WBCSD Implementation Guidance ISSB Standards and ESRS - World Business Council for Sustainable Development (WBCSD)

WBCSD CFO Network: Implementation Guidance for the International Sustainability Standards Board (ISSB) Standards and the European Sustainability Reporting Standards (ESRS)

Explore Implementation Guidance for the ISSB Standards

There is increasing demand for clear, comprehensive and comparable sustainability reporting from Financial Institutions, Regulatory Bodies, Consumers and Civil Society. Financial Institutions are increasingly looking for comparable and verified information on sustainability-related risks, opportunities, impacts and strategies to inform their assessment of long term business resilience when making investment decisions. For this reason sustainability performance and disclosure increasingly fall into the realm of the CFO and finance teams.

The purpose of this Guidance is to help CFOs and their teams prepare to implement the new sustainability reporting requirements to inform strategic decision-making on corporate sustainability performance and respond to requests from investors, banks and regulators.

The Guidance provides side-by-side analysis of two new sustainability disclosure standards that are setting the bar for sustainability reporting globally, and highlights priority issues for finance professionals identified through WBCSD’s CFO Network. The Guide focuses on:

The IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2: Climate-related Disclosures (released on 26 June 2023). These standards have been developed by the International Sustainability Standards Board (ISSB) under the International Financial Reporting Standards (IFRS). The ISSB Standards are intended to create a global baseline for sustainability disclosure by providing decision-relevant information to investors which is directly related to the financial value of the enterprise.

The European Sustainability Reporting Standards (ESRS) ESRS 1: General Requirements and ESRS 2: General Disclosures (adopted by the European Commission on 31 July 2023). The ESRS standards, in addition to these two cross-cutting standards, include 10 topic specific standards covering environmental, social and governance disclosures. The ESRS are based on draft standards that were developed by the European Financial Reporting Advisory Group (EFRAG) to support implementation of the Corporate Sustainability Reporting Directive (CSRD). The ESRS provide a comprehensive sustainability disclosure framework for all key stakeholders – including investors, employees, civil society and beyond.

The guidance also provides consideration for companies preparing to report against the U.S. Securities and Exchange Commission (SEC) climate disclosure rule (currently awaiting release) which is also intended to inform investor decision-making and help protect investors.

Who needs to report, and when is reporting required

The applicability of the standards will depend on each company’s specific circumstances, including the size, nature and geographical footprint of the business. Understanding which standards apply to your organization is a crucial first step to preparing for implementation.

ISSB Standards

European Sustainability Reporting Standards

As with the IFRS Accounting Standards, it is ultimately at the discretion of individual jurisdictions to mandate the use of the ISSB Standards. The ISSB is working closely with individual jurisdictions to support adoption, and to ensure compatibility and interoperability with national regulations.

The International Organization of Securities Commissions (IOSCO) has endorsed the ISSB Standards and called on its 130 member jurisdictions to “consider ways in which they might adopt, apply or otherwise be informed by the ISSB Standards within the context of their jurisdictional arrangements, in a way that promotes consistent and comparable climate-related and other sustainability-related disclosures for investors”.

The work of the ISSB has the support of several key stakeholders including the G7, the G20, the Financial Stability Board, African Finance Ministers, as well as from the Finance Ministers and Central Bank Governors of more than over 40 jurisdictions. This is a positive signal for their uptake as a global baseline for sustainability disclosures globally.

The ESRS will apply to around 50,000 companies operating within the EU.

This includes:

Large EU public interest entities, with more than 500 employees. These companies are already subject to the EU’s Non-Financial Reporting Directive (NFRD).
Large EU companies and EU subsidiaries of non-EU companies that meet at least two of the following criteria: €40 million in net turnover, €20 million in assets, and 250 or more employees.
Listed SMEs.
Non-EU companies with substantial activity in the EU, defined as €150m in annual turnover in the EU and having at least one subsidiary or branch in the EU.
Non-EU entities with debt or equity securities listed on an EU-regulated market.

Special considerations for SEC filers

The US SEC’s Proposed Climate rule would apply to both domestic and foreign registrants. Depending on the final rule, there may be exemptions for scope 3 emissions data for certain filers: the draft rule provided these exemptions for Smaller Reporting Companies.

Preparing for implementation

Do you have a clear view of which standards you will be required to report against by regulations at a group and/or subsidiary level?
Do you have a clear view of which standards your principle stakeholders are requiring or expecting you to report against (e.g. investors)?

Finding the answers: key tools and resources

Read about the ISSB’s work to ensure adoption across jurisdictions

The ISSB’s FAQs provide information on its efforts to ensure adoption, as well as other useful background information.

Review the applicability of the CSRD

Article 5 of the CSRD outlines the applicability of the CSRD for different types of entities.

Read IOSCO’s endorsement of the ISSB Standards.

IOSCO endorsed the ISSB Standards on 25 July 2023 through this statement.

The timelines for the standards depend on a number of factors, including the size, nature and geographical footprint of the business. Understanding when they will apply to your company is a crucial step to preparing for implementation, and managing your preparatory work for the new standards.

ISSB Standards

European Sustainability Reporting Standards

IFRS S1 and S2 standards will be applicable for the 2024 fiscal year period (reports published in 2025), but this will be dependent on the uptake of the standards by national jurisdictions.

However, the ISSB has introduced a one year transition relief period for IFRS S1. This means companies will only need to apply the requirements in IFRS S1 in relation to the disclosure of climate-related financial information (in accordance with IFRS S2) for the first year of application.

The transition relief also allows companies in the first year:

to publish sustainability information with their half year reporting, rather than with their annual report,
not need to report comparative information in the first year of application.

Companies covered by the CSRD will have to report against the ESRS based on the timelines outlined in the CSRD for the relevant category of companies. It will apply to:

Large EU ‘public interest entities’ that are already subject to the EU’s Non-Financial Reporting Directive (NFRD) for the 2024 fiscal year (reports published in 2025).
Large EU and EU subsidiaries of non-EU companies for the 2025 fiscal year (reports published in 2026).
Listed SMEs for the 2026 fiscal year (reports published in 2027).
Non-EU parent companies with substantial activity in the EU for the 2028 fiscal year (reports published in 2029).
Non-EU entities with debt or equity securities listed on an EU-regulated market.
- >500 employees, for the 2024 fiscal year (reports published in 2025).
- Other large issuers, for the 2025 fiscal year (reports published in 2026).
- SMEs, for the 2026 fiscal year (reports published in 2027).

In addition, some phase-ins have been provided to allow more time for implementation for specific elements of the ESRS. These include, for example, not having to report on the anticipated financial effects related to non-climate environmental topics and certain workforce topics in the first year.

Special considerations for SEC filers

The timeline for the implementation of the US SEC’s proposed climate rule varies depending on the company and disclosure in question. Per the draft rule, Large Accelerated Filers would disclose 2023 data in 2024, excluding scope 3 data, which would apply a year later.

Limited assurance requirements would also apply from 2025 (covering 2024 disclosures), with these becoming reasonable assurance requirements in 2027 (covering 2026 disclosures).

The timeline is pushed back for one year for accelerated filers and non-accelerated filers, with the assurance requirements not applying to non-accelerated filers.

Preparing for implementation: key questions

Do you have a clear view of the timelines for when you will need to disclose against the relevant standards?
Do you have a clear plan to prepare your disclosures on time?

Finding the answers: key tools and resources

Read about the ISSB’s timeline for implementation

Appendix E of IFRS S1 outlines the more information on the effective date and transition reliefs for implementation.

Review the timelines for applicability of the CSRD

Article 5 of the CSRD outlines the timelines for applicability of the CSRD for different types of entities

Explore the detail of the proposed phase-ins for the ESRS

Appendix C of ESRS 1 (p. 29) outlines in detail the phase-ins for the ESRS.

How to set up reporting

For information to be useful to key stakeholders – including business decision-makers and investors – it is crucial that companies produce high quality data, and set clear reporting boundaries. Each standard sets out specific parameters for ensuring the quality of information.

ISSB Standards

European Sustainability Reporting Standards

The ISSB Standards require the inclusion of information that would be relevant for primary users’ decision-making efforts.

IFRS S1 defines fundamental characteristics for quantitative information. This information must be:

Relevant, which means it makes a difference in decision-making for primary users – even if these users may not choose to use the information or can find it elsewhere.
Faithfully represented, meaning it is complete, neutral and accurate.

