Cover note and summary of redeliberations (Agenda Paper 3)

At this meeting, the ISSB continued redeliberating the proposals in Exposure Draft (ED) IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, including an update to the plan for redeliberations for IFRS S1 and initiating redeliberations on fundamental concepts relating to proposals on materiality and enterprise value, use of the term “significant” and breadth of reporting, including value chain.

Additionally, the ISSB was asked to make decisions on aspects of IFRS S1 that are likely to influence the interoperability with jurisdictional requirements, including those in the European Financial Reporting Advisory Group’s (EFRAG) European Sustainability Reporting Standards (ESRS). Finally, the staff was presented for discussion by the ISSB a range of considerations related to industry-based requirements, which may have implications on the role of the SASB Standards in IFRS S1.

Update to the plan for redeliberations (Agenda Paper 3A)

At the September 2022 ISSB meeting, the ISSB tentatively agreed a number of topics for redeliberating IFRS S1 and ED IFRS S2 Climate-related Disclosure. In addition to the topics tentatively agreed, the ISSB also suggested the staff reconsider bringing back one further topic on the requirement to disclose comparative information that reflects updated estimates for redeliberation (paragraphs 63-65 of [draft] IFRS S1).

Respondents to the consultation on IFRS S1 raised potential challenges in meeting this requirement, in particular, respondents:

• Raised the complexity and burden associated with updating estimates for previous periods
• Queried why the proposal is not aligned with IAS 8 which requires a change in estimate to be reported in the current period and prospectively
• Questioned whether it is most decision-useful to provide comparative information to reflect updated estimates given that sustainability-related financial information is often based on estimates

Following feedback from the ISSB and respondents to the consultation, the staff proposed that the ISSB updates its plan for redeliberations to reconsider the requirement to disclose comparative information that reflects updated estimates. At this meeting, the ISSB was asked for any comments or questions on this additional topic proposed for redeliberation.

ISSB discussion

All ISSB members agreed to add the additional topic for redeliberation. They acknowledged the concerns raised by respondents and considered that the extent of disclosure on changes in estimate and clarity on differences between errors and changes in estimate should be further explained in future

Fundamental concepts (Agenda Paper 3B)

This paper discussed the use of fundamental concepts and terms within IFRS S1 which includes description of matters raised in consultation period feedback and staff’s recommendations. At this meeting, the ISSB was asked for feedback and decisions on the below matters to provide further clarity on a path to more comprehensive decisions at a future ISSB meeting.

Part 1: Materiality and enterprise value

Respondents' feedback centred around the concepts of “materiality” and “enterprise value” and how they should be applied to identify and assess decision useful information for disclosure. In the redeliberations of fundamental concepts of IFRS S1, the staff recommended that the ISSB:

• Consider whether the ISSB should revise IFRS S1 to maintain more consistent definition and language with the IASB Conceptual Framework
• Consider whether the term ‘enterprise value’ should continue to serve as a fundamental concept in IFRS S1
• Discuss whether further guidance and resources are needed to clarify the scope of sustainability-related risks and opportunities and the application of the materiality assessment

The ISSB does not have a separate conceptual framework and the definition of ISSB materiality was developed based on the objective and definitions of “material” and “materiality” in the IASB’s Conceptual Framework and IAS 1. Some preparers may not have a strong understanding of what affects enterprise value and may find that information provided in order “to assess enterprise value” may be too restrictive and less decision useful than information provided under the broader definition of materiality in the IASB’s Conceptual Framework.

In addition, the objective of sustainability-related financial disclosures defined in IFRS S1 is different from the objective of financial reporting which refers to “providing resources to the entity” but not to enterprise value. While the intent of using enterprise value was to broaden the scope of information captured, the use of this term may have constrained the objective of IFRS S1 and created a disconnect with the various use cases of sustainability-related financial disclosures by primary users and the decisions that they make. Type and scope of sustainability-related risks and opportunities and sustainability-related financial information will differ from the resources reflected in general purpose financial statements.

It is expected that reassessments of materiality are likely to be more common for sustainability-related financial information. The ISSB may also need to consider providing additional clarity on the relationship between the ISSB’s concepts, terminologies, and definitions compared to other jurisdictional initiatives and sustainability reporting frameworks.

Matter to address 1—The staff recommended to confirm that information is being provided to meet the information needs of the primary users of general purpose financial reporting who are “existing and potential investors, lenders and other creditors”, in alignment with the IASB’s Conceptual Framework.

Matter to address 2—Is “enterprise value” a necessary and appropriate concept to help establish the objective of IFRS S1 and the definition of materiality?

The staff recommended to remove “enterprise value” from the objective and from the definition of materiality which would create alignment with the IASB’s Conceptual Framework but not fundamentally change the focus of the required disclosures.

Matter to address 3—Is there a better way to frame the notion of enterprise value by clarifying its meaning and connection to sustainability?

The staff recommended to include additional resources and language in IFRS S1 or throughout the Basis for Conclusions (BC) to further clarify the concept of enterprise value and the scope of sustainability-related financial information required. There may even be opportunities to align and include concepts from the Integrated Reporting (IR) Framework.

Matter to address 4—Is additional disclosure needed for materiality assessment of sustainability-related financial disclosures?

The staff recommended to introduce a disclosure requirement about the process of identifying and disclosing material information and/or materiality judgments. Similar requirements are required or under development by the US Securities and Exchange Commission (SEC) and EFRAG.

Part 2: Use and definition of the term “significant”

Most respondents said that the term “significant” lacked a clear definition and some noted that the distinction between using the terms “significant” and “material” is unclear throughout IFRS S1. The term “significant” is used in IFRS S1 only as part of the phrase “significant sustainability-related risks and opportunities”, with few exceptions on significant assumptions, significant changes in its performance, significant estimation uncertainty and sources of significant uncertainty.

