Under IFRS' Climate Disclosure Standard, ISSB Will Require Climate-Related Scenario Analysis

According to a statement released by the International Sustainability Standards Board (ISSB) of the IFRS Foundation, companies will be expected to utilize climate-related scenario analysis as part of their disclosures.

The decision represents another key step in the ISSB's creation of climate-related reporting requirements, after the board's announcement last month that Scope 3 emissions reporting would be included in its new standards.

Regulators in major global jurisdictions, including Europe, the United Kingdom, and the United States, among others, have enacted or are drafting mandatory sustainability reporting requirements for firms, with the majority significantly influenced by ISSB standards.

Some businesses use scenario analysis to assess the strategic and financial implications of potential climate-related risks and opportunities, including both transition risk and physical risk. However, according to a recent report by the professional services firm EY, less than half of businesses are currently conducting climate-related scenario analysis.

According to the IFRS, the board decided unanimously to confirm that businesses will be expected to use climate-related scenario analysis to report on climate resilience and to identify climate-related risks and opportunities to support their disclosures.

The board also stated that it will provide support for preparers regarding the application of climate-related scenario analysis, including providing guidance on which types of scenario analysis an entity should use, based on circumstances such as industry and country exposure, and recognising that "off-the-shelf scenarios" such as those of the Network for Greening the Financial System (NGFS) may be useful resources for businesses. NGFS scenarios represent a variety of potential future climate policies, physical hazards, such as heat, drought, and flooding, and short- and long-term risks associated with the transition to a greener economy, such as rising carbon costs.

The ISSB intends to conclude debates on its first two proposed standards for company sustainability and climate-related disclosures by the end of this year and to publish the final standards as soon as feasible in 2023.