IFRS S1 requires that qualitative information be:

Comparable: to enable users to identify and understand similarities and differences of the information provided.
Verifiable: information that can be corroborated – from the information itself, all the way to the initial inputs and data.
Timely: available in time to influence primary users’ decisions. Some information may continue to be timely long after the end of a reporting period because, for example, some users may need to identify and assess trends.
Understandable: information that is clear and concise, avoids generic ('boilerplate') information, avoids duplication and uses clear language and clearly structured sentences and paragraphs.

The ESRS requires information that is relevant when it could affect the decisions of multiple stakeholders.

The ESRS requires qualitative and quantitative information to be:

Relevant: information that can affect the decisions of any key stakeholders.
Faithfully represented: information to be complete, neutral and accurate.
Comparable: it can be compared with information provided by the undertaking in previous periods, but also with information provided by other undertakings.
Verifiable: to give users confidence that information is complete, neutral and accurate.
Understandable: to enable any reasonable knowledgeable user to readily comprehend the information being communicated. It should be clear and concise.

Summary

The standards are aligned on the characteristics of quality information. The main difference is that the ESRS do not specifically mention timeliness as being one of the enhancing factors, whereas the ISSB Standards do include it.

Preparing for implementation: key questions

Have you reviewed your information to ensure it meets the quality requirements outlined in the applicable standards?
Are you clear on the internal processes, controls and governance of your reporting to ensure it meets the quality requirements in the applicable standards?
Can you confirm that all of the information included has been faithfully represented (ie complete, neutral and accurate)? If it is not - Can you make changes to the way information is currently presented to make it more complete, neutral and accurate?
Is all information comparable, verifiable, timely and understandable?

Finding the answers: key tools and resources

Read how the ISSB describes the quality parameters of useful sustainability-related financial information

Appendix D of IFRS S1 gives a clear description of what the ISSB expects quality information to entail.

Inform yourself on the definitions that are used in the ESRS regarding quality parameters for information

Appendix B of ESRS 1 (p.27) is dedicated to information quality and describes what is expected of the information included in your sustainability report.

While the ISSB Standards and ESRS are newly developed, they are based on existing frameworks. Standard setters continue to work together to improve alignment and interoperability between standards. However, both the ESRS and ISSB Standards are more robust than many existing standards, and must be applied in their entirety. Building on existing disclosures will help companies implement the new standards, but companies should also carefully review the new standards and conduct a gap analysis to identify additional elements of disclosure required by the ESRS and ISSB Standards and prepare to comply.

ISSB Standards

European Sustainability Reporting Standards

TCFD

All ISSB disclosure requirements are structured around the four TCFD pillars of Governance, Strategy, Risk Management and Metrics and Targets.

If you already disclose in line with TCFD, the structure and processes around your TCFD reporting will provide a useful input into meeting the IFRS S2 Climate-related disclosures. IFRS S2 includes all TCFD recommendations, although there are some differences in wording and requests for more granular or additional information. These differences include, but are not limited to:

additional governance information,
information on emissions reduction targets,
information on the use of carbon offsets,
greater details on the processes and inputs for the identification, assessment and management of climate-related risks and opportunities,
the disclosure of industry-based metrics different treatment of GHG emissions disclosures, including requiring Scope 3 disclosure.

The ESRS build upon the TCFD pillar structure, to include impact, alongside risk and opportunity management. This aligns with its focus on double materiality rather than financial materiality alone.

If you already disclose in line with TCFD, the structure and processes around your TCFD reporting will provide a useful but not comprehensive foundation for your future reporting in line with the ESRS requirements.

The European Standards have also included all TCFD recommendations in the topical standard for ESRS E1: Climate Change. However, the ESRS E1 has broader and more comprehensive requirements than the TCFD Recommendations include, for example:

consideration of impacts alongside risks and opportunities,
inclusion of information on due diligence,
clearer references to aligning a transition plan with a 1.5 degree future.

GRI

The IFRS Foundation and GRI have signed a Memorandum of Understanding that states each group will coordinate its standard setting activities with the other. This has included efforts to align disclosures, guidance, concepts and definitions where possible, and to provide more information and guidance to issuers in the future to support the inter-operability of the standards developed by each organization.

Additionally, the ISSB has outlined that GRI and ESRS could be considered by issuers when identifying which disclosures and metrics to use in relation to identified risks and opportunities.

Due to the different focuses of the ISSB Standards (financial materiality) and the GRI (impact materiality), while there are efforts underway to ensure inter-operability, existing GRI reporting is unlikely to substantially contribute towards meeting the requirements of the ISSB Standards.

GRI has been involved throughout the development of the ESRS, with a focus on ensuring optimal interoperability between the global GRI Standards ESRS. The ESRS standards are closely aligned with GRI from an impact reporting perspective, meaning companies reporting in line with GRI will have already covered many aspects of the ESRS.

However, as GRI does not cover the financial materiality of topics, additional work will be needed to supplement existing GRI reporting with financial materiality reporting requirements of the ESRS standards (see materiality information in section 3).

SASB

The ISSB standards require sector specific disclosures as these provide important information to investors. The ISSB standards requires companies to consider the SASB standards when determining which risks and opportunities are material to them, but it does not require companies to apply the SASB standards.

Given the strong signal that companies should consider the SASB standards, it is wise to ensure that your Industry-based disclosures are based on the SASB standards.

If you already determine materiality and disclose in line with SASB, this will support you in meeting some of the requirements of the ISSB Standards, though additional efforts on materiality processes and disclosures around material topics not covered by SASB will likely be needed.

The IFRS is undertaking a project to update the SASB standards to improve their international applicability.

The European standards do not require or suggest the of the SASB standards. EFRAG intends to develop its own sector specific standards under the ESRS.

As SASB is now part of the IFRS, efforts to ensure the interoperability of the SASB standards with the ESRS will be covered in the ongoing discussions on alignment between these bodies.

OTHER STANDARDS

The ISSB S1 states that when identifying material risks and opportunities and relevant disclosures, in addition to SASB, companies may consider the CDSB Framework Application Guidance. This is the most recent pronouncements of other standard‑setting bodies whose requirements are designed to meet the information needs of users of general purpose financial reports; and sustainability-related risks and opportunities identified by industry or geographic peers.

In general, the ESRS states that a company is allowed to include disclosures under legislations or other standard-setting bodies, as long as a clear reference is made and it does not obstruct the disclosure of material information.

Summary

Both the ISSB and ESRS standards are built on existing frameworks. The ISSB Standards draws heavily on the TCFD and SASB standards which have a strong focus on providing information that is financially material to inform investors. The ESRS standards also draw on the structure of the TCFD. In addition they are more closely aligned with GRI which aims to provide information to a wider set of stakeholders. Companies need to carry out a detailed gap analyses to understand where their reporting against existing frameworks already helps them meet the requirements of the new disclosure frameworks, and where additional effort will be needed to comply with these requirements.

Preparing for implementation: key questions

Have you consulted guidance from the standard setters to help you understand how the ISSB and EFRS are aligned with existing frameworks and where they differ?
Have you identified the industry-specific disclosures you will be required to make?
Have you conducted a gap assessment to understand where your existing disclosures exactly meet the new requirements, and identify additional disclosures you will need to make?
Have you identified how you will address the gaps to comply with the new requirements?
- Have you identified quick wins where you can close the gap easily?
- Have you prioritized the areas that will need the most attention to collect more data or conduct further analysis?
- Have you identified the steps that will be required to gather the necessary information to make the additional disclosures and made a plan to achieve this?
Is your current reporting software set up to meet the requirements of the new standards? If not - Have you already engaged your supplier or spoken to others to explore your future needs and how they can support?

Finding the answers: key tools and resources

IFRS Sustainability Standards and ESRS Reconciliation table

EFRAG’s comparison of the general requirements of the IFRS S1 and ESRS 1 and 2 provides a clear overview of the overlaps and differences of the general requirements from the two standard setters.

GRI and the European Sustainability Reporting Standards

GRI’s Q&A on its alignment with the ESRS emphasizes the extent to which GRI reporting will prepare companies well for the ESRS. See in particular questions 1, 2, 4 and 5. GRI has also committed to creating guidance on how to use current GRI-based reporting to meet the ESRS requirements.

TCFD Recommendations and ESRS Reconciliation table

EFRAG’s comparison of the ESRS and TCFD outlines where the ESRS align with the TCFD recommendations, and where the ESRS go above and beyond the TCFD recommendations.

