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 following topics:

  • Agenda Paper 3A: Metrics and targets objective
  • Agenda Paper 3B: Disclosure of judgements, assumptions and estimates
  • Agenda Paper 3C and 4D: Reasonable and supportable information that is available at the reporting date without undue cost and effort
  • Agenda Paper 3D: Commercially sensitive information about opportunities
  • Agenda Paper 3E and 4E: Current and anticipated financial effects and connected information

It is expected that the February ISSB meeting will be the last decision-making meeting on [draft] S1.

Metrics and Targets Objective (Agenda Paper 3A)

IFRS Sustainability Disclosure Standards do not state how an entity should conduct its governance, strategy, and risk management with respect to sustainability-related risks and opportunities. This means that the purpose of disclosures on governance, strategy and risk management is to enable primary users to understand an entity’s existing policies and processes, etc.

The staff has received some feedback that market participants may interpret the objective of disclosures around metrics and targets as being limited to disclosures on metrics and targets the entity uses. This interpretation would, in the staff’s view, incorrectly limit an entity’s disclosures to the metrics and targets that the entity already uses and excludes metrics required by IFRS Sustainability Disclosure Standards (but not used by the entity) even if that information was material for users of general purpose financial reporting.

Therefore, the staff recommended clarifying that the objective of disclosures on metrics and targets in [draft] S1 and [Draft] IFRS S2 Climate-related Disclosures [draft] S2 is to enable users to understand performance on sustainability-related risks and opportunities, including (but not limited to) how an entity measures, monitors and manages such risks and opportunities.

ISSB discussion

All ISSB members (with one being absent) agreed with the staff recommendation.

A few suggestions were made by ISSB members including (i) adding the word "assessing" in the objective, (ii) explaining in the Basis for Conclusions (BC) the differences between the objective of disclosures on metrics and targets and the objective of disclosures on governance, strategy and risk management and (iii) adding a short guidance with example (e.g. on greenhouse gas protocol) to illustrate the differences. One of the Vice-Chairs and the staff confirmed that they will consider and further work on these suggestions.

Disclosure of judgements, assumptions and estimates (Agenda Paper 3B)

Disclosure of judgements, assumptions and estimates that an entity made in applying IFRS Sustainability Disclosure Standards

Some respondents asked the ISSB to introduce a requirement for an entity to disclose judgements, assumptions, and estimates that the entity made in preparing and presenting its sustainability-related financial disclosures. They explained that it is important for users’ understanding and enables assurance providers to assure the entity’s sustainability-related financial disclosures and for regulators to enforce the compliance of the entity’s sustainability-related financial disclosures with IFRS Sustainability Disclosure Standards.

The current [draft] S1 does not explicitly require an entity to disclose the judgements that the entity has made in preparing and presenting its sustainability-related financial disclosures. Following the respondents’ feedback, the staff has identified a requirement in IAS 1 on the disclosure of judgements that the staff thinks could be adapted into [draft] S1.

Also, following feedback from respondents, the staff recognise that estimation uncertainty may not solely arise when metrics cannot be measured directly and can only be estimated. Estimation uncertainty may also arise when an entity discloses information that enables users of general purpose financial reporting to understand the effects of significant sustainability-related risks and opportunities on its financial position, financial performance and cash flows for the reporting period, and the anticipated effects over the short, medium and long term (‘current and anticipated financial effects’).

Therefore, the staff recommended that the ISSB:

  • Introduce a requirement for an entity to disclose judgements that the entity has made in the process of preparing and disclosing its sustainability-related financial information that have the most significant effect on the information provided in those disclosures
  • Amend paragraph 55 of [draft] S1 to require an entity to identify the sources that have been applied in preparing the entity’s sustainability-related financial disclosures, including the industry or industries specified in IFRS Sustainability Disclosure Standards, SASB Standards or other industry-based sources of guidance;
  • Clarify that the disclosure requirements related to estimation uncertainty (paragraph 79 of [draft] S1) are also applicable to the requirements on current and anticipated financial effects (paragraph 22 of [draft] S1), including estimation uncertainty that has a significant risk of resulting in a material adjustment within the next financial year to the carrying amounts of assets and liabilities reported in the financial statements.

