Companies that must report to multiple sustainability regulations and standards are often looking for ways to reduce manual data collection and repetition. It can become tedious to have to report on similar metrics multiple times across new mandates while ensuring that the specifics of the regulations are met.
The International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG) have recognized this. In May 2024, the two groups published an interoperability guide, in which they showcased the alignment between the two standards – the IFRS Sustainability Disclosure Standards (ISSB standards) and the European Sustainability Reporting Standards (ESRS). The focus was on climate-related disclosures, particularly IFRS S2 (Climate-related disclosures) and ESRS E1 (Climate Change).
Through their calculation, they provided:
- Interoperability at the general reporting level between the two standards – this includes materiality, presentation, and disclosures for topics other than climate
- Table comparison and connection between the two standards, in relation to climate
- Notes and guidance for those organizations applying ESRS that want to apply IFRS
- Notes and guidance for those organizations applying ISSB that want to apply ESRS.
This guidance will prove to be extremely helpful for those organizations applying both standards and significantly reduce the amount of reporting work required. We recommend reviewing the full guidance to understand the nuances and see what specifically applies to you. Here’s a summary of what this guide covers:
Section 1: General requirements in ESRS and ISSB standards
- Materiality: Both standards are aligned on those climate-related disclosures that are financially material must be disclosed. The guidance shares that if an organization applies one of the standards, they can expect that the disclosures considered material will be in alignment with the other standard. However, for ESRS, there is an additional layer where all climate-related disclosures must also have a lens of impact materiality, on top of the financial materiality.
- Presentation: ESRS has specificities on how the information is presented and where it is located, including a sustainability statement for certain paragraphs within ESRS 1. There is alignment in that the ESRS required location for disclosures meets those outlined by IFRS S1. However, organizations should review both standards to understand the specificities of statement requirements and additional information needed.
- Disclosures for other topics: The ESRS has specific disclosure requirements for nine additional sustainability topics (not including climate), with each having a corresponding reporting standard. The IFRS 1 requires organizations to disclose sustainability-related risks and opportunities that are considered material, on top of the climate-related disclosure. Because the IFRS is less prescriptive than the ESRS, organizations should use their judgment to identify and prepare any additional information and disclosure they need to report on. There is guidance and various sources provided on how to recognize and report on the appropriate disclosures.
Section 2: Common climate-related disclosures
The guidance document provides extensive tables to showcase the disclosure requirements that the two standards align with. It indicates that nearly all the disclosures in the ISSB standards (related to climate) are included in ESRS. This guidance is particularly helpful because organizations have a starting point to understand what topics are covered in one standard versus another, and what areas to focus on when completing one and moving on to the other.
Additionally, it is important to note that ESRS currently lacks sector-specific standards. Until ESRS develops its own sector-specific guidance, organizations are advised to refer to ISSB’s industry-based guidance for relevant disclosures.
Section 3: ESRS to IFRS – Guidance for Organizations
These standards have a ton of alignment, making it simpler for organizations to respond to both. For those organizations that are looking to start with ESRS first and then move on to complying with ISSB standards, this section provides insight into the areas to focus on. There are key topics that organizations should provide additional information on that are not required in the ESRS. This includes:
- Transition plan assumptions
- Scenario analysis
- Industry-based metrics
- Greenhouse gas emissions: disaggregation
- Climate-related opportunities
- Capital deployment
- Carbon credits: any other factors
- Financed emissions
Organizations should be aware of the specific relief clauses provided by ISSB for disclosing the financial effects of climate-related risks and opportunities, whereas ESRS emphasizes qualitative disclosure when quantification isn’t feasible. Additionally, while ESRS allows for the estimation of value chain information if collection is impracticable, ISSB provides relief clauses based on reasonable efforts and available information.
Section 4: IFRS to ESRS – guidance for organizations
For organizations looking to start with the ISSB standards first and then comply with ESRS, this section provides insight into the areas of consideration and key differences. This includes:
- Scenario analysis
- Greenhouse gas emissions: disaggregation
- Carbon credits
- Quantitative information: single amount or range
- Climate-related physical and transition risks
- Greenhouse gas emission reduction targets
- Greenhouse gas emissions: organizational boundary
Additionally, a dedicated section addresses the specific climate-related disclosures required by the ESRS that are not covered by the ISSB standards, specifically IFRS S2 and IFRS S1. This section is critical for understanding the additional and incremental requirements that entities must comply with to align their reporting with ESRS and ISSB standards.
It is crucial to understand that ISSB offers specific relief clauses if estimating Scope 3 emissions is impracticable. Whereas ESRS allows estimation but lacks an equivalent relief clause. So Scope 3 emissions must always be calculated.
Understanding and applying relief clauses from both ESRS and ISSB can help entities achieve compliance efficiently. It can also assist them in balancing reporting requirements with practical considerations and avoiding undue costs and efforts. We highly recommend reading the full guidance document to understand how your organization can navigate interoperability between the two standards. It will also help you know how to ensure compliance.
The world of sustainability reporting and disclosure changes constantly. As new guidelines and mandates launch each year, it is helpful to have services and support from a trusted advisor. Cority’s Sustainability Cloud solution, along with our team of ESG and sustainability experts, supports organizations to advance their sustainability strategies across their value chain and beyond.
To further simplify your sustainability reporting, explore Cority’s Sustainability Cloud solution and connect with our ESG and sustainability experts today.
