The IFRS Foundation (International Financial Reporting Standards) is a non-governmental organization that for many years issued financial reporting standards. These standards, specifically the International Financial Reporting Standards (IFRS), were then adopted in various jurisdictions as mandatory. The European Union has also been adopting more IFRS over the years and making them mandatory for various groups of companies. Thanks to the IFRS Foundation's activities, the financial reports of companies from different countries are comparable. This does not apply to all countries and all groups of companies, for the road to standardized reporting is long.
Several years ago, the IFRS Foundation undertook work on sustainability reporting standards. This is being handled by the ISSB (International Sustainability Standards Board). So far, the ISSB has developed two standards: S1 (General Sustainability-related Disclosures) and S2 (Climate-related Disclosures). They will be effective as of January 1, 2024, of course, in those jurisdictions that adopt them.
Work on the S1 and S2 standards was going on at the same time as we were designing the ESRS standards in Europe. During the work, EFRAG's and ISSB's working groups had a series of working meetings. The structure and detailed provisions of the ESRS 1, 2 and E1 standards were adjusted to include what the ISSB S1 and S2 standards require of companies. So we should expect that a company preparing a report in accordance with the ESRS will automatically achieve compliance with international standards.
Such compliance cannot be achieved the other way around, i.e. a report prepared according to ISSB S1 and S2 will not comply with ESRS standards. There are two reasons for this situation. First, ISSB standards, at least for the time being, omit most of the relevant sustainability issues (environmental issues other than climate change, human and social issues and those related to governance). Second, the ISSB has developed standards according to the principle of financial materiality, ignoring impact materiality almost entirely.
The ISSB Board is currently conducting consultations of its work plan for the next two years. It's worth taking part, because stakeholder voices could influence whether the ISSB starts to be more ambitious about reporting on sustainability issues. After all, it's hard to consider today, in 2023, that only climate change issues are serious enough to obligate companies to report on them. It's also hard to ignore the fact that companies are responsible for the impact they have on people and society. It would be good if this were also reflected in the reporting obligations of all companies, not just European ones.
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