On Monday, June 26, 2023, the International Sustainability Standards Board (ISSB)1 published its Climate-Related Disclosure Standard (the Climate Standard) as well as its General Standard For Sustainability-Related Financial Information (the General Standard), together with the Climate Standard (the ISSB Standards).

The ISSB Standards are intended to provide a global baseline for sustainability disclosures (see our earlier paper on climate-related disclosure proposals, which discusses the governance implications of these new standards2). The ISSB Standards are voluntary but are expected to have a significant impact on the development of mandatory sustainability and climate disclosure regimes in Canada and abroad. The Canadian Securities Administrators (CSA) has announced its review of the ISSB Standards proposals with a view to how they may impact and inform the CSA climate disclosure proposals that were published for consultation in October 2021 (the CSA Climate Disclosure Proposals).3 We note that the CSA has indicated it is supportive of a global baseline for sustainability disclosures, while advocating that the standards should phase in and scale disclosure requirements to accommodate smaller issuers.

This insight will provide an overview of how entities that apply the ISSB Standards will need to identify, assess and disclose both sustainability-related4 and climate-related5 risks and opportunities (together, the Disclosed Risks and Opportunities).

10 key aspects of the ISSB Standards

  1. The ISSB Standards incorporate and consolidate the Task Force on Climate-related Financial Disclosure recommendations, Sustainability Accounting Standards Board Standards, Climate Disclosure Standards Board Framework, Integrated Reporting Framework and World Economic Forum metrics to streamline sustainability disclosures.?
  2. The ISSB Standards require disclosures related to board mandates and composition as they relate to the Disclosed Risks and Opportunities, such as (i) how the terms of reference, board mandates, role descriptions and other related policies identify responsibilities for oversight of climate-related risks and opportunities; (ii) how the board and any relevant committees ensure that the appropriate skills and competencies are available to oversee strategies designed to respond to Disclosed Risks and Opportunities; and (iii) how often the board and any relevant committees are informed about the Disclosed Risks and Opportunities.
  3. The ISSB Standards require disclosures related to strategy, such as how the board and its committees consider Disclosed Risks and Opportunities when overseeing strategy, major transactions and risk management policies and how the board and its committees oversee the setting of targets related to significant Disclosed Risks and Opportunities and subsequently monitor progress towards them.
  4. The ISSB Standards require disclosures related to management's role in assessing and managing climate-related risks and opportunities and how oversight is exercised over the relevant management positions.
  5. The ISSB Standards require disclosures around an entity's risk management processes, such as how Disclosed Risks and Opportunities are identified, assessed, prioritized and managed and how these processes are integrated in an entity's overall risk management process.
  6. The ISSB Standards require that an entity disclose information that enables users of general-purpose financial reporting (being existing and potential investors, lenders and other creditors) to understand the effects of significant sustainability-related and climate-related risks and opportunities on its financial position, financial performance and cash flows for the reporting period, as well as the anticipated effects of climate-related risks and opportunities on these items over the short, medium and long term. This disclosure is to include quantitative and qualitative information about any significant risk of a material adjustment to carrying amounts of assets and liabilities within the next financial year, expectations around how an entity's financial position and financial performance will change over time given its strategy to address significant Disclosed Risks and Opportunities and planned sources of funding to implement strategy.
  7. The ISSB Standards contemplate that sustainability-related and climate-related disclosure will be made with, and at the same time as, an entity's annual financial reporting, unless applicable regulators determine more frequent disclosure is required. The General Standard states any disclosures made thereunder would constitute part of an entity's general-purpose financial reports, and can be included, for example, in the entity's management commentary or similar report (i.e., the MD&A). An entity may make their climate-related disclosures with their second-quarter filings in the first reporting period in which the entity applies the ISSB Standards.
  8. The Climate Standards require that entities use climate-related scenario analysis to assess the resilience of the entity's strategy (including its business model) to climate-related changes, developments or uncertainties. Disclosure will include the entity's capacity to adjust or adapt its strategy and business model over the short, medium and long term to climate developments in terms of: (i) the availability of and flexibility in existing financial resources to address climate-related risks and/or to be redirected to take advantage of climate-relate opportunities; (ii) the ability to redeploy, repurpose, upgrade or decommission existing assets; and (iii) the effect of current or planned investments in climate-related mitigation, adaptation or opportunities for climate resilience. The General Standard does not prescribe scenario analysis, but requires disclosure of whether and how an entity uses scenario analysis to inform its identification of sustainability-related risks.
  9. The Climate Standards require that an entity disclose its absolute Scope 1, 2 and 3 Greenhouse Gas (GHG) emissions in accordance with the GHG Protocol Corporate Standard. An entity is not required to disclose its Scope 3 emissions in the first annual reporting period in which the entity applies the Climate Standard.
  10. The ISSB Standards require entities to consider all reasonable and supportable information that is available to the entity, without undue cost or effort, to identify and address the Disclosed Risks and Opportunities. The limit of undue cost or effort provides a guideline around the resources expected to be used in applying the ISSB Standards, which was not previously addressed in the draft standards. However, it remains to be seen what would constitute undue cost or effort and entities should be prepared to spend significant resources to apply the ISSB standards.

Implementation

Entities may apply the ISSB Standards for annual reporting periods beginning on or after January 1, 2024. Notably, the General Standard provides that an entity in its first annual reporting period is permitted to apply the General Standard only on disclosures related to climate risks and opportunities pursuant to the Climate Standard. The prioritization of the Climate Standard is based on investor preferences and is consistent with the CSA Climate Disclosure Proposals.

Boards of directors should consider whether to start addressing the disclosures contemplated by both the ISSB Standards and the CSA Climate Disclosure Proposals. Given existing general obligations to disclose material risks and information, waiting to disclose specific climate-related risks until the specific disclosure rules apply will raise the question of whether they really only became material in the year the climate disclosure rules were implemented and therefore, whether an issuer's prior disclosure (or lack thereof) was appropriate.

Footnotes

1. The ISSB is an independent private sector body that develops and approves International Financial Reporting Standards (IFRS) sustainability disclosure standards and functions under the oversight of the IFRS Foundation. The IFRS Foundation is well known for setting globally accepted accounting standards through the International Accounting Standards Board.

2. https://www.dentons.com/en/insights/guides-reports-and-whitepapers/2023/january/25/the-csa-and-issb-climate-related-disclosure-proposals

3. CSA Notice and Request for Comment (Notice) on proposed National Instrument 51-107 Disclosure of Climate-related Matters (NI 51-107) and its proposed Companion Policy 51- 107CP (the Climate Disclosure Proposals) published on October 18, 2021.

4. An entity's sustainability-related risks and opportunities arise out of the interactions between the entity and its stakeholders, society, the economy and the natural environment throughout the entity's value chain. These interactions—which can be direct and indirect—result from operating an entity's business model in pursuit of the entity's strategic purposes and from the external environment in which the entity operates. (General Standard, B2).

5. Climate-related risks refers to the potential negative effects of climate change on an entity. These risks are categorised as climate-related physical risks and climate-related transition risks. Climate-related opportunities refers to the potential positive effects arising from climate change for an entity. Efforts to mitigate and adapt to climate change can produce climate related opportunities for an entity.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.