What do the IFRS Sustainability Disclosure Standards mean for entities in the Channel Islands?

Blog
March 01, 2024

The long-awaited global IFRS Sustainability Disclosure Standards (also known as the ISSB Standards) have been effective since 1 January 2024. Here we set out how we expect the standards to drive progress towards financial-grade sustainability reporting in the Channel Islands.

What are the IFRS Sustainability Disclosure Standards?

Investors need globally comparable and useful sustainability information in order to aid decision-making, support the efficient allocation of capital, and ensure the smooth running of capital markets. The International Sustainability Standards Board (ISSB) was set up for this purpose and issued its first two global IFRS Sustainability Disclosure Standards in June 2023.

The structure of the Standards will be familiar to those who have an understanding of the Task Force for Climate-Related Financial Disclosures (TCFD) framework as they are based on the same four pillars of governance, strategy, risk management, and metrics and targets:

IFRS S1 is a general sustainability reporting standard which forms the core framework for identifying and disclosing sustainability-related risks and opportunities across an entity’s value chain. It requires management to identify risks and opportunities that could affect business prospects over the short, medium and long-term; and then determine relevant disclosures in relation to these identified risks and opportunities.
IFRS S2 is a climate-specific reporting standard which builds on and has effectively replaced TCFD climate risk disclosures (the TCFD framework does however remain available for use and is a good starting point ahead of adopting the IFRS Sustainability Disclosure Standards). In fact, the Task Force itself has been disbanded and ownership has transferred to the IFRS.

Further Standards covering other environmental and social sustainability matters are expected to follow.

How do we anticipate the Standards will be rolled out?
What approach is the UK taking?
What does this mean for entities in the Channel Islands?

How do we anticipate the Standards will be rolled out?

S1 and S2 have been effective since 1 January 2024. Just like the IFRS Accounting Standards, the Sustainability Disclosure Standards are global; however, each jurisdiction needs to decide whether and how to endorse and adopt the standards locally. There has been widespread support and jurisdictions around the world are now considering how they will incorporate the Standards into their regulatory frameworks.

It is useful to note that the EU has its own European Sustainability Reporting Standards (ESRS) and there is continued work underway to optimise interoperability between the regimes.

What approach is the UK taking?

The UK’s approach is important because Channel Islands entities can often be caught by UK requirements, and our local regulators often look to follow the UK.

The UK Government has confirmed its commitment to endorse the IFRS Sustainability Disclosure Standards and in August last year published guidance on its framework for endorsement through the creation of the UK Sustainability Disclosure Standards (UK SDS). The UK SDS will only differ from the IFRS Sustainability Disclosure Standards for UK-specific matters and only where absolutely necessary.

The UK SDS are expected to fold into the UK Sustainability Disclosure Requirements (SDR) regime, which is expected to be finalised by July 2024. The SDR regime, which is applicable to FCA-authorised UK firms and their UK-domiciled products marketed in the UK, currently includes policies on anti-greenwashing, investment labels, disclosures and naming/ marketing rules. However, the FCA has confirmed its intent to work on an approach to extending the regime to apply to overseas funds marketed in the UK in the future.

For listed entities, the FCA intends to consult on implementing the UK SDS by expanding the current TCFD disclosure rules, and expects to finalise its approach by the end of 2024. The new reporting requirements would then be applicable for listed entities for financial years beginning on or after 1 January 2025.

What does this mean for entities in the Channel Islands?

We think it is likely that the first Channel Islands entities to be directly captured by the UK SDS will be corporates with UK listings. The specifics of the FCA’s listing rules scope will be important, as closed-ended investment funds are currently exempt from TCFD climate reporting requirements. Whether or not this exemption extends to the IFRS Sustainability Disclosure Standards remains to be seen, and will determine the impact for UK-listed financial products in the Channel Islands.

We can also expect the fold-in of IFRS Sustainability Disclosure Standards into the UK SDR regime to impact local funds and companies indirectly because it will redefine what best practice sustainability disclosures for the sector look like and raise the bar on minimum expectations.

The UK is of course not the only jurisdiction signalling intent to adopt the Standards, with many of the Channel Islands’ other main markets and competitor jurisdictions also expected to do so.

The Standards introduce a value chain consideration, which means that in-scope asset owners, suppliers, clients and lenders will ultimately be requesting data to prepare their own reporting over their upstream and downstream value chain. We therefore think it is likely Channel Islands businesses could be in the value chain of other entities required to report under the Standards, and may therefore be requested to provide data to in-scope stakeholders even if not directly in-scope themselves.

The key message is that, directly or indirectly, the IFRS Sustainability Disclosure Standards are raising expectations about the scope, approach, quality and level of trust in sustainability disclosures for Channel Islands entities, and setting the direction of travel towards future financial-grade sustainability reporting alongside financial performance reporting.

More broadly there is an opportunity for Channel Islands regulators to take an appropriate and proportionate approach to endorsing and supporting the Standards. In doing so they can further position the islands as centres for sustainable finance in which the finance industry’s exposure to sustainability risks and opportunities is well understood and managed. In Guernsey, the GFSC has expressed an intention to consult on an appropriate and proportionate approach to adopting the IFRS Sustainability Disclosure Standards. Meanwhile, in Jersey, the JFSC will consider in due course what, if any, local adoption or equivalence is appropriate and in what circumstances - which may further expand application to certain local entities.

Here are our top 10 practical actions for Channel Islands entities looking to prepare:

Gathering reliable data is essential to meeting reporting requirements. You may not collect the data required yet, or be sure where it is, or it may not be robust enough. Start with a clear data set, clean it up, automate it and re-house it, taking a tech-powered approach with embedded processes and controls.

Horizon-scan expected sustainability disclosures in all relevant jurisdictions for your business, in order to maximise efficiencies and interoperability. Looking at the IFRS Sustainability Disclosure Standards alongside those in the EU and USA, for example, will provide opportunities to take a strategic, cohesive and efficient approach to compliance. See our views on the impacts of the EU Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD) for Channel Islands’ entities.

Whilst these Standards themselves don’t mandate external assurance, it could be required on jurisdictional endorsement. With rising demand for credible reporting, together with growing greenwashing concerns, we are seeing an increasing trend in voluntary assurance to mitigate risk and build trust in sustainability reporting. We strongly recommend building an early understanding of the requirements in order to inform your approach.

If you would like to discuss the IFRS Sustainability Disclosure Standards, and what they mean for entities in the Channel Islands, please do get in touch.

About the authors

Tori Davis

Advisory Senior Manager, Sustainability, PwC Channel Islands

Sustainability Regulatory & Reporting Senior Manager, Jersey

Amy Pickering

Assurance Director, Sustainability, PwC Channel Islands

Sustainability Assurance Director, Guernsey

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