Comment Letter for Exposure Drafts IFRS® Sustainability Disclosure Standards IFRS S1 and S2

Posted by CHARLES CHO - Sep 13, 2022

July 27, 2022

International Sustainability Standards Board, IFRS Foundation

Professor Charles H. Cho
Dr. Blerita Korca
Professor Joanna Krasodomska
Professor Ian Thomson
Professor Gunnar Rimmel

Re: Exposure Drafts IFRS® Sustainability Disclosure Standards IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures

Dear members of the International Sustainability Standards Board,

We are a group of Professors of Accounting who have been researching in the field of sustainability accounting and reporting for many years – some of us for decades.

Considering our research evidence-based and practice-based expertise in the field of sustainability accounting and reporting, we would like to offer several suggestions for the International Sustainability Standards Board (ISSB) to take into account when publishing the new IFRS Sustainability Disclosure Standards. We strongly believe that there are several critical aspects which need to be rethought, reconsidered and revised in order to provide disclosure standards that facilitate entities’ disclosure and address stakeholders’ needs. In this regard, some major issues are identified below.

Materiality definition

The definition of materiality in the exposure drafts has two major drawbacks as follows:

  • It is rather ambiguous and unclear whether it is defined as sector- or entity-specific. As such, entities will have to conduct materiality assessments on a regular basis which can be very costly. More precise guidance on how material aspects must be defined and reported on would facilitate disclosure and not burden entities with extra costs.
  • While the definition of materiality in the exposure drafts is ambiguous, it does refer to financial (and single) materiality, or the ‘outside-in’ perspective. The exposure drafts refer to disclosure on risks and opportunities that can arise from climate-related events. However, the exposure drafts completely neglect to address the impact that entities have on the outside environment with (because of) their operations, or the ‘inside-out’ perspective. By only providing reporting standards with a financial materiality perspective, the ISSB fails to capture the importance of sustainability reporting and its objective—that is, to help solve planetary In addition, it is important to note that climate-issues which are classified as material from an inside-out (impact) perspective can quickly become material also from an outside-in perspective. Thus, while the outside-in perspective is mainly concerned with risks impacting the value-creation in the short-term, the inside-out perspective instead captures more long-term impacts. Considering this dynamic nature of materiality, it is important that the ISSB goes beyond financial materiality and embraces both the inside-out and inside-in perspective (i.e., double materiality) in line with the approach adopted by EU and Global Reporting Initiative.

We note that 31 of the 39 submissions from academics to the IFRS Foundation Trustees Consultation Paper on Sustainability Reporting (IFRS Foundation, 2020) did not agree with a financial materiality approach (Adams and Mueller, forthcoming). This is reinforced by the recent special issue of Accounting in Europe on the “Future of Corporate Reporting” and its editorial (Cho et al., 2022). To contribute to sustainable development, companies need to understand, manage and report their climate-related impacts transparently, trustworthy, and objectively. Without identification of material impacts on climate, companies will not be able to determine climate-related risks and impacts on their financial performance. A reporting framework that does not encourage companies to provide information on their climate-related impacts is therefore damaging to sustainable development – and, ironically, to their long-term financial success (Adams et al., 2021). From a long-time perspective, most sustainability matters will also have financial implications due to, for example, reputational risks.

Therefore, we disagree with the objective established for S2, as it is not in line with the double materiality concept. Thus, the information provided as a result of its implementation would notenable users of general purpose financial reporting to assess the effects of climate-related risks and opportunities on enterprise value.” An enterprise must first identify its material sustainability impacts. Otherwise, assessing financially relevant climate-related risks and opportunities (or relevant to the enterprise value) will be incomplete.

The literature review conducted by Adams et al. (2021) allowed identifying several benefits related to the application of double materiality, such as enhanced stakeholder engagement (Cooper and Morgan, 2013; Brown and Dillard, 2015; Puroila and Mäkelä, 2019), better investment decision making, improved financial performance (Khan et al., 2016), and more accurate analyst forecasts (Khan et al., 2016; Grewal et al., 2020; Martinez, 2016; van Heijningen, 2019). However, there are also problems and challenges when applying double materiality. Literature suggests that the materiality determination process is not adequately reported (Adams, 2004; Beske et al., 2020; Machado et al., 2021; Guix et al., 2018), and materiality assessment favors short-term financial interests (Puroila and Mäkelä, 2019). The materiality assessment process was found not to be included within the scope of sustainability assurance engagements (Borial et al., 2019), or the assurance was limited to data checking (Boiral and Heras-Saizarbitoria, 2020; Boiral et al., 2019; Farooq and De Villiers, 2019; Gürtürk and Hahn, 2016). These problems are due to the lack of experience in conducting materiality analysis and heterogeneity of materiality definitions, guidelines, and applications (Adams et al., 2021).

