Background: on March 31, 2022, the International Council for sustainable development standards (issb) issued international financial reporting sustainable disclosure standard No. 1 - General requirements for sustainable related financial information disclosure (Draft for comments) (hereinafter referred to as "IFRS S1 draft") and international financial reporting sustainable disclosure standard No. 2 - climate related disclosure (Draft for comments) (hereinafter referred to as "IFRS S2 draft"). The issb launched a 120 day (until July 29, 2022) consultation on the two drafts. During the Boao Forum for Asia in 2022, when participating in the theme discussion of "building a sustainable ESG", Fang Xinghai, vice chairman of the CSRC, proposed that the international ESG information disclosure standards to be issued by the issb will have a great impact on the listing and valuation of Chinese enterprises.
Content: draft IFRS S1 sets out the general requirements for enterprises to disclose all financial information related to sustainable development, which is applicable to all enterprises that prepare financial statements in accordance with IFRS accounting standards or other generally accepted accounting standards. The disclosure themes are divided into four major themes: governance, strategy, risk management, indicators and objectives (see Table 1 for details). It provides a set of financial disclosure standards related to sustainable development for enterprises. At the same time, the draft also defines "useful" financial information, including relevance, importance, authenticity, comparability, verifiability, timeliness and understandability, and fully complements the reporting subject, the connection mode of information in the report, the degree of fairness and the principle of maximizing disclosure.
Based on the recommendations of the working group on climate related financial information disclosure (TCFD), draft IFRS S2 incorporates industry-based information disclosure requirements derived from SASB standards: enable investors to assess the impact of major climate related risks and opportunities on enterprises, assess the ability of enterprises to adapt to climate related risks, and understand how enterprises support their climate risk and opportunity strategies through the disclosed information. Draft IFRS S2 applies to enterprises that are affected by climate related risks or may have access to climate related opportunities.
In terms of the overall framework of disclosure requirements, draft IFRS S1 and draft IFRS S2 are consistent. Draft IFRS S2 puts forward more detailed indicators on the basis of draft IFRS S1 to measure a single risk, and the issues involved are more specific. When both sustainable development disclosure standards and climate related disclosure standards require the disclosure of the same information, enterprises should avoid unnecessary duplication and finally disclose it in an integrated form.
Significance: after the issb issues the final standards, the above standards will form a comprehensive global sustainability disclosure benchmark to urge enterprises to disclose high-quality and globally comparable sustainable development related information and meet the growing information needs of investors in assessing the value of enterprises.
Impact: the launch of the two drafts marks the establishment of the first investor centered global ESG standard. The international organization of Securities Commissions (IOSCO) issued a statement on March 31, 2022, confirming that an in-depth review of the draft standard will begin. IOSCO encourages all stakeholders to communicate constructively with the issb during the consultation. Based on IOSCO's approval of the two drafts, the implementation of the global ESG reporting standard will not be far away.
Suggestions for enterprises: we believe that Chinese enterprises need to conduct in-depth research and Discussion on the two drafts. For Chinese enterprises and listed companies in Hong Kong who want to be listed abroad, understanding the international financial information disclosure standards related to sustainable development will help them obtain the support of international capital in the future; For Chinese enterprises that have been listed abroad, the study of disclosure standards can avoid the pressure on the stock price due to insufficient information disclosure; For Chinese enterprises, exploring the information disclosure standards related to sustainable development will help enterprises realize their own risk exposures and opportunities, make long-term plans and attract overseas funds.
In addition, in the long run, the disclosure of financial information related to sustainable development is likely to become one of the global standards, and the lag in action feedback during the opinion solicitation period is likely to weaken the international competitiveness of Chinese enterprises in the future. On the contrary, if enterprises actively feed back ESG thinking with Chinese characteristics and become participants in standard setting, it will help Chinese enterprises master the voice of international competition.
Risk analysis: ESG policy support is not as expected.
