do you agree with this proposal? Why or why not? If not, what would you suggest and why?

As we mention at Q5(a) in our comment letter for IFRS S2, we are aware that international regulatory and/or legal restrictions can give rise to difficulties in disclosing information, and we therefore support this proposal for relief from disclosing such prohibited information.

13. Effective Date (Appendix B)

(a) When the ISSB sets the effective date, how long does this need to be after a final Standard is issued? Please explain the reason for your answer, including specific information about the preparation that will be required by entities applying the proposals, those using the sustainability-related financial disclosures and others.

As we mention in our general comments above regarding ‘Degree of flexible implementation’, there is a need to balance the need for comparable disclosures with the practicalities of implementation and compliance, in light of the very significant workload implications for reporting entities in terms of the resources (time, effort, systems and coordination) that will be required across all areas and aspects of the reporting entity’s’ operations, given sustainability-related risks and opportunities extend across businesses. This burden is likely to be especially marked for reporting entities that are at the beginning of their sustainability reporting journey and that may also currently lack the required skills and expertise. This could to some extent be mitigated by inter alia phased implementation by the ISSB (for example, more challenging aspects such as scenario analysis could be brought in later), and phasing also when the standards are adopted at jurisdictional level, perhaps with the largest corporates brought in first to generate best practice (as was the case with TCFD reporting in the UK).

(b) Do you agree with the ISSB providing the proposed relief from disclosing comparatives in the first year of application? If not, why not?

Yes, we agree.

14. Global Baseline

Are there any particular aspects of the proposals in the Exposure Draft that you believe would limit the ability of IFRS Sustainability Disclosure Standards to be used in this manner? If so, what aspects and why? What would you suggest instead and why?

Please see our general comments above regarding our support for a global baseline for sustainability reporting requirements to apply as widely as possible and the need for international collaboration to create a consistent approach across markets in order to optimise reporting efficiency for companies falling under multiple reporting regimes. It is also important to ensure that there is alignment between these various differing reporting regimes, including that only one set of underlying data is required that should not need to be re-cut in order to comply with different reporting regimes, to help corporates comply without disproportionate burden or cost.  We therefore support the decision of the ISSB to base its draft Standards on those developed by the Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB).

15. Digital Reporting

Do you have any comments or suggestions relating to the drafting of the Exposure Draft that would facilitate the development of a Taxonomy and digital reporting (for example, any particular disclosure requirements that could be difficult to tag digitally)?

We note the ISSB is currently consulting on this, which we will consider in due course.

16. Costs, Benefits, & Likely Effects

(a) Do you have any comments on the likely benefits of implementing the proposals and the likely costs of implementing them that the ISSB should consider in analysing the likely effects of these proposals?  

As mentioned above, in our view, requiring disclosure of sustainability-related financial information is necessary to enable investors to assess the sustainability-related risks and opportunities affecting the enterprise value of their current and potential investee companies, allowing them to integrate this into their investment decision-making by providing them with key decision data and enabling them to hold companies to account. We therefore support these proposed disclosure requirements. A flexible and phased introduction of reporting requirements could assist in meeting the need to manage the challenge and associated cost. It would allow companies to build their internal capability in a proportionate fashion (see Q13 and Q14 above).

(b) Do you have any comments on the costs of ongoing application of the proposals that the ISSB should consider?

We reiterate our comments above regarding the need for international collaboration to create a consistent approach across markets in order to optimise reporting efficiency for companies falling under multiple reporting regimes. It is also important to ensure that there is alignment between these various differing reporting regimes, including that only one set of underlying data is required that should not need to be re-cut in order to comply with different reporting regimes, to help corporates comply without disproportionate burden or cost.  

17. Other Comments

We have no further comments

We hope you find these comments useful. Please do not hesitate to make contact if you have any questions.

Your sincerely,

Nigel Pears

Chair of the Investor Relations Society’s Policy Committee

(Email: enquires@irsociety.org.uk, Tel: + 44 (0) 20 7379 1763)

Published 1 August, 2022

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