IFRS S1 and S2: How Investment Firms Can Prepare for ISSB Reporting

Challenge 1 – Integrating New Requirements into Existing Systems

• Typically, financial and sustainability reporting is managed separately. However, the IFRS Sustainability Standards have created a shift in traditional reporting norms, requiring sustainability data to be a part of the financial reporting process. To adapt to this, investment firms must ensure that their internal systems are flexible enough to manage both financial and sustainability data while maintaining efficiency. This may require system upgrades, new processes, and additional support to handle the complexity of combined disclosures.

Mitigation Strategy: Evaluate the Reporting Requirements; Assess Materiality: 

• A thorough evaluation of reporting requirements, grounded in a materiality assessment, is essential for effective ISSB disclosure. For smaller firms, this assessment typically focuses on internal operations. However, for investment firms with portfolios of multiple entities, the materiality scope is far broader. Each entity may face unique reporting obligations depending on its industry, geography, and operations. By focusing on materiality, investment firms can streamline the reporting process, ensuring that only relevant data is disclosed and unnecessary reporting burdens are avoided. For additional Gguidance on materiality assessments, read Steps 2 & 3 in Part 2 of our Critical Success Factor Series for ESG Integration in Private Equity, or book a free consultation with our team of experts. 

Challenge 2 – Concerns of Internal Capacity & Accessing Cross Departmental Information: 

• While finance teams are experienced in managing financial data, the inclusion of sustainability metrics demands coordination across multiple departments. Additionally, departments that previously had no involvement in reporting may now need to provide critical data for disclosures.  Quantitative indicators under the ISSB Standards add another layer of complexity to cross-departmental collaboration. For example, calculating a single indicator might involve inputs from three or four different departments, including calculations that must be precisely applied.

   

• These shifts mean that investment firms must build capacity within departments and develop a cohesive strategy for accessing, processing, and validating cross-departmental information. 

Mitigation Strategy 1: Conduct a Data Gap Analysis:

• Conducting a data gap analysis will allow firms to understand what’s missing and where new processes are needed. This gap analysis will then guide firms on how to:

Mitigation Strategy 2: Develop Internal Competencies and Assign Responsibilities:

• To effectively execute the ISSB imperative, investment firms need to build internal capacity and competencies. Larger firms tend to do this by hiring in-house sustainability teams that can coordinate and deliver on the many moving parts of the ESG data collection and reporting process. However, this option is neither scalable nor economical. Instead, firms can take a hybrid approach by assigning overall responsibility for ISSB compliance at the C-suite level,  investing in a designated ESG resource, and supplementing this with an  ESG reporting technology platform that offers implementation support at the portfolio company (PortCo) level. For more guidance on developing internal capacity, read Part 4 of our Critical Success Factor Series for ESG Integration in Private Equity, or book a free consultation with our team. 

Challenge 3 – Portfolio Management:

• As part of ISSB reporting, investment firms must also disclose sustainability data from all of their PortCos.. This process involves collecting, aggregating, and validating data from diverse entities and creates challenges around data accuracy, completeness, and consistency.