ISSB’s IFRS S1 & S2

In June 2023, the International Sustainability Standards Board (ISSB) issued their inaugural International Financial Reporting Standards (IFRS) for Sustainability Disclosures. IFRS S1 establishes a comprehensive set of disclosure requirements that enable companies to communicate sustainability-related risks and opportunities to investors. IFRS S2 focuses specifically on climate-related disclosures and is designed to be used in tandem with IFRS S1.

Together, these standards are designed to provide a global baseline of sustainability-related disclosures for the capital markets and fully incorporate the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. Over 30 jurisdictions have already decided to use or are taking steps to introduce these ISSB Standards into their regulatory frameworks. These jurisdictions account for over 55% of global GDP, comprise over 40% of global market capitalization, and contribute towards more than half of global greenhouse gas emissions.

In contrast to the EU’s Corporate Sustainability Reporting Directive (CSRD), the IFRS Standards adopt single materiality as opposed to double materiality, meaning that they are primarily concerned with information about sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term.

The structure of these ISSB disclosures mirrors the TCFD framework in that they are both broadly categorized under the four overarching themes of governance, strategy, risk management, and information on metrics and targets. An analysis of these themes reveals several areas of overlap and identifies a variety of reporting synergies between the IFRS Standards and the GRESB Assessments.  

Governance

The GRESB Real Estate and Infrastructure Assessments have dedicated sections on “ESG Decision Making” comprising indicators designed to drill down into an entity’s governance structures with regard to responsibilities, accountabilities, and oversight for the implementation of sustainability and climate-related objectives. This also involves indicators that explore how sustainability factors are included in the annual performance targets of personnel and whether performance on these targets has predetermined financial consequences for an entity’s employees.

Accordingly, this section provides an important evaluation of how an entity integrates sustainability into its overall business strategy by identifying who has responsibility and decision-making authority for managing ESG issues. This enables GRESB to communicate to investors how an entity both structures and rewards its management of sustainability issues, thereby helping support Article 6 of IFRS S1 and Article 27 of IFRS S2.

In addition, the GRESB Assessments go beyond the individualized lens of IFRS reporting and add a deeper layer of insight into the governance dynamics of an entity by: (1) breaking down each governance indicator into its constituent elements in the GRESB Benchmark Report to reveal how the rest of the industry answered these questions, facilitating direct comparisons; (2) scoring an entity on its governance practices and providing analytics to benchmark this performance against its peers; (3) requiring evidence to support an entity’s answers to these governance questions, with validation performed thereon.

Strategy & risk management

The “strategy” and “risk management” sections of the IFRS Standards are splintered into various disclosures regarding strategy and decision-making, business model and value chain, sustainability and climate-related risks and opportunities, as well as resilience. Notably, the GRESB Real Estate and Infrastructure Assessments have very strong degrees of overlap on multiple components due their robust climate-related risk management indicators that drill down into an entity’s climate resilience, scenario analysis, and their identification and impact assessments of both transition and physical risks, as well as climate-related opportunities.

These indicators all combine to provide a wealth of information regarding an entity’s risk management, the resilience of their strategy to climate-related risks and opportunities, their use of scenario analysis, and their processes for identifying transition and physical risks that could have material financial impacts on the entity. These indicators also include mechanisms that help relay the outcomes of these risk assessments by detailing the material impacts of both physical and transition risks, as well as climate-related opportunities on the entity’s business and financial planning through the lens of policy, law, technology, market, and reputation.

Moreover, the checkbox structure of the GRESB Assessments infuses a high level of granularity into each sub-element of the risk management process with correlated answer options that carefully scrub the reporting entity for material information that is most relevant to investors. This information is then scored and delivered in an easily digestible format in the GRESB Benchmark Report, along with a schema that displays how the rest of the industry answered these questions, facilitating direct comparisons on multiple fronts. In addition, these disclosures are further strengthened by evidentiary requirements and an associated validation process that ensures there is a sufficient demonstration of both process and outcomes relating to these risk assessments.

Metrics and targets

The greatest overlap between the GRESB Assessments and the IFRS Standards materializes in the “metrics and targets” disclosures, particularly in IFRS S2 which requires a myriad of metrics relating to GHG emissions and climate-related target-setting. The GRESB Real Estate and Infrastructure Assessments have fully fleshed out GHG indicators that capture, validate, benchmark, and score GHG emissions across a reporting entity’s assets. Accordingly, GRESB’s GHG data covers all scopes and also includes both location and market-based emissions. In turn, the robust GHG collection and accounting practices that have been instilled through GRESB reporting sets up entities to seamlessly report on most of the IFRS S2’s climate-related metrics.

The GRESB Assessments also contain dedicated target-setting sections that are designed to extract key material information pertaining to the entity’s approach and methodologies regarding how they set and communicate their targets across multiple dimensions. This also includes information on net-zero targets, with significant effort devoted towards creating a clear and structured reporting mechanism to produce straightforward and actionable insights for investors, particularly in Infrastructure where GRESB has prioritized a set of valuable updates to net-zero target setting.

The most notable overlap between GRESB and the IFRS S2 derives from the influence of the GRESB Real Estate Assessment in structuring the industry-based metrics required for real estate. IFRS S2 requires disclosures on both cross-industry metrics and industry-based metrics, the latter of which are associated with “particular business models, activities, or other common features that characterize participation in an industry” (Article 28(b), IFRS S2). The industry-based metrics for real estate are outlined in Volume 36, page 292 of the IFRS guidance document. Here, it is particularly noteworthy that the GRESB Real Estate Assessment forms the basis upon which the IFRS’ industry-based metrics for real estate have been modeled.

GRESB is referenced throughout the IFRS guidance document, and numerous definitions, calculations, and terms used in the guidance are directly drawn from the GRESB Assessment. Furthermore, the guidance consistently emphasizes that “the entity shall consider the 2018 GRESB Real Estate Assessment Reference Guide as a normative reference, thus any updates made year-on-year shall be considered updates to this guidance” (page 297, IFRS guidance document). As a result, the GRESB Standards form the scaffolding of the IFRS’ disclosure metrics for real estate, thereby reinforcing GRESB’s position as the global standard for real estate. If interested, please see this article for more information on this topic.

Given its worldwide adoption, the IFRS framework is poised to become the global standard for sustainability reporting. Its recognition of the GRESB Real Estate Standard, in combination with the multiple synergies detailed above across the GRESB Real Estate and Infrastructure Assessments, positions GRESB as a strong facilitator of, and supplement to, IFRS reporting. Moreover, GRESB’s additional attributes of double materiality, benchmarking, scoring, validation, industry-specificity, advanced analytics, and asset-level insights provide significant extra layers of value above and beyond the individualized and single materiality lens of IFRS disclosures.

As multiple countries slowly incorporate the IFRS Standards into their national laws over the coming years, GRESB is well positioned to both inform and supplement IFRS reporting with additional levels of sectorally relevant non-financial information that can best equip capital markets to make informed decisions and conduct effective risk management across their real asset portfolios.