Comparison - [Draft] IFRS S2 Climate-related Disclosures with the TCFD Recommendations

The ISSB has published a comparison of its draft climate standard with the TCFD recommendations to outline where the ISSB’s requirements are different to the guidance of the TCFD.

Both standards require the reporting entity to be the same as for the general purpose financial statement. Companies will be required to report on activities along the value chain – both upstream and downstream. This means that companies are responsible to fairly and responsibly represent their own data, as well as the data from across their value chain.

Both standards also require companies to report on their Scope 3 Emissions which means gathering data on emissions both upstream and downstream in the value chain.

Collecting data on sustainability-related issues in the value chain is a challenge for most companies who are asking their suppliers to provide it. This effectively means that companies not covered by the CSRD may be required to collect data to comply with the ESRS disclosure requirements because they are asked to provide data to companies they supply, or buy from, who are required to report against the CSRD. Similarly companies that have not opted voluntarily to report against ISSB and are not required by national regulation to do so, may still find they need to prepare information for ISSB disclosures requested by companies in other parts of the value chain.

ISSB Standards

European Sustainability Reporting Standards

The ISSB Standards require sustainability related financial disclosures to be for the same reporting entity as its general purpose financial statements.

The ISSB Standards use a broad definition of the value chain. When disclosing, companies will need to assess sustainability-related risks and opportunities related to the full range of activities, resources and relationships used and relied on from conception to end-of-life of the entity’s products or services.

This ISSB requires companies to reporting on Scope 3 emissions using the Green House Gas protocol. These requirements are set out in S2 Climate-related Disclosures.

The ISSB has allowed a one year transitional relief for companies to report on their scope 3 emissions when applying the standards, giving companies some extra time to implement the necessary systems to gather and report value chain-level data.

ESRS also requires that sustainability disclosures match the boundaries of the financial statements.

The ESRS defines value chain as the full range of activities or processes needed to create a product or service, including relationships upstream and downstream of its own activities. Companies are required to take the whole value chain into account when assessing sustainability impacts, risks and opportunities, and to present this information as part of their reporting.

The ESRS requires companies to report on their Scope 3 emissions using the Green House Gas protocol. The ESRS is more restrictive than the ISSB because it requires companies to use the operational control method of carbon accounting. These requirements are set out in ESRS E1 Climate Change.

The standards recognize that it can be difficult to gather data from the whole value chain where the entity’s level of control or influence is low, so they allow approximations when reasonable effort has been made to produce the information.

In such instances, the entity has to disclose the basis for the approximation and the planned actions to reduce the level of missing data.

Summary

Both standards require that the reporting entity should be the same for sustainability disclosures and financial statements. Preparers will have to identify sustainability risks and opportunities across the value chain both upstream and downstream. Whilst the wording of the definition of value chain differs slightly between the IFRS and the ESRS, the practical application for boundary setting for reporting entities should be the same. The principle difference is that the ESRS also requires reporting on impacts along the value chain in addition to risks and opportunities.

Preparing for implementation: key questions

Have you mapped the data you currently gather on your value chain (upstream and downstream)?
How reliable is this data?
Where will you need to focus to fill the gaps?
- Can you make contractual agreements with parties in your value chain for the delivery of information?
- What support or incentives can you provide to actors in your value chain to support you in gathering data meeting your reporting obligations?
- What estimations will you need to make and how can you ensure these are as robust as possible?
- Do you have a roadmap to move away from estimations to more reliable data?
To what extent do your materiality, strategy and risk management processes cover the full value chain?
- Do you collect information on risks, opportunities and impacts?
- Have you identified what changes are needed to your materiality, strategy and risk management processes to include the full value chain perspective?
Have you considered what data will you have to provide to other entities in the value chain? – have you made plans to collect and supply it?

Finding the answers: key tools and resources

Corporate Value Chain (Scope 3) Standard: Greenhouse Gas Protocol

The Corporate Value Chain (Scope 3) Accounting and Reporting Standard allows companies to assess their entire value chain emissions impact and identify where to focus reduction activities.

Value Change in the Value Chain: Best Practices In Scope 3 Greenhouse Gas Management

The Science-Based Targets Initiative’s guidance on best practice emissions management in the value chain includes guidance on collecting data (p. 11), tracking impact (p.15) and engaging suppliers (p.21).

Pathfinder Framework Version 2.0

The Partnership for Carbon Transparency (PACT)’s Pathfinder Framework to help organizations develop and exchange primary data-based product carbon footprints (PCFs). The requirements captured in it seek to further enhance data reliability and consistency across industries and value chains.

Incentives for Scope 3 supply chain decarbonization

WBCSD and PwC’s guidance on incentivizing decarbonization in the value chain assesses the different levers for incentivizing supplier decarbonization. This includes an in-depth review of how to mandate carbon reporting in the supply chain.

Impact Statement Downstream – Industry-Agnostic Guidance

The Value Balancing Alliance provides a three step methodology for companies to quantify their downstream value chain impacts.

Sustainability reports exist in many different forms. To align sustainability reporting with financial reporting and bring it to the same level of quality and comparability, integrated reporting is used. This means that the sustainability report and the financial report are included in the same publication.

ISSB Standards

European Sustainability Reporting Standards

For the ISSB Standards, sustainability information needs to be included in general purpose financial reporting. However, the exact location of the information is not specified. Sustainability information could be included in management commentary, management’s discussion and analysis, operating and financial review, integrated report and strategic report.

When sustainability information is included in other publications, it needs to be clearly identifiable and not obscured by additional information.

When information is available under the same terms and at the time as the general purpose financial reporting, cross-referencing is allowed. However, the cross-referenced information should also comply with the ISSB Standards.

If information is included by cross-reference, the body or individuals that authorize the use of the information take the same responsibility as for the information directly included. The reference needs to state the location, including a specific part of the location where the information can be found and how to access it. Duplication of information should be avoided.

The ISSB has agreed a one year transitional relief for companies to provide annual sustainability-related disclosures at the same time as the related financial statements.

For the ESRS, sustainability information needs to be included in a dedicated section of the management report and identified as “the sustainability statements".

The sustainability statements consist of four parts: general, environmental, social and governance information. Companies need to follow this order, but the standards allow for cross-referencing to avoid duplication of information.

In addition, other references may be used across financial statements, other reports (corporate governance report, remuneration report or other obligated public disclosures by European legislation), but only if they are:

clearly identified as addressing the disclosure requirement from the ESRS
published at the same time
subject to at least the same level of assurance
available with the same technical digitalization requirements
has the same basis of preparation, scope of consolidation and treatment of value chain information.

EU Taxonomy disclosures must also be included in the sustainability statements and identified as such.

Additional disclosures, coming from local legislations and other sustainability reporting frameworks (such as ISSB and GRI), may be included in the sustainability statements, next to ESRS requirements and should be clearly identified and referenced.

Summary

The ESRS are more strict in the structure and location of the sustainability information. Where the ISSB Standards only requests that the information is included in the same publication as the general purpose financial reporting, the ESRS requires it to be included in the management report and follow a pre-specified structure: first general, then environmental, next social and last governance information.

References are allowed under both frameworks, under some conditions, and inclusion of other information is also allowed, when clearly identified.

Preparing for implementation: key questions

How does the structure of your current sustainability report differ from new requirements you need to disclose against?
- have you identified changes in reporting processes, systems or structures that will be needed to be able to comply?
Have you identified efficient ways to enable your reporting processes and structures to meet the requirements of multiple frameworks without duplication of effort? Eg can you include references to avoid duplication of information?
Do you already publish the sustainability and financial report at the same time?
- Are you able to collect the information from supply chain partners to align the timing of sustainability and financial reporting?
- Do processes need to be accelerated to make sure all information for the report is available in time for publication?

Finding the answers: key tools and resources

Find more information on the structure of the sustainability statements that will be required under CSRD

Appendix D of ESRS 1 (p.32) shows the required structure of the sustainability statements under the CSRD. Appendix F gives an example of what this might look like. Lastly, appendix G gives an example of how references can be used in this structure.

Find out more information on the structure and location requirements of the ISSB Standards

Paragraphs 60-63 of IFRS S1 include detailed information on the location requirements for companies reporting in line with the standards.

Transition to integrated reporting: A guide to getting started

The Value Reporting Foundation’s guidance outlines the key steps companies can take to begin their journey towards integrated reporting. The Value Reporting Foundation is now part of the ISSB.

Working paper on the EU Taxonomy and CSRD climate risks assessments:

How to comply and what are the differences?