We support the views which welcome the movement towards embracing double materiality and encourages the ISSB to reconsider its decision to focus on financial (and single) materiality only. To be used as a global baseline, IFRS S2 should be revised to integrate double materiality. As Baumüller and Sopp (2022) conclude, while perhaps being initially attractive for investors, financial materiality would do little to meet the needs of other information users. It would likely lead to omitting important sustainability impacts from sustainability reporting. This situation would harm the planet’s sustainability and all stakeholders, including investors. Therefore, we strongly suggest that the ISSB acknowledges that an entity’s financial sustainability is interdependent with the sustainability of the planet and society (see also Open letter about the Materiality Debate).

The global baseline

There are several issues with the exposure drafts which do not allow them to serve as the global baseline. The exposure drafts are not coherent with the direction of other international frameworks and regulations on several aspects as follows:

  • Materiality definition (again) – In various jurisdictions worldwide, the concept of double materiality is being used in sustainability reporting (e.g., Afolabi et al., 2022). The report from the International Platform on Sustainable Finance (2021) offers an overview of jurisdictions which have in place regulations following a double materiality perspective. Specifically, jurisdictions such as Brazil, the EU, Kenya, Norway, and Singapore have in place or are planning disclosure measures with a double materiality perspective (International Platform on Sustainable Finance, 2021). In this regard, the exposure drafts do not fit with jurisdictional requirements due to its financial materiality perspective and thus will not be of much use.
  • Carbon offsets – The impact of carbon offsetting on global climate systems is a contested field (IPCC, 2021) The impact very much depends on the type of offsetting and underlying measurement protocol (Environment Agency, 2021) and not all of the carbon offsets that can be purchased actually reduce global GHG emissions. However, the IFRS exposure drafts indicate instead that it is possible to use offsets as a strategy for reducing climate-related risks. This is in conflict for example with the draft European Sustainability Reporting Standards (ESRS), whichs refrain from using the term offsetting, but rather carbon credits. It is important that it is clearly noted in the IFRS exposure drafts that the offsetting and reduction of the GHG emissions are two different actions in target setting and that choosing one over the other can have a higher utility in mitigating climate change. Therefore, we recommend that offsetting not to be allowed as a strategy in setting targets as this means that entities might continue to emit while taking advantage of the largely unregulated carbon offset market. Furthermore, as Thomson and Charnock (2022) have pointed out, how to measure, and account for, carbon emissions is important to financial sector risk assessments (Coulson and Monks, 1999; Busch and Hoffmann, 2007; Bebbington and Larrinaga-González, 2008; Bebbington et al., 2020) and accountability, governance and regulatory dynamics (Macve and Chen, 2010; Gond and Piani, 2013; O’Sullivan and O’Dwyer, 2015).
  • Addressing the needs of stakeholders – Sustainable development requires a multi-stakeholder approach (Adams and Mueller, forthcoming). The IFRS exposure drafts in its current state do not take into account the needs of a broader group of stakeholders in sustainability reporting. While the focus of the IFRS exposure drafts is solely on investors, it is important to note that other stakeholders are not only interested in risks and opportunities that can arise from climate change but are also in the impact that entities have on climate change. The exposure drafts are not taking into account the needs of other stakeholders, besides users of “general purpose financial reporting.” However, this ignores the future financial impact that stakeholder can have on future financial value. It is worth reflecting on the standard definition of a stakeholder as an individual or institution with a vested interest in a company that can affect or be affected by that company’s decisions, operations or performance. It is the action of stakeholders that drives future financial performance. For example, consumers are an important source of a business financial value in the short, medium and long term and governments/regulators have a critical role in influencing the cost and taxation base of any business. Therefore, it is challenging to use the exposure drafts in its current state as the global baseline to satisfy the needs of various stakeholders as the crucial aspect of the inside-out perspective is not addressed at all.

 Scope 3 disclosures

We support the disclosures on Scope 1, Scope 2, and Scope 3 and the use of the GHG Protocol for this purpose to ensure comparability and quality of the information provided.

