The Institute’s response to the ISSB’s exposure drafts on general and climate-related disclosures

Anthony Wong

A summary of the Institute’s response to two exposure drafts setting out proposed IFRS Sustainability Disclosure Standards by the International Sustainability Standards Board

As the only body authorized by law to set and promulgate standards for professional accountants in Hong Kong, including those relating to sustainability disclosures, the Institute has responded to the International Sustainability Standards Board’s (ISSB) exposure drafts (EDs) on its IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures as mentioned in the feature article with Emmanuel Faber, Chair of the ISSB, in the May 2022 issue of A Plus.

This article provides highlights from our response to the EDs. The full response is available on our website.

Our key comments

Overall, we are supportive of the ISSB’s lead in establishing a comprehensive global baseline of sustainability disclosures designed to meet the information needs of investors when assessing enterprise value. This can facilitate investors to assess the effect of significant sustainability-related risks and opportunities on an entity’s enterprise value. It can also encourage entities to further integrate sustainability into their corporate thinking and business strategy by, for instance, establishing appropriate governance and risk management, as well as disclosing their strategy and metrics of significant sustainability issues. In the long run, it will likely enhance the competitive advantage and improve the corporate image of an entity.

We noted that the EDs contain many highly prescriptive requirements that are challenging even for companies that are more experienced in sustainability reporting. While we appreciate the urgency of addressing climate and sustainability-related risks and opportunities, we encouraged the ISSB to allow the market sufficient time to build up capacity for this relatively new yet significant reporting initiative in order for preparers to produce information that is truly meaningful to investors.

The availability of reliable source data remains a major concern for all stakeholders, and practices are still emerging and evolving as to what is appropriate in terms of methodologies, models, assumptions and drivers. This is particularly true for Scope 3 emissions data and scenario analysis which in turn affects an entity’s ability to quantify the anticipated effects of climate on its future financial position and performance. As such, we strongly recommended the ISSB to consider a phased approach to the mandatory adoption of certain aspects of the proposed standards. We also suggested to the ISSB to adopt a proportionality approach in terms of the timing and extent of application by small- and medium-sized entities (SMEs) as the challenges faced by them are more pronounced.

In addition, we strongly encouraged the ISSB to collaborate with the United States Securities and Exchange Commission and the European Financial Reporting Advisory Group in terms of their sustainability disclosure standards to achieve alignment in disclosure principles on investor-focused sustainability information as much as possible to achieve global consistency and to reduce costs for preparers and other stakeholders. We also thought that there would be merit in including specific transitional provisions in the ISSB standards to facilitate existing sustainability report preparers to transition to the ISSB standards.

Other key comments


We find the determination of materiality for disclosing sustainability-related information to be highly subjective and judgemental. We therefore recommended the ISSB to specify the factors that an entity should consider when determining materiality, e.g. the likelihood and impact of the event, its frequency of occurrence, duration, etc.

Comparative information 

We generally find that adjusting for all changes in estimates retrospectively will create a disconnect between prior year sustainability information and financial statements information. We recommended that entities distinguish between different types of changes in estimates and, depending on the nature of change, adjust for it retrospectively or prospectively as appropriate.

Current and anticipated effects 

The draft IFRS S2 requires an entity to disclose quantitative information unless it is unable to do so. However, it is unclear what “unable to do so” means. Besides, there are concerns about the usefulness of isolating the anticipated effects of climate-related risks and opportunities from other risks and opportunities as many of the environmental, social and governance risks are interlinked and it is difficult to isolate one assumption or input from another to estimate each risk’s standalone effect. The end result of any arbitrary disaggregation could potentially be misleading. In addition, while it may be appropriate to provide quantitative information for short- to medium-term expectations, it may be more appropriate to provide qualitative information for long-term expectations due to the lack of reliable data for the long term.

Climate resilience 

Climate scenario analysis requires a large amount of data and resources depending on the methodology used, and this may be difficult for entities, especially SMEs or entities with limited access or knowledge, on related topics. We recommended to the ISSB to specify how many and which type of scenarios should be disclosed, as well as to include the drivers/factors that each scenario should consider to increase comparability between entities and facilitate application of the requirements. Furthermore, we recommended to the ISSB to require the disclosure of significant drivers, methodologies, estimates and assumptions used in the scenario analysis.

Scope 1 and Scope 2 emissions for associates, joint ventures, unconsolidated subsidiaries or affiliates (non-controlling investments) 

There are many known challenges in terms of financial reporting where information from non-controlling investments is not easy to obtain due to a lack of control. For greenhouse gas (GHG) emissions, the challenges could be further complicated by the investee’s (i) use of a societal value approach; (ii) use of a method that is not “GHG Protocol aligned”; (iii) use of an operational control method while the reporting entity uses an equity share method; and (iv) having a different period-end from that of the reporting entity. We asked the ISSB to consider requiring the use of consistent methodologies as the reporting entity by non-controlling investments, similar to IFRS Accounting Standards which require associates and joint ventures to use consistent accounting policies as the group.

Scope 3 emissions 

It is difficult to obtain high-quality and reliable source data for Scope 3 emissions as they fall outside an entity’s direct management. We suggested that the ISSB allow a phased approach for the disclosure of Scope 3 emissions, starting with the identification of material sources of Scope 3 emissions and proceeding to requiring quantitative Scope 3 information only once practices become more mature and more reliable information becomes available. In addition, we believe it would be beneficial for the ISSB to provide guidance to assist entities in determining how many levels up and down the value chain they should disclose for Scope 3 emissions or refer stakeholders to relevant existing literature.

Appendix B of draft IFRS S2 

We noted that certain metrics in Appendix B might still not be applicable in many jurisdictions even though attempts have been made to internationalize them. This might hinder international adoption of the standard as entities might be prevented from asserting compliance with IFRS S2 given Appendix B is an integral part of the standard. We recommended that AppendixB not be made mandatory until the ISSB has conducted further industry-wide consultations and made relevant updates thereto to ensure the metrics in Appendix B can truly serve as an international baseline for global adoption.

Effective date 

We suggested the ISSB allow a phased approach for the effective dates of certain elements of the standards such as Scope 3 emissions, scenario analysis, as well as the disclosure of emissions for non-controlling investments and financed emissions. If an entity takes such an approach, it should explain why certain requirements have not been complied with and the expected timeline for compliance. This may encourage more uptake by entities and allow an earlier effective date for the other requirements of the standards.

This article was contributed by Anthony Wong CPA, CESGA, Associate Director of the Institute’s Standard Setting Department. Visit the department’s “What’s new” webpage for our latest publications, and follow us on LinkedIn for upcoming activities.

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