Deloitte’s working paper sets out the differences in conducting a climate risk and vulnerability assessment in compliance with the EU Taxonomy and the Corporate Sustainability Reporting Directive.

Identifying what to report

Materiality and the materiality assessment process are vital for companies to effectively identify, manage and report on significant ESG risks and opportunities. Materiality is defined at the high level in the standards. Companies are then required exercise judgement about what information is relevant for decision-making and how they determine this. The ISSB Standards and the ESRS take different approaches to materiality.

ISSB Standards

European Sustainability Reporting Standards

The ISSB Standards are specifically focused on information that is useful to the investor and defines information users as “the primary users of general purpose financial reports.” As a result, all of the information required under the ISSB Standards directly links to the financial performance of the company.

Under the ISSB Standards, companies are required to report on any information that would reasonably affect an investor’s decision-making. In other words, information is material when omitting or misconstruing the data would likely result in an investor making a different decision.

Companies are not required to disclose information that is not material for the company and no thresholds for materiality are specified that would predetermine what information would be considered material in a particular situation. Instead, companies are required to apply judgement to identify material sustainability-related financial information.

Companies must also disclose how those assessments were conducted.

Materiality judgements will need to be reassessed at each reporting date.

The ESRS take a double materiality approach in order to meet the requirements of a wide range of stakeholders. This means that information disclosed under ESRS is designed to illustrate potential financial impacts on a company (financial materiality), but also impacts on the environment and society (impact materiality).

Because the ESRS are designed to provide information to a wide variety of stakeholder groups (from investors to civil society), the audience also includes everyone that might be affected (positively and negatively) by the actions of the company across its value chain.

The ESRS requires companies to apply a double materiality lens which means they must report information that has financial materiality OR impact materiality for stakeholders. This means the materiality analysis must cover issues that have impact materiality even if they are not financially material and vice versa. This should encourage companies to identify issues which may become financially material in the future and to incorporate these into their strategy.

Within the ESRS, only ESRS 2: General Disclosures is mandatory for all companies. The other topical standards are mandatory if they are deemed material as a result of the company's materiality assessment. If a company’s materiality assessment concludes that climate change is not a material topic, meaning the company will not report in line with ESRS E1 Climate Change, the company must provide a detailed explanation of the conclusions of its materiality assessment in relation to climate change.

If a company determines that data points deriving from other relevant European legislation (e.g. SFDR) is not material, they should also provide a table stating the relevant data points.

Summary

Both the ISSB and ESRS use materiality as the basis for creating the sustainability report. But as the intended audiences for the ISSB Standards and the ESRS are different, the methods for determining the required topics will be different. The principal audience for the ISSB report is the investor, whereas in the ESRS, the audience is defined as 'affected stakeholders', which means anyone who could be affected (positively and negatively) by the actions of the company across its value chain.

Companies are required to conduct materiality assessments, and report on the findings. Companies must use their own judgement to identify material sustainability-related information, i.e. information that would reasonable affect the decision-making of the target audience (investors and/or all stakeholders).

Companies are required to disclose the process they used to conduct their materiality assessment and should be prepared to disclose why they have considered some issues are not material as this is essential information for stakeholders to understand the completeness and credibility of the materiality assessment.

Special considerations for SEC filers

Companies disclosing under the US SEC and who produce regulatory filings such as the 10-K or 10-Q are already listing and describing material information on risk factors. Companies filing in the United States that also need to comply with the ISSB Standards or ESRS should include the ESG topics covered in the ESRS and ISSB Standards in their integrated risk assessments. This will help ensure alignment between ISSB, ESRS and US SEC disclosures and the processes to meet them. Some topics included under the ISSB Standards and ESRS may not meet the SEC’s risk threshold, but appropriate disclosures may still need to be made to meet the requirements of the global or European standards.

Preparing for implementation: key questions

Does your current materiality process use a single or double materiality perspective?
Have you conducted a gap analysis against the materiality definition and requirements of the new framework
Does your materiality process identify time horizons for short, medium and long term risks, opportunities and impacts?
Have you identified the stakeholders that need to be involved in your materiality assessment to ensure all relevant perspectives are represented?
- Have you made a plan for how and when to engage stakeholders and who is responsible?
Have you identified any changes you need to make to your materiality process to meet the new requirements (e.g. to implement a double materiality lens)?
Have you aligned the impact materiality process with the financial materiality process to ensure the information is consistent?
Have you aligned your strategy and the content of your report with the results from the materiality assessment
Have you identified any capacity gaps for conducting your materiality assessment in line with the new requirements?
- Do you have a plan to close the capacity gap ? eg upskilling staff, hiring consultants, changing the scope of consultant engagements etc.

Finding the answers: key tools and resources

Read the ISSB Standards section on materiality

Paragraphs 17-19 and B13-B18 of Appendix B the IFRS S1 standard include detailed information on its definition of materiality and how materiality applies in the ISSB Standards.

Read the ESRS’ section on materiality

Section 3 of ESRS 1 (p.5) outlines the double materiality principle in detail.

Understand your materiality assessment process

Companies who need to understand different approaches to materiality, and how to develop their internal processes and external disclosure should explore “The Reality of Materiality: Insights from real-world applications of ESG materiality assessments”

How to use the materiality assessment process to inform your report

For detailed information on how materiality assessments can be used to determine what and how much information to include in the sustainability/ESG report, please visit the ESG Disclosure Handbook’s dedicated section on materiality.

Follow best practice guidance for a robust materiality assessment process

Visit Reporting Matters for insight into market tracking on the most common material issues amongst leading companies, as well as key principles for robust disclosure for your materiality assessment. These include descriptions of the process, prioritization, outcomes and alignment with strategy – among others.

Get a grip on the context

Understanding the differences between impact, financial & double materiality will help you will help you develop your materiality assessment to ensure it serves your reporting and wider strategic needs.

Conveying entity-specific sustainability-related risks and opportunities is the main purpose of the report and are the ideal outcome of a robust materiality process. Use your materiality assessment process to identify risks and opportunities. Each standard classifies risks and opportunities slightly differently.

ISSB Standards

European Sustainability Reporting Standards

For the ISSB Standards the basis of the report is sustainability-related risks and opportunities. Companies are asked to describe risks and opportunities over the short-, medium- and long-term, and to clearly define what these time horizons mean for the company.

The standards also request information about the input parameters used and how risks and opportunities are monitored and managed. In addition, companies should consider the SASB industry-specific standards to identify sustainability-related risks and opportunities. They can also make reference to wider standards when doing so (e.g. CDSB, other standards focused on financial materiality, and peer and geographic benchmarks).

Companies are also required to disclose the anticipated effect that the identified risks and opportunities could have across the value chain and where the effect is concentrated (geographical, facilities, assets, inputs, outputs, distribution channel, etc.).

Companies are exempt from disclosing commercially sensitive information about a sustainability-related opportunity, but will have to disclose that they are using this exemption. The exemption cannot be used on a broad basis to avoid disclosure.

Disclosure on process

Companies are required to disclose the process for identifying, assessing and prioritizing sustainability-related risks and opportunities.

In addition, the standards require companies to explain whether and how they have integrated this process into their overall risk management framework.

For the ESRS the basis of the report is sustainability-related risks, opportunities and impacts:

The term impacts refer to positive and negative sustainability-related impacts that are connected to a company’s activities or business model. It refers to both actual and potential future impacts.
“Risks and opportunities” refer to the company’s sustainability-related financial risks and opportunities, including those “deriving from dependencies on natural, human and social resources”.

In a situation where a company’s actions to address or benefit from impacts, risks or opportunities have a material negative impact on another sustainability matter, the entity should disclose this and how it is addressed.

Disclosure on process

Companies are required to disclose the methodologies and assumptions applied as well as the processes to identify, assess and prioritize impacts, risks and opportunities that (may) have financial effects. The standards also require that companies disclose how they determine what information is material.

Companies will need to provide information on their internal decision-making and internal control processes, and the extent to which sustainability-related impacts, risks and opportunities are included in the overall risk management process. Any changes in the processes compared to the prior period need to be disclosed, as well as any modifications or future revision dates to the materiality assessment.

The materiality assessment process is also subject to external assurance.

Summary

Both standards require companies to disclose on sustainability-related risks and opportunities, but the ESRS also requires disclosure on sustainability-related impacts. The ISSB explicitly allows companies not to disclose commercially sensitive information related to sustainability opportunities.

Both standards require companies to report on the process for identifying sustainability risks and opportunities and how these processes are integrated into their overall risk management approach.