ISSB discussion

All ISSB members (with one being absent) agreed with the staff recommendations. A number of ISSB members were supportive and appreciated the connectivity of sustainability information and financial information in this paper.

One ISSB member suggested to change "significant effect on the information provided in those disclosures" to "significant effect on the types and amounts of information provided in those disclosures", in order to emphasise that sustainability disclosures do not only focus on quantitative information but also qualitative information (e.g. sources of disclosure). Also, another ISSB member clarified with the staff that "most significant effect" referred to multiple effects instead of a singular effect. Therefore, one of the Vice-Chairs and the staff agreed that changing the wording to "significant effect on the types and amounts of information provided in those disclosures" would help and they will carefully draft the wording going forward.

Consistent use of financial data and assumptions to the extent possible

Some respondents raised concerns about how to connect information when an entity uses different financial data and assumptions to prepare its sustainability-related financial disclosures compared to those the entity uses to prepare its financial statements.

The staff thinks that an entity should ideally use consistent financial data and assumptions given that those financial data and assumptions would represent management’s view about the entity and so should not differ in the preparation and disclosure of its sustainability-related financial information and financial statements. However, an entity’s financial statements must also reflect specific recognition criteria and other specific requirements in IFRS Accounting Standards (or other relevant GAAP). As a consequence, it is not possible to impose the use of consistent financial data and assumptions without attaching a condition to acknowledge relevant accounting requirements.

However, the staff agrees with suggestions made by respondents that requiring an entity to explain the differences in the financial data and assumptions used by the entity would enable users to better understand the extent to which those financial data and assumptions have been applied consistently in the entity’s sustainability-related financial disclosures and financial statements and the reasons why differences may arise.

Therefore, the staff recommended that the ISSB:

  • Clarify that the words ‘to the extent possible’ mean ‘to the extent possible taking into consideration the requirements of IFRS Accounting Standards (or other relevant GAAP)’
  • Require an entity to explain significant differences in the financial data and assumptions that the entity has used in preparing its sustainability-related financial disclosures, in comparison to those that the entity has used in preparing its financial statements

ISSB discussion

12 of 14 ISSB members (with one being absent) agreed with the first staff recommendation and all members (with one being absent) agreed with the second staff recommendation.

There were different views expressed by the ISSB members. Some of them were highly supportive of the recommendations because they believed it would improve the consistency and connectivity between sustainability reporting and financial reporting. They agreed with the staff that the same set of fact pattern, assumptions and data should be used in both reporting frameworks.

However, one ISSB member expressed his concern on consistency because he believed financial reporting was sometimes driven by management judgements and expectations. He used the accounting depreciation policy as an example. A fully depreciated asset carried a zero value based on management expectation in financial reporting but could still be used by the management and should be reported under sustainability reporting. He believed that connectivity and disclosures of differences should be the main focuses instead of consistency. One ISSB member then suggested that adding an explanation in the BC may help to ease this concern.

On the other hand, another ISSB member suggested to disclose all differences in one single note in order to not obscure the information.

Supporting preparers to disclose judgements, assumptions and estimates made in preparing and presenting sustainability-related financial disclosures

The staff recommended that the ISSB provide guidance to illustrate how to disclose the judgements, assumptions and estimates made in applying IFRS Sustainability Disclosure Standards. Appendix A of the agenda paper provides an indication as to the type of content that might be provided to illustrate the types of judgements, assumptions and estimates made in applying IFRS Sustainability Disclosure Standards. This Appendix A will be further developed subject to the ISSB’s decision.

ISSB discussion

All ISSB members (with one being absent) agreed to provide illustrative guidance in [draft] S1 to illustrate how to disclose the judgements, assumptions and estimates made in applying IFRS Sustainability Disclosure Standards. In addition, all ISSB members (with one being absent) agreed to separately develop some educational materials that illustrate the types of disclosure an entity may provide in order to meet this requirement.

Commercially sensitive information about opportunities (Agenda Paper 3D)

This paper presented the staff recommendations based on feedback received from respondents on [draft] S1 and [draft] S2 regarding the disclosure of information about sustainability-related opportunities which may be commercially sensitive.