As acknowledged by the ISSB in question 9, the disclosure of Scope 3 GHG emissions is increasing in quality and becoming more common. However, it still presents several challenges. At the same time, Scope 3 emissions, also referred to as value chain emissions, often represent the majority of an organization’s total GHG emissions (Environmental Protection Agency, 2021). Research provides evidence that Scope 3 was and is still far less reported than Scope 1 and Scope 2 (Kolk et al., 2008; Tang and Demeritt, 2019). According to Kolk (2008), lower disclosure of Scope 3 is not surprising as under the GHG Protocol, quantifying these emissions is not required. Firms that provide information tend to only report on a few activities that fall under Scope 3 emissions. The most widely reported Scope 3 emissions are from employee business travel (Kolk, 2008). Similar results were obtained 11 years later by Tang and Demeritt (2019). Companies covered by the study were found to collect some data on Scope 3 emissions, typically associated with flights and business travel, which were relatively easy to manage compared with the full life cycle analysis that might be required to trace the emissions arising up and down the supply chain. The authors concluded that since these indirect Scope 3 emissions are not linked with any costs to the company, the reason for collecting them was reputational and related to participation in voluntary reporting schemes, such as CDP’s Climate Change Program, which rates companies more favorably if this additional information is reported. Therefore, we suggest implementing a phased approach with the requirement to provide Scope 1 and Scope 2 disclosures immediately and at least some more problematic Scope 3 disclosures with a delay. However, a study of S&P 500 GHG emissions over the period 2015-2019 identified that on average scope 1 and 2 emission only represented 23% of GHG emissions already disclosed by S&P 250 firms, with over 37% of GHG disclosures already including Scope 3 emissions (Thomson et al, 2021). This suggests that ISSB recommendations will result in a rollback in corporate disclosure practise..

The use of SASB standards and TCFD recommendations

According to the SASB website 1,411 (42%) of SASB reporting comes from the USA. Only 374 (11.7%) were from Europe (Value Reporting Foundation, 2022). In Europe, SASB Standards are not commonly applied and there is limited understanding of them.

Appendix B, which is an integral part of the S2 is comprehensive and contains extensive and detailed disclosure requirements. The large number of metrics specified raises concerns about the potential difficulties related to S2 implementation and the cost-effectiveness of the reporting process.

On the contrary, the TCFD recommendations are a globally recognized framework for climate-related reporting. As of October 2021, in addition to the support of dozens of regulators and supervisors, Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the United Kingdom have announced requirements for domestic organizations to report in alignment with the TCFD recommendations (FSB, 2021). However, many countries have not decided to follow this path. Therefore, problems and costs related to the implementation of S2 would be different across countries.

Prior research suggests that despite the issuance of the TCFD framework contributed to the increase in climate reporting from 2015 to 2018, its compliance with TCFD recommendations is poor, specifically concerning the core element of strategy (Bastien and Giordano-Spring, 2022).   Most of the disclosures were in voluntary sustainability reports, not the financial filings recommended by the TCFD. Similarly, Demaria and Rigot’s (2020) research results highlight disparities across TCFD areas and suggest that firms are less compliant with specific crucial recommendations of TCFD. O’Dwyer and Unerman’s (2020) study identified such specific challenges regarding using TCFD reporting practices as, e.g., understanding novel climate-related scenario planning, integrating climate risks into corporate-level risk management, determining the climate-related materiality, and aligning TCFD reporting with other corporate reporting frameworks.

We understand the urgency related to the implementation of the S2. However, given the above, we suggest that the ISSB considers implementing a phased approach and allowing applying some requirements earlier and some with a delay. For example, disclosures involving scenario planning or some quantitative measures, as Scope 3 mentioned above, could be provided later, and qualitative information on corporate governance, risks, and opportunities may be disclosed earlier.


Charles H. Cho, PhD, CPA
Professor of Sustainability Accounting
Erivan K. Haub Chair in Business & Sustainability
Schulich School of Business, York University, Canada

Blerita Korca, PhD
Research Collaborator
Department of Economics and Management, University of Trento, Italy

Joanna Krasodomska, PhD
Associate Professor
Department of Financial Accounting, Cracow University of Economics, Poland

Gunnar Rimmel, PhD
Chair in Accounting & Corporate Reporting
Director of The Henley Centre of Accounting Research & Practice (HARP)
Henley Business School, University of Reading, United Kingdom

Ian Thomson, PhD, CMA
Professor of Accounting & Sustainability
Director, Lloyds Banking Group Centre for Responsible Business
Birmingham Business School, University of Birmingham, United Kingdom



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