Preparing for implementation: key questions

Do you currently document your process for identifying, prioritizing and validate your sustainability-related impacts, risks and opportunities?
Can you provide a clear explanation of why you consider the topics that you don’t report against are not material for your company?
Does your process allow you to identify the effects that the identified risks and opportunities could have across the value chain and where the effect is concentrated ? If not, Have you identified the necessary steps to complete this analysis?
Do you identify and measure the outcomes of your actions to address identified risks and opportunities?
- If yes, do you analyse how these actions may have impacted other sustainability – related topics (positively or negatively?)
- If no, have you identified the changes you need to make to collect this additional information and conduct this analysis?
Is your process for identifying, prioritizing and validate your sustainability-related impacts, risks and opportunities integrated into your general risk management process? If not, Have you identified the necessary steps to achieve this integration and who will be responsible for implementing them?
Does your process for identifying risks, opportunities and impacts include a short-, medium- and long-term focus that is adequate to meet the requirements?

Finding the answers: key tools and resources

Read the ISSB Standards section on risks and opportunities

Paragraphs 30-31 and B19-B28 of Appendix B of the IFRS S1 standard include detailed information on how risks and opportunities should be considered when applying the standards.

Read the ESRS’ section on materiality

Section 4 of ESRS 2 (p.47) includes detailed information on the identification and disclosure of impacts, risks and opportunities.

Understand your materiality assessment process

How to use the materiality assessment process to inform your report

Follow best practice guidance for a robust materiality assessment process

Visit Reporting Matters for insight into market tracking on the most common material issues amongst leading companies (p. 16), as well as key principles for robust disclosure for your materiality assessment (p. 28). These include descriptions of the process, prioritization, outcomes and alignment with strategy – among others.

Get a grip on the context

Understanding the differences between impact, financial and double materiality will help you develop your materiality assessment to ensure it serves your reporting and wider strategic needs.

SASB Materiality Map and Standards

The SASB Standards identify the financially material topics across 77 industries most relevant to financial performance in each of 77 industries. They are designed to help companies disclose financially-material sustainability information to investors. The SASB Materiality Map looks at how 26 sustainability topics manifest across the 77 topics.

Metrics in financial reporting are relatively well-developed. However, metrics used in sustainability reporting and across different companies can vary widely, in part due to a lack of standardization globally. Setting targets and metrics for corporate sustainability performance that capture an organization’s unique impact and strategy, while also providing stakeholders with relevant information, is often difficult to do. Both the ISSB Standards and the ESRS outline how to define metrics so that report users have the information they need.

ISSB Standards

European Sustainability Reporting Standards

Metrics and targets are defined in the ISSB Standards as information used to assess, manage and monitor the entity’s performance in relation to sustainability-related risks and opportunities over time. An entity should disclose the metrics it uses to:

manage and monitor sustainability-related risks and opportunities,
measure performance, including progress towards the targets it has set.

Metrics

For Metrics and targets the ISSB requires that companies:

include those defined in other IFRS topic-specific standards, metrics identified from SASB, CDSB, ESRS, GRI, other relevant frameworks focused on financial materiality, and industry and geographic benchmarks, as well as metrics developed by an entity itself, provided that the source helps the entity meet the needs of investors.
Label metrics and targets with meaningful, clear and precise names and descriptions

For each metric, the following should be provided:

How the metric is defined and which sources are used to construct the metric,
Whether the metric is absolute or relative,
Whether the metric is validated by an external body, and if so, which one, and,
How the metric is calculated, including an explanation, the inputs used, and significant assumptions and limitations.

Targets

For each target, the following should be provided:

The metrics used,
The specific target,
The period and the base period,
Milestones or interim targets,
Performance against the targets and an analysis of trends or significant changes in performance, and,
Where applicable, revisions of targets should be explained.

The ISSB Standards emphasize the importance of the consistency in definitions and calculations of metrics and targets. If they are redefined or replaced, this needs to be explained (why is the replacement metric an improvement) and where practicable, restated comparative figures need to be provided.

In accordance with the ESRS, metrics are used to evaluate performance and to track effectiveness of its actions to manage material sustainability matters (impacts, risks and opportunities).

Metrics

For metrics, the ESRS requires that companies:

Use metrics defined in the topic ESRS or use entity-specific metrics, which can be based on other sources or self-developed.
Label metrics and targets with meaningful, clear and precise names and descriptions.
For each metric an entity should disclose whether a validation has been done by an external body (other than the assurance provider) and specify which body.

Targets

For targets, the ESRS requires that companies:

Develop targets that are measurable and outcome oriented.
Describe the methodologies and significant assumptions made when setting targets(including scenario, data sources, alignment with (inter)national policy goals, wider context, local situation).
Describe whether targets are based on conclusive scientific evidence and whether stakeholders have been involved in target setting.
Give an explanation of any changes in targets or metrics (for example measurement, assumptions, limitations, data sources, data collection processes):
Explain the reason for any changes in targets or metrics and identify the effect on comparability.

For each target the company should:

Disclose the relationship of the target to policy objectives to assess progress i.e.
- specify the defined target level (is it absolute or relative, which unit is used),
- define the scope (including activities, value chain and geographical boundaries),
- disclose the baseline value and base year, and the period (and where applicable milestones / interim targets).
- Describe the performance or overall progress against the target i.e..
  - How is the target monitored?
  - Is progress in line with the plan?
  - What are the results from an analysis of trends or changes in performance?

The ESRS topic specific standards can be highly prescriptive on the nature of certain targets. For example,

for climate targets, companies will have to outline whether their target is in line with limiting global warming in line with a 1.5 degree world and how it aligns with sector or cross-sector roadmaps to achieve it.
For biodiversity targets, companies will have to outline how the targets is compatible with no net loss by 2030 and full nature recovery by 2050.

If no targets are adopted to certain sustainability matters, the entity should disclose the reason for not having adopted targets, and outline how it is tracking progress, as well as describing the timeframe for targets to be developed or why no targets will be adopted.

Summary

Both frameworks have similar disclosure requirements regarding the quality and description of metrics and targets. Both standards require companies to disclose information on the definition and scope of metrics and targets and on the process that was used to define them . Both standards also require companies to explain any changes in metrics and targets and how these will affect the comparability of information

However the ESRS has additional requirements compared to the ISSB Standards. The biggest differences are:

The ESRS requires the use of metrics defined in the ESRS topical standards, which can be augmented by additional metrics from other sources. The ISSB does not specify the use of particular metrics, but identifies a range of possible sources for companies to define relevant metric
The ISSB does not require companies to set targets, only to report on any targets they have set, whereas the ESRS requires companies to explain if they have not set targets on material sustainability issues, when a target will be assigned or why no target will be assigned, and how it will measure progress without a target.
The ESRS also requires companies to disclose the alignment of these targets with international policy frameworks and scientific evidence.

The ESRS requires companies to disclose on the involvement of stakeholders in setting the targets which is not required by the ISSB Standards.

Preparing for implementation: key questions

Have you conducted a gap analysis to determine whether your current metrics and targets meet the requirements of the standards?
- Are your metrics consistent with the required sources (e.g. ESRS topical standards)?
- Have you analyzed and documented the alignment of your targets with international policy commitments on climate, biodiversity and human rights?
- If there are gaps, what existing sources could you draw on to set metrics and targets, to meet the needs of the ESRS and ISSB standards?
Is your process of identifying metrics and targets clearly documented?
- If no, have you identified someone responsible to collect and report this information?
Do you clearly track and document any changes you make to metrics or targets?
- If yes, do you conduct a clear analysis of the impacts of these changes on the comparability of your data from year to year?
- If no, have you identified the necessary step to implement this?
Do you have a process in place to ensure that your current metrics and targets satisfy report users’ needs?
- Do you have a process for engaging stakeholders in identifying metrics or setting targets?
- If yes, is the process documented clearly
- If no, have you identified the necessary step to implement this?

Finding the answers: key tools and resources

Read the ISSB Standards section on metrics and targets

Paragraphs 45-53 of the IFRS S1 standard include detailed information on the metrics and target disclosure requirements when applying the standards.

Understand the ESRS’ approach to disclosures on metrics and targets.

Section 5 of ESRS 2 (p.50) outlines the minimum disclosure requirements in relation to metrics and targets.

Find market performance on measurements and target setting

Recommendation from Reporting Matters is that every material topic should have one of multiple SMART targets that show progress towards the overall strategy for that material topic. Additionally, companies are recommended to disclose performance against those SMART targets on an annual basis and provide historical context.