The objectives of this paper were to:

  • Summarise the stakeholder feedback on particular disclosure requirements proposed in [draft] S1 and [draft] S2 that could result in the disclosure of commercially sensitive information
  • Seek the ISSB’s feedback on the staff’s analysis and recommendations regarding information to be disclosed
  • Seek decisions from the ISSB on the staff’s recommendations

Staff recommendation

The staff recommended:

  • To introduce an exemption in [draft] S1 that would permit entities, in limited circumstances where information is not already publicly available, to exclude information about a sustainability-related opportunity when the information is commercially sensitive
  • To base this exemption on addressing a particular situation—that is, permitting entities to not disclose a particular item of information in situations when disclosing that item of information related to an opportunity ‘can be expected to prejudice seriously’ the economic benefits the entity is able to realise in pursuing the opportunity
  • Require entities, when assessing such situations, to consider whether it is possible to disclose the information about the opportunity at a sufficiently aggregated level that would resolve the entity’s concerns about commercial sensitivity, while still meeting the objectives of the disclosure requirements
  • To include the following requirements associated with the exemption:
    • Entities must identify a specific reason for non-disclosure of information, and that to qualify for the exemption, the information must provide an entity with an economic benefit that translates to a competitive advantage because the information is not publicly available
    • By item of information omitted, require an entity to disclose the fact that information has been omitted and the general reason why the information has been omitted
  • Require entities to reassess whether the information qualifies for the exemption from disclosure at each reporting date
  • To specify that this would not:
    • Be applicable to information which is already publicly available
    • Permit broad non-disclosure, with commercial sensitivity being used as a justification
    • Permit non-disclosure of information about risks

ISSB discussion

Throughout the discussion, ISSB members were overall supportive of the staff recommendations related to disclosure of commercially sensitive information about opportunities.

One key topic discussed by several of the ISSB members throughout the meeting was the question of asymmetry, and the focus of the exemption being on the opportunity side, with risks not being subject to the exemption. A few ISSB members questioned the ability in some situations to separate an opportunity from a risk and confirmed that the staff’s view is that companies would still be required to disclose these situations, as the disclosure requirement for risks would trump the exemption. The staff clarified that the exemption is meant to be used in limited circumstances and would typically be relevant in the earlier stages before the company is ready to disclose information about the opportunity.

Continuing on the topic of asymmetry, one ISSB member raised that [draft] S1 mentions the concept of neutrality and that preparers cannot treat risks and opportunities differently. The ISSB member drew comparison to the language describing prudence which comes from the IASB and the treatment of assets and liabilities. The ISSB member commented that risk is something an entity is currently being exposed to, whereas an opportunity is something the entity might do. The ISSB member made the connection that trade secrets therefore speak to opportunity rather than risk and that in this aspect, there may not be an absence of neutrality due to the nature of opportunities being different from risks and the notion of commercial sensitivity applying to opportunities but not to risks. The ISSB member showed support for the staff recommendation, however noted that it may be beneficial to revisit the references to risks and opportunities throughout [draft] S1 to make sure that it is consistently used with the asymmetry discussed in this paper.

One of the Vice-Chairs mentioned that the approach taken for the exemption is similar to the disclosure requirements introduced by the IASB related to business combinations. That Vice-Chair noted that the disclosure requirement provides a good balance between helping companies protect value in a way that reduces the risk of disadvantage to users of the information.

A few ISSB members discussed drawing a connection between timing of disclosure requirements for financial reporting purposes and sustainability reporting, noting that often the information may become applicable for sustainability reporting before it has an impact on financial reporting. The Chair emphasised that public companies in particular will need to incorporate the sustainability topic into the existing frameworks and protocols in place for managing confidential information. The Chair noted that before a matter becomes relevant for accounting purposes, many companies are operating with long-term visions and are disclosing their progress towards achieving that long-term vision. This contributes to their price earnings multiple. The Chair noted that the ISSB will need to rely on management’s assessment of determining what is material and price sensitive information when determining the applicability of the exemption. The Chair agreed with the notion of asymmetry and noted that the existing market mechanisms, pressure from investors and board mechanisms in place will encourage the appropriate disclosure of information. The Vice-Chair added that the topic of sustainability leads entities to face several uncomfortable truths which are often related to risks. Likely, entities may want to disclose the positive side, and opportunities that are present.

