IFRS to Establish New International Disclosure Standards for Corporate ESG

[Asia Economy Reporter Kwon Jae-hee] The International Financial Reporting Standards (IFRS) is set to establish an international common standard that will serve as a benchmark for disclosures related to climate change issues, which have emerged as a global challenge.

According to the Nihon Keizai Shimbun on the 4th, the IFRS Foundation announced at the 26th United Nations Climate Change Conference of the Parties (COP26) held in Glasgow, UK, the day before, that it will establish an organization under its umbrella to create internationally unified ESG (Environmental, Social, and Governance) sustainability disclosure standards by June next year.

The subsidiary organization, named the International Sustainability Standards Board (ISSB), will have hubs worldwide centered in Frankfurt, Germany. Tokyo and Beijing are being considered as candidate hubs in the Asia region.

Until now, standards related to corporate ESG information for sustainable growth, including climate change issues, have been independently created by private organizations.

These standards vary, including stakeholder-targeted disclosure standards mainly used in Europe and shareholder-focused numerical information and metrics originating in the United States, leading to criticisms of poor comparability and consistency.

Against this backdrop, the IFRS Foundation has begun drafting new disclosure standards that can be used internationally in a unified manner.

The new standards, focused on climate change issues, will be reviewed based on recommendations from the Task Force on Climate-related Financial Disclosures (TCFD), a global financial authority organization that participated in preparatory work until the ISSB's launch.

The Nihon Keizai Shimbun predicted that considering the influence of the IFRS Foundation, which creates international accounting standards used in about 150 countries and regions worldwide, the use of the new disclosure standards introduced by the ISSB will spread.

The disclosed TCFD recommendations include provisions to disclose greenhouse gas emissions as much as possible.

They impose obligations to disclose 'Scope 1' emissions, which are direct emissions from factory fuel use; 'Scope 2' emissions, which come from electricity production supplied by other companies; and 'Scope 3' emissions, which occur throughout the entire supply chain related to parts procurement and other activities.

Additionally, companies are required to set climate-related targets and disclose whether these targets are based on scientific evidence and have undergone third-party verification.

Broad disclosure obligations are also imposed regarding climate-related corporate governance and risk management.

In this context, the Federation of Korean Industries (FKI) announced in July its opposition to the IFRS Foundation's new sustainability disclosure standards, citing increased litigation risks faced by companies.

At that time, the FKI argued that "considerable assumptions or estimates are necessary for the informatization of non-financial information related to climate response and carbon neutrality," and that sustainability-related disclosures should be left to corporate autonomy.

However, the Nihon Keizai Shimbun anticipated that in a situation where environmental disclosure standards are fragmented, if disclosures such as greenhouse gas emissions progress according to the new standards established by the IFRS Foundation, it will become easier for investors to compare companies' climate change responses, aiding in investment decisions and giving momentum to climate change measures.

This content was produced with the assistance of AI translation services.