SASB Standards

The SASB Standards are a key point of reference for identifying relevant metrics for the ISSB Standards. They cover financially material topics across 77 industries. The ISSB is undertaking a process to update the SASB standards to improve their international applicability in the coming years.

CDSB Framework application guidance for water- and biodiversity-related disclosures

The CDSB’s guidance for water- and biodiversity- related disclosures is a key reference for entities seeking to make relevant disclosures in line with the ISSB Standards.

ESRS topic-specific standards

The first set of the ESRS include 10 topic-specific standards, which outline relevant disclosure metrics. These cover five environmental, four social and one governance topic.

Due diligence is a very broad topic, which most companies have included in their internal policies but not tended to make extensive external disclosure on.

ISSB Standards

European Sustainability Reporting Standards

Due diligence is not explicitly mentioned in the ISSB Standards.

The ESRS defines sustainability due diligence as: “ the process by which undertakings identify, prevent, mitigate and account for how they address the actual and potential negative impacts on the environment and people connected with their business.”

The ESRS do not impose any conduct requirements in relation to sustainability due diligence; nor do they extend or modify the role of administrative, management or supervisory bodies.

However, On 1 June 2023, the European Parliament agreed on its position on the Directive on corporate sustainability due diligence (the CSDDD). The CSDDD requires in-scope companies to conduct due diligence on, and take responsibility for, human rights abuses and environmental harm throughout their global value chains. The formal adoption of the CSDDD will significantly expand the requirements on companies operating in Europe to conduct human rights and environmental due diligence throughout their value chains, and make associated disclosures on the policy, process and outcomes of such activities.

ESRS describes the due diligence process as input for the materiality assessment, in particular in relation to understanding impact materiality. Where the undertaking cannot address all impacts at once, the due diligence process allows for action to be prioritized based on the severity and likelihood of the impacts.

Due diligence processes are incorporated in various disclosure requirements within the ESRS including:

Embedding sustainability due diligence in governance, strategy and business model(s),
Engaging with affected stakeholders,
Identifying and assessing negative impacts on people and the environment,
Taking action to address negative impacts on people and the environment, and,
Tracking the effectiveness of these efforts.

Summary

ISSB Standards do not specifically mention due diligence however the ESRS do incorporate it. Due diligence, is define in the ESRS d as “ the process by which undertakings identify, prevent, mitigate and account for how they address the actual and potential negative impacts on the environment and people connected with their business.” Due diligence processes are therefore built into disclosure requirements focusing on the identification and management of impacts on people and the environment.

Preparing for implementation: key questions

Do you have clear documented due diligence processes in place for the identification and management of your most material sustainability impacts? If yes,
- Do these procedures cover all relevant processes to identify and manage impacts of people and the environment? (or are they limited to specific activities, for example, your procurement process)?
- Does your due diligence process include engagement with stakeholders to gain the necessary insights on impacts and necessary actions?
- If no, have you identified the necessary steps to implement this?
Does your due diligence process include steps to prioritize impacts and actions based on the severity and likelihood of the impacts?
Is information from your due diligence process used to inform your materiality assessment, in particular to understanding impact materiality?
- If no, have you identified the necessary step to do this?

Finding the answers: key tools and resources

Understand the ESRS’ approach to due diligence

Section 4 of ESRS 1 (p.9) outlines the due diligence requirements when applying the standards.

Find global leading due diligence guidance

The OECD due diligence guidance for responsible business conduct proposes the following steps to take:

Embed Responsible Business Conduct
Identify and assess adverse impact
Cease, prevent or mitigate
Track
Communicate

Europe is developing regulation on due diligence disclosures

While this regulation is still under development, it is good to get up to date on what is coming. Find the proposal here: Proposal for a Directive on corporate sustainability due diligence and annex | European Commission (europa.eu)

Obtain the insights to develop due diligence procedures

Sustained value creation requires companies to manage business performance to ensure that sustainability matters that affect business value are addressed. By addressing emerging and increasingly relevant impacts and dependencies, boards are better equipped to make informed decisions about strategy and to provide robust oversight while delivering on their fiduciary duties. Modernizing governance: key recommendations for boards to ensure business resilience - World Business Council for Sustainable Development (WBCSD)

Information on the proposal for a Directive on corporate sustainability due diligence

For information on this proposal, visit this link.

How to report on business impacts

Typically, strategy disclosures are designed to draw out information on potential sustainability impacts, risks and opportunities may have on a company’s strategic and financial planning. The ISSB Standards and ESRS require a qualitative description of how sustainability affects the strategy and business model.

ISSB Standards

European Sustainability Reporting Standards

The ISSB Standards are designed to help investors (primary users) understand how sustainability-related financial risks and opportunities could affect:

Business model and value chain, including where in the business model and value chain sustainability-related risks and opportunities are concentrated.
Strategy and decision-making, including the entity’s (future) response to specific risks and opportunities, progress against plans, and trade-offs considered.
Financial position, financial performance and cash flows, including how sustainability-related risks and opportunities (and the strategy to address these) have affected its most recently reported financial position, performance and cash flows and how this financial position may change.
Resilience, including an assessment of the resilience of the strategy and business model is to its identified sustainability risks.

ESRS requires companies to describe the strategy and business model more generally – and not just how it relates to sustainability. Using this context, a company will be required to describe the interaction between the strategy, business model and sustainability.
Reporters are required to describe the company’s mission, vision, purpose and values, alongside a description of how key stakeholders (beyond investors) are considered in the strategy.
Additionally, all material impacts, risks and opportunities identified in the materiality analysis will need to be clearly linked to the strategy and business model. To do this, the company will need to report on how each impact, risk or opportunity relates to the strategy and business model, item by item.

For example, for each material topic, the company will need to answer the following questions:

What strategic decisions and commitments were made because of these material impacts, risks and opportunities?
What are the related policies, plans and targets?

The phase-in allowances of the ESRS mean that companies are exempt from reporting on the anticipated financial effects related to non-climate environmental issues (pollution, water, biodiversity, and resource use) for the first year of implementation of the standards. They will also be allowed to use qualitative disclosures for the first three years.

Summary

The purpose of sustainability reporting is to inform investors and other key stakeholders, but it’s also a critical tool to help companies think about how they make decisions internally – and about the sustainability of their business models. Both frameworks will require a qualitative description of how sustainability affects the strategy and business model. While the ISSB Standards are designed to help investors understand how sustainability related risks and opportunities could financially impact a company’s strategy and business model, the ESRS requires companies to consider all impacts on strategy and business models and how key stakeholders (beyond investors) are considered in the strategy.

Special considerations for SEC filers

The proposed climate rule would require companies to disclose how any climate-related risks identified have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term as well as how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook.

Preparing for implementation: key questions

Do you have a clearly documented Business model including the full value chain?
- If yes, Do you identify and document where in the business model and value chain sustainability-related risks and opportunities are concentrated?
- If no -, have you identified the necessary steps to develop this?
Do you have processes in place to assess the resilience of your business model in responding to potential sustainability risks, opportunities and impacts? For example do you:
- Examine industry megatrends related to ESG and sustainability
- Conduct impact and dependency mapping
- Discuss emerging and existing sustainability trends/impacts/opportunities with your key stakeholders
- Conduct materiality assessment for sustainability issues
Does the organization's strategy include how you are responding to specific risks and opportunities, progress against plans, and trade-offs considered?
Have you identified any changes needed to your business model to ensure your organization is resilient, can respond to identified sustainability risks, opportunities and impacts and continue to fit with the business purpose and strategy?
Have you analyzed and documented how sustainability-related risks and opportunities impact your company’s Financial position, financial performance and cash flows,
- If yes, do you have a strategy in place to manage these risks?
- If no, have you identified the necessary steps to conduct and document this analysis?

Finding the answers: key tools and resources

Apply enterprise risk management (ERM) concepts and processes to ESG-related risks as related to strategy and objective-setting

Review Chapter 2 in COSO’s ERM ESG framework for guidance on Strategy and objective-setting for ESG-related risks.

Use your business model to decide how to prepare and present ESG information

For information about how companies present ESG information according to business model stages, please visit the ESG Disclosure Handbook’s dedicated section on business model and strategy (pg. 19).

Explore best practices and guidelines for business model representation

Presenting the business model helps illustrate the “corporate philosophy and structure”. The Italian Network for Business Reporting’s guidance aims to help organizations in the provision of information on their business model in the integrated report. The NBIR works with the World Intellectual Capital /Assets Initiative and the IIRC (now part of the ISSB).