The ISSB will need to consider whether the term “significant” is needed to achieve the objective of IFRS S1, or if it would be appropriate to replace or remove the term. The ISSB will also need to consider whether greater clarity needs to be provided on the process for identifying sustainability-related risks and opportunities and on the relationship between materiality and the concept of significant.

Matter to address 5—Is the term “significant” and phrase “all significant” necessary and/or appropriate to define the objective of IFRS S1?

Below options depend on the ISSB’s treatment of other fundamental concepts, such as materiality and enterprise value, and how these are incorporated into disclosure requirements.

• Option 1—Remove the term “significant” and “all significant” without replacing it with an alternative term

The ISSB should consider whether insignificant sustainability-related risks and opportunities could result in material sustainability-related financial disclosures. If the ISSB cannot identify such instances, then removing the reference to “significant” could reduce confusion without fundamentally altering the objective and scope of the disclosure requirements.

• Option 2—Replace “significant” with a different term like “principal”, “relevant” or “key”

The staff anticipates that market participants will continue to raise concerns over these new terms, how they are defined, whether they conflict with existing laws or frameworks and the effect they are intended to have on disclosure requirements. It may also be useful to explain how that term relates to the materiality assessment.

• Option 3—Maintain the existing approach

If the ISSB determines that “significant” and “material” are truly different filters, then it may be appropriate to keep the existing language, while providing guidance for how those concepts should be interpreted and applied. However, it should be noted that the IASB has sought to avoid using the term “significant” due in part to the lack of clarity around that term. This was one reason that the IASB has moved to requiring material information about accounting policies in its recent amendments to IAS 1.

Part 3: Breadth of reporting – subsidiaries and value chain

Many respondents commented that the scope of reporting on value chains could be broad and subject to interpretation and they also anticipated challenges with reporting on activities in their value chain that they do not control.

Matter to address 6—Are the breadth of reporting requirements across an entity’s subsidiaries and value chain appropriate?

Although assessing important value chain risks and opportunities is a difficult exercise, it is not new or unique to the field of sustainability reporting. The staff considers that IFRS S1 does not require a radically new approach to risk management or strategic business model analysis, and therefore, did not recommend changing the substance of the IFRS S1 reporting requirements for value chain or reporting entity.

Matter to address 7—Does IFRS S1 require greater clarity on the breadth of reporting required across an entity’s subsidiaries and value chain?

In the short term, the ISSB may consider improving the examples in paragraph 40 of IFRS S1. However, the staff indicated that there is substantial market guidance and practice around reporting on a broad range of activities in the value chain and across subsidiaries. Specifically, many of the industry-based SASB Standards contain disclosure topics and metrics that demonstrate how an entity could report on value chain activities, and which activities may be relevant for a given industry. The ISSB could consider including similar guidance to support application of IFRS S1 or incorporating examples of how companies have reported to the SASB Standards or other frameworks or standards as part of its capacity building.

ISSB discussion

Matter to address 1—All ISSB members agreed with the staff recommendation.

Matter to address 2—All ISSB members confirmed that the defintion of materialty should align with the IASB’s Conceptual Framework and agreed to remove “enterprise value” from the objective and from the definition of materiality. However, most ISSB members suggested to have an additional filter/anchor in order to faciliate preparers’ understanding on how to apply the standard. There was a mixture of views on the terms to be used, for example value creation and value erosion, which required further discussion and research in future.

Matter to address 3—All ISSB members agreed with the staff recommendation and most of them supported the use of IR Framework to further describe the connection between sustainability and value.

Matter to address 4—A number of ISSB members expressed their concerns on introducing this additional disclosure. They were concerned that the disclosure would become boilerplate and the cost of complying with this disclosure would outweigh the benefit. Some ISSB members considered the existing IFRS S1 already covered this issue through the disclosure requirements on governance, strategy and risk management, and therefore, it would not be necessary to add an additional disclosure requirement. The ISSB eventually suggested that the staff reconsider this matter, check whether the IAS 1 guidance on judgement could be made reference to and consider whether additional guidance for making materialty assessment could be provided to support preparers.

Matter to address 5—There was a mixture of views on whether it was appropriate to remove the terms “significant” and “all”. One of the ISSB Vice Chairs explained the differences between “significant” and “material” and provided examples on significant topics/assumptions versus material information for disclosure. However, she acknowledged the confusion expressed by a lot of respondents and some ISSB members also shared the same confusion. Translation issues were also highlighted by ISSB members from Asia as it was difficult for them to illustrate the differences in their languages. On the other hand, some ISSB members considered the terms “significant” and “all” should not be removed and thought it would be difficult to find alternative terms. The ISSB staff was eventually suggested to retain the term “all” and remove the term “significant”, but at the same time, develop some materials or guidance to explain the assessment process. Leveraging the IASB’s materials, for example IAS 1 and Practice Statement 2, and adding a flowchart as guidance were also suggested by ISSB members.

Matters to address 6 and 7—All ISSB members agreed with the staff recommendations. One of the ISSB Vice Chairs explained that the concept of “investments it controls” was different from the concept of “control of an investee” under IFRS Accounting Standards. IClarity and explanation would be provided within IFRS S1 in future. The ISSB staff also explained the referencing to industry-based SASB Standards in the staff paper was only used as an example for the scope and extent of disclosure and it was not intended to be a recommendation. During the discussion, ISSB members emphasised the importance of clarity which could also faciliate the development of future standards. Some ISSB members also suggested clarity and guidance should be provided for conglomerates because they had practical issues on materiality assessment and disclosing the appropriate amount of information. Other members responded that conglomerates involved in a broad range of activities might need to disclose a braod range of information and that the experience with SASB standards is that some use as many as 14 industry classifications.