November 2021 saw an abundance of activities at the United Nations’ Conference of the Parties in Glasgow, Scotland, bringing new government commitments and plans to respond to the climate crisis. As part of the events, the Trustees of the International Financial Reporting Standards (IFRS) Foundation, which oversees the International Accounting Standards Board (IASB), delivered major announcements that will affect the entire corporate reporting paradigm.

The culmination of a due diligence process that began in September 2020, the IFRS Foundation’s announcements had three major components.

The formation of an International Sustainability Standards Board (ISSB). The merger of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) (itself the merged former Sustainability Accounting Standards Board and the International Integrated Reporting Council). The merger into the IFRS/ISSB is expected to be executed by June 2022.

The work plan of the IFRS Foundation’s Technical Readiness Working Group (TRWG) along with two prototype disclosures. The TRWG consists of representatives from the IASB, VRF, CDSB, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), and the World Economic Forum. The International Organization of Securities Commissions (IOSCO) is providing additional oversight to the TRWG’s work.

According to the TRWG’s work plan, the two published prototypes are the first in a series of documents that the group will deliver to ISSB as part of the new ISSB’s foundational work. The ISSB will expose these prototype standards in a process similar to its sister board, the IASB, both of which report into the IFRS Foundation.


The first of the two published prototype standards, General Requirements for Disclosure of Sustainability-related Financial Information Prototype, describes the general objectives of sustainability standards that will be in the hands of the ISSB to develop. This prototype cites IASB’s IAS 1, Presentation of Financial Statements, to describe financial reporting and sustainability reporting’s common goal: facilitating the delivery of useful information to financial markets to support investors’ decisions on whether to contribute economic resources to the entity.

Tjeerd Krumpelman, global head of advisory, reporting, and engagement/group sustainability at ABN AMRO, observes that the general disclosure prototype supports connectivity between traditional financial accounting and sustainability reporting. “For example, it includes a general requirement to connect sustainability-related financial disclosure with other information, including the financial statements and a general requirement that any underlying financial assumptions used to prepare sustainability-related disclosure will be consistent with those used to prepare the financial statements.”


It’s expected that many sustainability disclosures will find connectivity to financial reporting through management commentary. Many jurisdictions that have adopted IFRS, through the actions of their securities regulators, also mandate disclosures that align with IFRS Practice Statement 1, Management Commentary. Generally, this calls for disclosures regarding management’s view of the entity’s performance position and progress, including forward-looking information. It shows how an entity responds to risks and executes strategy that affects assessments, expectations, and estimates of performance and cash flows over the short, medium, and long term.

The release of the IFRS Foundation’s announcements brings uncertainty to the outcome of IASB’s Practice Statement Exposure Draft, ED/2021/6, which was issued just a few months before the Trustees’ announcements at Glasgow. Nili Shah, executive technical director at the IASB, notes, “This is an area both boards will likely need to think about further—that is, how do the components of the reporting package (financial statements, sustainability disclosures, and management commentary) fit together. Some are calling for the boards to jointly work on a project on management commentary.”

The second TRWG release, Climate-related Disclosures Prototype, further illustrates the path toward operationalizing the connectivity between financial and sustainability disclosure. The climate prototype largely exposes the existing recommendations of the TCFD. Although regulatory and standard-setting authorities hadn’t (yet) formally adopted the TCFD before the IFRS Foundation’s announcements, these guidelines were well underway to becoming generally accepted. In substance, the climate prototype provides for entity disclosure of the following four areas:

  • The governance processes, controls, and procedures the entity uses to monitor and manage climate-related risks and opportunities
  • Climate-related risks and opportunities that could enhance, threaten, or change the entity’s business model and strategy over the short, medium, and long term, including information about business model and resilience
  • How climate-related risks are identified, assessed, managed, and mitigated by the entity
  • The metrics and targets used to manage and monitor the entity’s performance in relation to climate-related risks and opportunities over time

These items largely correspond to the information that users seek from management commentary. They speak to business model, risks, and management perspective and analysis.

The U.S. Securities & Exchange Commission (SEC) is also moving to enhance corporate disclosure of climate risks. First, it’s insisting on compliance with its Commission Guidance Regarding Disclosure Related to Climate Change, Release No. 33-9106 (February 2, 2010) (Interpretation), and the Division of Corporation Finance has announced its intention to review 2021 Forms 10-K for compliance. Specifically, the SEC will look for disclosure of material effects related to climate change that may affect business, financial condition, and results of operations. These include not only regulatory and compliance burdens, but also “market trends that may alter business opportunities, credit risks, or technological changes.” Further, it’s expected that the SEC will propose specific regulations in early 2022 around climate-related disclosures that will be comparable to the TCFD.


The accelerating demand for climate risk disclosures, and therefore the movement by the IFRS Foundation, the SEC, and other authorities around the world, reflects investor concern around transitional risks, including stranded asset risks, as the economy moves toward low or zero emissions alternatives. That is, assets (both recognized and unrecognized value) may lose their ability to earn an adequate economic return at some time prior to the end of their economic lives, as originally anticipated, as the economy transitions to low or zero-emissions alternatives. For financial accounting professionals, this means impairment assessments of tangible, on-book assets. But the issue is broader.

An entity’s unrecognized or intangible value to investors, which includes its ability to remain agile and generate cash flows into the future, must be considered as well. Corporate reporting is moving toward a new paradigm in which investors are provided with information that supports assessment of an entity’s ability to perform and deliver sustainably into the future.

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