Follow best practice guidance for reporting on your strategy

Visit Reporting Matters for insight into what the market does as well as key principles for your strategy disclosures. These are aligned with ESRS’s approach as described above.

Governance disclosures in sustainability reporting aim to convey information on how management and oversight bodies consider sustainability in their decision making.

ISSB Standards

European Sustainability Reporting Standards

The ISSB Standards are seeking to enable users of general purpose financial reporting to understand the governance bodies, processes, controls and procedures used to monitor and manage sustainability-related risks and opportunities. Main disclosures include:

What are the responsibilities of the governance body regarding sustainability and how are these documented?
How does the governance body ensure that the appropriate skills and competencies are available for the oversight and how and how often is the body informed?
How does the governance body consider sustainability, among other considerations in strategy, decisions on major transactions, risk management policies, the setting of targets and monitoring of progress? Are these metrics included in remuneration policies?
What is the role of management in assessing and managing sustainability-related risks and opportunities? If this role is delegated: how is oversight executed? Are dedicated controls and procedures applied and how are these integrated with other internal functions?

The ESRS require a description of the roles and responsibilities of the governance bodies and management regarding sustainability. Specifically, this includes:

Their sustainability expertise, training, the relation of bodies' knowledge to the material topics, and the sustainability criteria for nominating and selecting members of bodies.
How are bodies informed about sustainability, specifically of the facts, decisions and concerns within their responsibility.
A list of sustainability matters addressed by governance bodies and how they were addressed. Were the bodies able to fulfil their roles and responsibilities?
Describe how incentive policies consider bodies' and other employees' sustainability related objectives and performance.
Provide a general assessment of embedding the core elements of due diligence in sustainability statements.

Summary

The requirements under ISSB and ESRS are similar regarding disclosures on governance. The main disclosures focus on the roles and responsibilities for sustainability decision-making and oversight at Board level and at management level, the skills and competencies of those responsible for sustainability governance, how and how often the governance bodies are informed about and consider sustainability issues, and the link between sustainability and performance incentives including remuneration.

Special considerations for SEC filers

The proposed climate rule would include a requirement to disclose on the oversight and governance of climate-related risks by the company’s board and management teams. This would include information on the board committee responsible, relevant expertise of board members, the process and frequency through which the board discuss climate-related risks, and how these are considered as part of business strategy, risk management and financial oversight, as well as the board’s role in setting and reviewing progress on targets. For the management team, the proposed rule would include requirements to understand how and who is involved in the assessment and management of climate risk, processes to ensure management is informed of and monitors climate risk, and how management feeds this information to the board.

Preparing for implementation: key questions

Is sustainability included in the formal role description of the management and oversight bodies?
- Do committee and governance body terms of reference explicitly mention ESG topics?
Are all your material topics covered in the responsibilities of the bodies' members? Are the topics explicitly mentioned?
Have you documented how frequently does your board/oversight committee discuss ESG topics, which topics are discussed and what decisions are made as a result of these discussions?
Are formal communication lines in place for sustainability information to be communicated to the bodies responsible for the oversight? – are these processes documented?
Have you identified and documented the level of knowledge and competencies on sustainability issues for Board members and members of relevant board committees?
- Have you carried out an assessment or analysis to identify relevant skills and competencies and identify gaps?
- Have you analyzed and documented the systems and processes used by the board to ensure it has the necessary diversity of perspectives and experiences to effectively govern sustainability risks, opportunities and impact?
- Have you put in place and documented programs or initiatives to build the sustainability-related knowledge and competence of members of sustainability governance bodies?

Finding the answers: key tools and resources

Find a suite of resources for boards

This page has been designed to increase awareness and support the integration of environmental and social considerations into boardroom decision-making and existing governance responsibilities. The resources consist of informative videos, relevant reports, questions to ask the board collectively and questions to ask management.

How to start on sustainability governance

This one pager collated a series of questions for both board directors and for management designed to be used as prompts for discussion. The questions are intended to be used to help organizations further integrate environmental and social issues into existing governance arrangements and decision-making.

How to ensure credible disclosures

Assurance enhances credibility and trust in the sustainability information that companies disclose in their corporate reports. Assurance helps practitioners, companies, investors and others have greater confidence in sustainability information so that stakeholders can rely on it for decision-making. The scope of assurance is either determined by the company (voluntary) or by regulation (legal requirement). While the ISSB Standards do not require assurance, the CSRD requires limited assurance in line with the ESRS: this is expected to evolve to reasonable assurance over time.

There are two types of assurance for sustainability information: limited assurance and reasonable assurance. The ICAEW explains the difference as follows:

“The conclusion in a limited assurance engagement is accordingly framed in a negative sense: "Based on the procedures performed, nothing came to our attention to indicate that the management assertion on XYZ is materially misstated."
In contrast with a reasonable assurance conclusion which would be formed in a positive sense, i.e.: "Based on the procedures performed, in our opinion, the management assertion on XYZ is reasonably stated".

ISSB Standards

European Sustainability Reporting Standards

While the ISSB Standards do not explicitly require assurance, numerous jurisdictions may require external assurance of the sustainability information once standards are adopted.

The ISSB Standards are designed to facilitate third-party verification. Verifiability is included in the qualitative characteristics of useful sustainability-related financial information in the ISSB Standards.

Requirements for assurance are included in the directive (CSRD). The directive aims to put sustainability reporting in line with financial reporting and recognizes the need for (reasonable) assurance to achieve this goal.

However, because there is not yet a sustainability assurance standard, the CSRD first mandates limited assurance to be implemented by member states. The full report is in scope for assurance and the assurer would need to verify alignment with ESRS.

There is ambition to move towards reasonable assurance in the near future, which will be evaluated a couple of years after implementation of the standards to better understand its feasibility.

Summary

Both standards have been developed to serve as a framework that will allow assurance providers to verify disclosures. While the ISSB does not require third-party assurance itself (though national jurisdictions may do so in their uptake of the standards), the ESRS requires limited assurance, with a view to reasonable assurance within a few years, once the feasibility of this is better understood.

Special considerations for SEC filers

The proposed SEC rule includes assurance requirements. Accelerated and large accelerated filers would have to instruct an assurance provider to review their scopes 1 and 2 emissions data. This will initially cover limited assurance, but could extend to reasonable assurance. There is expected to be a phase-in of the effective date for the assurance requirements under the SEC’s rule.

Preparing for implementation: key questions

Do you have internal controls in place to test the faithful representation of sustainability-related information?
- If yes, do you have internal controls cover the process and methodology for sustainability data collection, verification, and reporting?
- If no, have you identified the necessary steps to conduct and document this analysis?
Have you identified capacities you need to build internally to strengthen internal controls and prepare for external assurance?
- Have you taken the necessary steps hire new competencies or ensure team members undergo appropriate training?
Have you identified you current assurance requirements for sustainability information e.g. in national regulations or from investors or other stakeholders?
- Do you have appropriate processes in place to meet these requirements?
- Have you identified steps you can take to increase your level of assurance in line with current or expected future requirements? E.g. Can you start with assuring part of your sustainability data and build it out over time so that you build towards compliance with new legal requirements ?
Have you mapped the current level of assurance of your sustainability disclosures? E.g.
- Which disclosures are verified by a third party?
- What level of assurance do you currently undertake, over which information?
- What gaps do you have to meet more rigorously or broader sustainability assurance requirements?
If no third-party assurance is conducted, have you analyzed and documented how your company satisfies itself on the credibility of sustainability information, the robustness of its systems and the data produced?

Finding the answers: key tools and resources

Follow best practice guidance for assuring sustainability information

The final chapter of COSO’s guidance for applying ERM to ESG related risks and opportunities focuses on communication and reporting – and includes independent verification, assurance over sustainability information.

Involve your internal audit by using the IIA’s three lines business model

The three lines model establishes three essential roles that define governance at the foundation level: accountability, actions, and assurance. Assurance is independent from the governing body and management - it assures the reliability of internal control processes for ESG data disclosure and reporting.

Understand: what is assurance, how does it work, and how does it help information users?

Read the Buyers Guide to Assurance for practical guidance (pg 26), considerations and tips to help assess whether assurance is the right service to meet your needs and to identify and procure assurance services that are ‘fit for purpose’.

Follow the latest developments

Follow the latest developments, as IOSCO endorses IAASB’s efforts to develop sustainability assurance standards for assurance providers.

