General Sustainability-related Disclosures

Date recorded:

Cover note and summary of redeliberations (Agenda Paper 3)

At this meeting, the ISSB continued redeliberating the proposals in the Exposure Draft IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information ([draft] S1), including the concept of value, the identification of sustainability-related risks and opportunities, and materiality judgements.

Fundamental Concepts (Agenda Paper 3A)

The staff sought decisions from the ISSB on below recommendations to build on the feedback and tentative decisions from the Octocber ISSB meeting.

Part 1: Value and sustainability

Staff recommendation 1—Clarify the framing and objective of [draft] S1 to:

  • Describe how the value created, preserved or eroded for an entity is inextricably linked to other stakeholders, society and the natural environment
  • Describe how an entity relies on these resources and relationships to create value for itself and providers of financial capital
  • Describe how, in interacting with these resources, an entity creates impacts and dependencies on them, which may positively or negatively affect the resources and relationships, and give rise to sustainability-related risks and opportunities that the entity is exposed to
  • Describe how sustainability-related risks and opportunities can affect the entity’s performance or prospects, influence its business model or strategy and create or erode the value of the entity or the returns for providers of financial capital over the short, medium and long term

Part 2: Identification of sustainability-related risks and opportunities and assessment of material information

Staff recommendation 2—Amend the [draft] S1 Illustrative Guidance to further expand and clarify how to identify sustainability-related risks and opportunities and how to assess and disclose material sustainability-related financial information to meet the objective and requirements of [draft] S1. The staff recommend expanding and clarifying the illustrative guidance by specifically addressing the following:

  • Clarify the distinction and connection between identifying sustainability-related risks and opportunities that an entity needs to provide information about and disclosing material sustainability-related financial information (i.e. a two-step process)
  • Provide further illustration on the identification of sustainability-related risks and opportunities to provide information about material sustainability-related financial information (the first step in the two-step process) by providing a general description, describing the factors and inputs to consider, illustrating a process that could be used as an example and emphasising which types of risks and opportunities to provide information about
  • Provide further illustration on making materiality judgements in the context of sustainability-related financial disclosures (the second step in the two-step process) by discussing management judgement and entity-specific circumstances, primary users and the decisions they make, and making judgements in light of uncertain outcomes

Staff recommendation 3—Amend the [draft] S1 Illustrative Guidance by drawing on existing market resources (such as the SASB Implementation Primer) to provide further illustration of how preparers may approach the two-step process articulated above when their business activities span multiple industries (i.e. identifying sustainability-related risks and opportunities for disclosure and making materiality judgments). More specifically, the staff recommend amending the ‘Industry-based SASB Standards’ section of the illustrative guidance to add a specific example for how a conglomerate can use SASB Standards to inform the identification of sustainability-related risks and opportunities and the selection of metrics and other information.

ISSB discussion

Staff recommendation 1

All ISSB members agreed with the staff recommendation 1 but provided the following comments at the same time:

  • The “two concepts of value” as set out in the paper may create a communication gap between the entity and its stakeholders and may also not be helpful for preparers. All ISSB members suggested that the staff focus on value as a whole rather than creating a subset of values
  • Natural environment should not be considered as one of the other stakeholders and a reporting entity could not create value for nature. Therefore, all members agreed that nature should be removed from the concept of value
  • One member received many comments from the Japanese market after the ISSB decided to remove enterprise value from [draft] S1 and the comments expressed concerns on what alternatives would be used to replace enterprise value. He considered ‘value for other stakeholders’ to be too broad for capital markets and it should therefore be redefined
  • Some members stated that “capitals” as defined in the Integrated Reporting Framework (“IR Framework”) may create confusion for certain stakeholders who are not familiar with the IR framework, and therefore, it may not be globally and generally accepted
  • One member further questioned the difference between “capitals” and the “resources and relationships” stated in the [draft] S1. Another member also said that “capitals” should be well defined in [draft] S1 rather than merely adding a reference in illustrative guidance. The staff agreed to focus on “resources and relationships” rather than “capitals”
  • All members emphasised the importance of time horizons and said that the current staff paper lacks sufficient discussion on this area. They asked for a more thorough analysis in a future paper
  • The term “financial users” should be used rather than “financial capital”. One of the Vice-Chairs supplemented that it could also interpreted as “primary users of financial statements”
  • The staff was advised to describe the notion of sustainability rather than providing a definition. Sustainability will be described in IFRS S1 as the ability for a company to sustainably maintain resources and relationships with and manage its dependencies and impacts within its whole business ecosystem over the short, medium and long term
  • One member expressed concerns on disclosing sustainability information related to culture which is not easy to measure and asked the staff to further consider this
  • One of the Vice-Chairs asked for an interim opportunity for all ISSB members to read the draft before the [draft] S1 is finalised

Staff recommendations 2 and 3

All ISSB members agreed with the staff recommendations 2 and 3 but provided comments as follows at the same time:

  • ISSB members generally supported the guidance and illustration proposed for the two-step process and said it would be useful for preparers. However, a few ISSB members said that the concept of materiality was inseparable from the first step and the [draft] S1 should highlight that the materiality assessment would apply for the entire [draft] S1. A few ISSB members also suggested drafting to the staff for capturing culture within the process. All ISSB members agreed with these views and suggestions
  • One of the Vice-Chairs explained why the ISSB would like to emphasise the concept of materiality. This is because she observed much misunderstanding from the market for the differences between mandatory disclosure and required disclosure if the information is material. She further used [draft] S2 as an example and explained that a reporting entity may consider whether it needs to provide climate information as a first step and decide upon disclosing which particular piece of information (e.g. Scope 1, 2 or 3 emission) could influence investors decisions in a second step
  • Reporting entities should acknowledge that the two-step process was only a tool and it should be their responsibility to apply judgement on their entity-specific materiality assessment
  • All ISSB members agreed that recommendation 3 should not be jurisdictional or conglomerate- focused. Instead, it should be a wider concept that may even support smaller entities
  • One ISSB member suggested that the staff further develop the ISSB’s own principles and concepts instead of making references to other standards. One of the Vice-Chairs confirmed that the staff was working on that
  • One ISSB member suggested that the staff should further consider adding company responses to risks and opportunities to [draft] S1. [Draft] S1 should require explanations on entity-specific decisions and strategies
  • The staff confirmed they would work closely with the IASB’s Management Commentary project team to ensure that there is no contradicting language within IFRS Sustainability Disclosure Standards. One of the Vice-Chairs then confirmed that the progress of the IASB’s Management Commentary project would not affect the issuance of IFRS Sustainability Disclosure Standards

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