The IFRS ESG Standards Impact on US Companies

U.S. entities should be aware of the global push towards Environmental, Sustainability and Governance (ESG), as many organizations within our economy operate as part of an international supply chain.

Public demand for ESG reporting has accelerated reporting requirements globally, which will likely have an impact on organizations throughout supply chains, despite geographic borders.  As the landscape continues to evolve, the International Financial Reporting Standards (IFRS) Foundation is moving quickly to establish a global standard. 

The IFRS Foundation has established the International Sustainability Standards Board (ISSB) to address general ESG considerations with consistent, international standards. This board sits alongside the International Accounting Standards Board (IASB) and will be working in close cooperation going forward on the creation of standards with the ultimate goal of creating a global framework for ESG reporting. ISSB anticipates working with various international organizations and governments to create these standards. Countries will then consider adoption of the ISSB standards individually. 

The ISSB recently issued its first two proposed exposure drafts:

• IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information – Establishes the general requirements for sustainability-related disclosures in line with IASB’s conceptual framework. Under IFRS S1, entities would be required to report all material information about significant sustainability-related risks and opportunities for the purpose of providing users with additional information to assess the value of the organization. Organizations would be required to report on governance, strategy, risk management, metrics and targets. The proposal also would require adopters to report sustainability information alongside their financial reporting and discuss the connections between this information. 

• IFRS S2 Climate-related Disclosures – This exposure draft would require entities to provide information about their exposure to climate-related risks and opportunities to assist users in assessing an entity’s future cash flow and enterprise value. Issued alongside IFRS S1, the ISSB views climate change as a significant risk for all entities. The proposal draws heavily on the Task Force on Climate-related Financial Disclosures (TCFD) standards, which have already been widely adopted. Entities would be required to disclose governance, strategy, risk management, metrics and targets relating to climate-related risks and opportunities. 

Similar to the ISSB standards, the Security and Exchange Commission’s (SEC) proposed greenhouse gas (GHG) disclosures have also been based on the framework developed by the TCFD. While U.S. companies await the developing SEC guidelines, the ISSB standards may provide an expectation of future requirements. In addition, entities that have voluntarily disclosed this information ahead of requirements have already seen benefits from investors, customers and employees. The SEC has also joined the Sustainability Standards Advisory Forum, which was created by the ISSB to enhance compatibility of their sustainability standards.  

Under the proposals, U.S. companies with large customers operating in a county adopting these standards will see pressure to provide GHG reporting, as these entities will be required to report the carbon footprint within their entire supply chain. Currently, 144 legal jurisdictions require the usage of the IFRS standards. Of the Group of Twenty (G20) economies, 15 economies require IFRS, while three are closely aligned. The G20 is comprised of the world’s largest 19 industrialized and developing economies and the European Union, representing approximately 90% of gross world product. Given the IFRS adoption rate, it is expected that the majority of these nations will adopt the ISSB standards. In addition, China, one of the G20 nations whose standards are closely aligned to the IFRS standards, has already signaled intention to adopt the ISSB standards.

The ISSB anticipates finalizing standards by the end of 2022. The effective date will be announced following finalization, with early adoption permitted. Dates may also vary as individual nations enact adoption for companies operating within their borders. Additionally, the ISSB has announced plans for further standards, including industry-based standards similar to the approach used by the Sustainability Accounting Standards Board (SASB). The ISSB is encouraging financial statement preparers to continue to use the SASB standards alongside the IFRS S1 and S2 during this transition phase. 

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Schneider Downs provides assurance and advisory services for companies. For more information concerning ESG matters and their impact to your organization, please visit the Schneider Downs Our Thoughts On blog or email us at [email protected].