One ISSB member raised whether it was necessary to provide the exemption and drew connection to a similar exemption that exists in Chinese accounting standards, where in practice the exemption is not used by many entities. They suggested to add a minor wording adjustment, to make it clear that the exemption should be applied on a gross basis for situations where an opportunity and risk may be combined. They also noted that it may be beneficial to mention that the application of the exemption is expected to be very rare.

The Chair mentioned that caution should be used when referring to opportunities mattering less to investors than risks. Opportunities are infinite, and the question to entities should be when entities pick an opportunity to pursue at what point do they need to disclose it. The Chair noted that quite often an entity would wait until they have made a decision about pursuing an opportunity before announcing it, and therefore until it is in the pipeline of management there is a risk of alerting the market of a false opportunity if the disclosure occurs too early. On the other hand, he noted that a risk is something an entity has identified and is managing. One ISSB member commented that if an entity believes they will lose an opportunity to a competitor if they were to disclose it and if they were pushed to disclose all opportunities, it may encourage entities to avoid pursuing opportunities to avoid having to disclose them.

One ISSB member mentioned that it is difficult to anticipate the various types of commercial situations that may arise, and therefore the guidance must be robust. The ISSB member discussed the potential situation where information may be publicly discussed but the company has not confirmed if they are moving forward. It may be beneficial to add colour on what is meant by public information.

One ISSB member asked whether the exemption should be extended to certain situations surrounding risk, where disclosure of a particular risk may prejudice their ability to achieve the risk they are trying to manage. The ISSB member noted that this may not occur often but could be helpful in limited situations to expand the disclosure.

One ISSB member raised a question surrounding what the additional disclosure would look like in practice, when a company chooses not to disclose the specific opportunity but is required to disclose the fact and reason why the information was not disclosed. The staff clarified that the disclosure in practice may end up being fairly boilerplate, where, for example, management gives a nod to something that is occurring but that further details are being withheld due to proprietary reasons. However, in some situations it may be even more generic. One of the Vice-Chairs noted that the wording for the exemption was borrowed from IAS 37. The staff provided some colour on what the disclosure looks like in practice for IAS 37, however noted that it is difficult to make a direct comparison. The staff confirmed that they anticipate that the disclosure may end up looking fairly boilerplate in practice. The Vice-Chair added that an alternative would be for the company to disclose if it has used the exemption full stop. Another ISSB member raised that the objective of the exemption is to provide as much information to users as possible without disclosing something commercially sensitive.

One ISSB member said that commercial sensitivity is being discussed in the context of [draft] S1 but is likely to come up again in specific disclosure requirements. The staff confirmed that the plan is for the exemption to be housed in [draft] S1, but that it would also apply to opportunities in future standards unless otherwise specified.

ISSB decision

All 13 of the ISSB members present agreed with the staff recommendation regarding the introduction of an exemption in [draft] S1 that would permit entities, in limited circumstances where information is not already publicly available, to exclude the information about a sustainability-related opportunity when the information is commercially sensitive.

All 13 of the ISSB members present agreed with the staff recommendation regarding basing the exemption on addressing a particular situation and requiring entities to consider whether it is possible to disclose the information about the opportunity at a sufficiently aggregated level that would resolve the entity’s concern about commercial sensitivity.

All 13 of the ISSB members present agreed with the staff recommendation regarding inclusion of the specific reason for non-disclosure of information, disclosure of the fact that the entity has used the exemption and that the entity must reassess whether the information qualified for the exemption from disclosure at each reporting date. The ISSB members voted in favour of adjusting part of the disclosure wording to read “by item of information omitted, require an entity to disclose the fact that it has used the exemption.”

All 13 of the ISSB members present agreed with the staff recommendation regarding specifying that this would not be applicable to information that is already publicly available, would not permit broad non-disclosure with commercial sensitivity being used as a justification and would not permit non-disclosure of information about risks.

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