Get familiar with the de-facto standard for assurance of sustainability information from IAASB that assurers are using

Explore guidance for applying International Standard on Assurance Engagements 3000 (Revised), to sustainability information. The Guidance helps companies understand what assurance providers will be looking for and the necessary preconditions for assurance. It ensures that assurers are applying appropriate competence and capabilities, exercising professional skepticism and judgement, as well as more specific technical matters.

Get familiar with the proposed International Standard on Sustainability Assurance (ISSA) 5000

The International Auditing and Assurance Standards Board has developed a proposal for a global sustainability assurance standard. The proposed standard is comprehensive, standalone, and can apply to any sustainability topic disclosed under multiple sustainability frameworks.

Special considerations on reporting ESG data

Providing comparative information on the previous reporting period provides important context for a variety of users. To ensure the information is truly comparative, companies are expected to gather information year-on-year in the same way, using the same definitions and including the same elements (for example, including the same business units every year). As sustainability reporting is less developed than financial reporting, this may not always be possible. There may be improvements made to definitions or data processes. When this happens, companies will need to disclose these changes.

ISSB Standards

European Sustainability Reporting Standards

In the first period of application of the ISSB Standards, comparative information is not required.

After the first year, the ISSB Standards will require companies to disclose comparative information for all metrics as well as all narrative and descriptive disclosures.

When a definition, estimate, or metric changes from year to year, a company will be asked to disclose this along with a description of why there’s been a change. Additionally, if data isn’t available for the prior period, the company will be required to describe why.

In the first period of application of the ESRS, comparative information is not required.

After the first year, ESRS requires comparative information for all metrics and KPIs. Comparative information will be required for all narrative and descriptive disclosures as well.

For specific disclosures, the standards may require comparative information for more than one reporting period.

When a change in preparation or presentation occurs, the company needs to correct the comparative information. When this is not possible, the company must disclose this fact.

ESRS specifies that some standards might require more than one comparative period to be included in the report.

Summary

The requirements for comparative information are similar under the ISSB Standards and ESRS: during the first year, comparative information is not required. After the first year, comparative information will be required for all metrics, KPIs, narrative and descriptive disclosures. If changes occur, comparative information should also be corrected. If this is not possible, this will be disclosed by the company.

Preparing for implementation: key questions

Have you analyzed your data processes and systems to assess whether all required comparative data under the relevant framework is currently available?
- If yes, have you identified any new data that needs to be collected or new processes need to be initiated to make sure the required data is available in time?
- If no, have you identified the necessary steps to conduct and document this analysis?
Have you changed any data definitions, estimations or metrics since your previous reporting year ?
- Have you documented why you made these changes?
- Have you analyzed how these changes will affect the comparability of your data with previous years?
- Have you analyzed whether you will be able to gather the data in the same way as before or whether changes in data gathering are needed and have been put in place?
Do you currently disclose clearly how your data was gathered, whether changes in definitions have been made and their impact on comparability compared to prior year?
- If yes, you can already disclose comparable data in accordance with ISSB / ESRS,
- If no, have you identified what is needed to incorporate these elements in your disclosure going forward?

Finding the answers: key tools and resources

Read the ISSB Standards section on comparative information

Paragraphs 70-71 of the IFRS S1 standard include detailed information on the comparative information requirements when applying the standards.

Read the ESRS’ section on comparative information

Section 7.1 of ESRS 1 (p.13) outlines the comparative information requirements when applying the standards.

Follow best practice guidance for presenting targets, commitments and performance criteria

Visit Reporting Matters for insight into the best ways to demonstrate year-on-year performance. The report holds recommendations for how to present commitments, targets, commitment and performance criteria in a way that illustrates key trends – including visual elements and a clear narrative.

Estimations and uncertainties are inherent in non-financial reporting, especially when looking at future events. To be sure that report users understand how estimations and uncertainties are used within the report, it’s important to describe how and why certain estimations were used or why there are specific uncertainties.

ISSB Standards

European Sustainability Reporting Standards

The ISSB Standards recognize the need for using estimations in sustainability reporting – for example, when timelines are long or scenarios are changing.

Under the ISSB Standards, companies are required to accurately describe and explain where and how such estimations are used.

When estimates are material, companies need to describe the effects on cash flow. The range and likelihood of the possible outcomes also need to be described.

The ESRS recognize the need for using estimations.

Under ESRS, companies are required to accurately describe and explain where and how such estimations are used.
All companies use estimations when reporting about future events. When these estimates are material, their effects on the cash flows and enterprise value need to be described.

ESRS specifically ask companies to disclose the impacts on people or the environment, including the range and likelihood of possible outcomes.

Summary

Both the ISSB Standards and the ESRS recognize the need for using estimations in disclosures. Both therefore require companies to describe and explain when and how estimations are used. Estimations are inherent in reporting about future events. When these estimates are material, the effects on the cash flow need to be described for ISSB and impacts on people and environment need to be described under ESRS.

Preparing for implementation: key questions

Have you identified and documented the estimates and uncertainties currently included in your disclosures
Have you identified where new reporting requirements may require the use of estimations?
- If yes, have you identified the methodology, processes and competencies required to implement this?
Do you have mechanisms in place to regularly review and update estimates based on changing circumstances or new information?
Have you identified opportunities to replace estimates with primary data?
- Have you identified how this data can be collected? E.g. are new data collection processes required? Or are there new services emerging in the market that will make data available that wasn't previously?
Have you identified specific disclosures (including amounts) that are subject to a high level of measurement uncertainty?
For estimates and uncertainties that cannot be replaced by hard data, for example in scenario analysis, have you clearly and transparently explained how you got to the reported information?

Finding the answers: key tools and resources

Learn how to document uncertainties, limitations, sensitivities and reappraisal

Review page 27 of the ESG disclosure handbook for clear descriptions of how to document uncertainties, limitations, sensitivities and reappraisal with respect to sustainability and ESG-related information.

Get insights on the auditor perspective

This study explores the issues of materiality and conciseness in Integrated Reporting (<IR>) from the perspectives of corporate report preparers, company auditors and users of reports. Page 48 specifically focuses on the perspective of the auditor.

Read the ISSB Standards section on estimations and uncertainties

Paragraphs 77-82 of the IFRS S1 standard include detailed information on the estimations and uncertainties requirements when applying the standards.

Read the ESRS’ section on estimations and uncertainties

Section 7.2 of ESRS 1 (p.14) outlines the estimations and uncertainties requirements when applying the standards.

Even with the best intentions, reporting errors may occur. The standards describe what an entity should do in case an error is identified. Errors are omissions and misstatements arising from a failure to use, or misuse of, reliable information that was available at the time of authorization of the report and could reasonably be expected to have been obtained and considered. These include mathematical mistakes, incorrect definitions for metrics and targets, oversights, misinterpretations and fraud.

ISSB Standards

European Sustainability Reporting Standards

The ISSB standard requires companies to correct material prior period errors by restating the comparative amounts for the prior period(s) disclosed. The nature of the error should be described in the report.

When impracticable to determine the effect of the error on all prior periods presented, the company must correct the error from the earliest data practicable and describe the circumstances and how and from when error has been corrected.

Note that corrections of errors are different from changes in estimates; since these are approximations that may need revision as additional information becomes available.

The ESRS requires companies to correct material prior period errors by restating the comparative amounts for the prior period(s) disclosed. The nature of the error should be described in the report. Do not use hindsight in making assumptions about what the management's assumptions would have been in a prior period.

When impracticable to determine the effect of the error on all prior periods presented, correct the error from the earliest data practicable and describe the circumstances and how and from when error has been corrected.

Note that corrections of errors are different from changes in estimates; estimates have to be revised as soon as additional information becomes available.

Summary

The standards are aligned on way on which errors in the prior reporting period should be addressed. The ESRS explicitly states companies should not try to reconstruct management assumptions from the previous period using hindsight.

Preparing for implementation: key questions

Do you have a process in place to identify errors in reporting?
Do you have a methodology in place to determine if the error is material i.e. (Would users make a different decision if they had the correct information)?
Do you document errors identified including clear description of the error?
Have you identified how to correct the error? Eg by collecting additional information or re-calculating any prior comparative data?

Finding the answers: key tools and resources

Read the ISSB Standards section on reporting errors

Paragraphs 83-86 of the IFRS S1 standards include detailed information on the reporting errors requirements when applying the standards.

Read the ESRS’ section on reporting errors

Section 7.5 of ESRS 1 (p.15) outlines the reporting errors requirements when applying the standards.