A thorough comparison of the differences between SSBJ standards and IFRS standards: New disclosure obligations required of companies

Director of Zeroboard Research Institute, Director of Global Sustainability Standards Board (GSSB)

Tomoo Machiba

In the previous column, we looked back at the history of non-financial and sustainability information disclosure, explained the emergence of domestic disclosure standards by the Sustainability Standards Board of Japan (SSBJ), the draft of which was published in March 2024, and explained the background to the movement toward making disclosure mandatory in securities reports. In this article, we will explain the main points of the SSBJ standards and the sustainability disclosure standards of the International Financial Reporting Standards (IFRS) on which they are based, and describe the significance of Japan's first legislation requiring sustainability information disclosure and the response required of companies.

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IFRS standards evolved from TCFD

The SSBJ standards are positioned as the Japanese version of the IFRS Sustainability Disclosure Standards. The IFRS Foundation, which is involved in the Create of IFRS, established the International Sustainability Standards Board (ISSB) in 2021. Following the example of accounting standards, the board has been studying financial disclosure standards for international investors, and in June 2023 published IFRS S1 (general disclosure standards for sustainability information) and S2 (climate-related disclosure standards) .

The IFRS standards follow the final recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) published in 2017, and expand the framework for companies to disclose information about climate-related risks and opportunities that affect their business activity, dividing it into four categories: governance, strategy, risk management, and metrics and targets, to cover sustainability Issue in general. *1 S2 requires companies to calculate greenhouse gas (GHG) emissions from Scopes 1 to 3, i.e., emission amount from the entire value chain beyond their own company, as well as disclose internal carbon prices.

The guidelines call for more specific and quantified disclosure than the TCFD recommendations, including whether the supervisory body (board of directors, committees, etc.) has appropriate management capabilities, how related risks and opportunities may affect financial positions and cash flows, and the amount of capital expenditures, procurement, and investments spent on controlling risks and opportunities (Table 1).

In identifying important risks and opportunities to be considered (materiality), we follow the guidelines of the US Sustainability Accounting Standards Board (SASB)＊2The report asks companies to consider applicability by referring to the sector-specific disclosure topics of the standard (in the case of S2, the " Industry-Specific Guidance for the Application of IFRS S2 " derived from SASB standards). It also recommends the Climate Change Disclosure Standards Board (CDSB) as a source of information that can be considered applicability.^＊3The report specifically cites guidance on the application of the framework to water- and biodiversity -related disclosures. Furthermore, simultaneous disclosure is required along with financial statements, raising concerns for reporting companies about the timing of data collection and disclosure preparation, such as GHG emission amount.

Table 1: Main items of IFRS S2 climate change-related disclosure standards

Create a Zeroboard based on SSBJ's "IFRS S2 Climate-related Disclosures"

Points to consider when formulating the Japanese version

The SSBJ was established in July 2022 under the Financial Accounting Standards Foundation (FASF) as a mirror organization of the ISSB , and has been working on Create a Japanese version of the standards with members including the Japanese Institute of Certified Public Accountants, corporate and Financial Institution representatives, and university professors. Based on the basic concepts of "high-quality standards" and "internationally consistent standards," the SSBJ will generally incorporate the provisions of IFRS S1 and S2, but has also engaged in extensive discussions on how much of the standards should be tailored to suit domestic conditions. For example, the SSBJ has considered changing provisions in cases where IFRS standards are not useful because they provide too many options, reducing comparability, or where it is clear that they place an excessive burden on companies (Table 2) ^*4 .

Table 2: Main discussion points of SSBJ

Zeroboard Create based on SSBJ's "Publication of Exposure Draft" ( March 29, 2024)

The draft SSBJ standards, which took over two years to Create, including the time of the Establishment Preparatory Committee, have settled on a content that is almost entirely consistent with IFRS standards in terms of requirements. This is a reasonable conclusion, as there was a concern that Japan alone would have to go through a double effort if it were to adopt its own standards, as global companies that rely primarily on IFRS compliance. However, some aspects have been adjusted to suit domestic circumstances, so next I would like to explain the content, focusing on the differences with IFRS standards.

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Key points of the SSBJ standard

Unlike IFRS standards, the SSBJ draft standards consist of a universal standard and two thematic standards (general disclosure standards and climate-related disclosure standards). IFRS S1 consists of a section that specifies the basic requirements for Create sustainability disclosures and a section that specifies the disclosure items related to related risks and opportunities (which SSBJ calls "core content"). For clarity, SSBJ separated the former, which specifies the basic requirements for disclosing all sustainability Issue, from the latter, which specifies general core content. While the items in the former universal standard (Table 3) differ slightly in structure and order, they largely follow the requirements of the first part of IFRS S1, except for exceptions regarding the timing and period of reporting and the disclosure of comparative information for voluntary disclosure or when otherwise required by law. In addition to the SASB Standards, Industry-specific guidance on the application of IFRS S2, and the CDSB Framework, the report also identifies the Global Reporting Initiative (GRI) Standards and the European Sustainability Reporting Standard (ESRS) set out in the EU Corporate Sustainability Reporting Directive (CSRD) as sources of information whose applicability can be considered to the extent that they do not contradict the SSBJ Standards when considering materiality.

Figure 1: Composition of IFRS Standards and SSBJ Standards

Zeroboard Create based on SSBJ's "Publication of Exposure Draft" ( March 29, 2024)

Table 3: Items of the SSBJ Universal Standards

Zeroboard Create based on SSBJ's "Universal Standard for Sustainability Disclosure Exposure Draft"

Both of SSBJ's thematic standards are based on a framework for disclosing related risks and opportunities in four areas: governance, strategy, risk management, and metrics and targets, inherited from the TCFD recommendations. The core content provisions in the latter part of IFRS S1 are to be applied when no specific IFRS standard exists. Accordingly, while the SSBJ Climate-Related Disclosure Standards are the only standards currently developed for specific sustainability topics, it is already possible to disclose risks and opportunities related to the environment, labor, human rights, and other areas by applying the SSBJ General Disclosure Standards.

The Contents general disclosure standard largely follows IFRS S1, calling for specific and as quantifiable as possible information regarding sustainability-related risks and opportunities, including the supervisory authority's appropriate management capabilities, the impact on financial conditions, and expenditures for control. It also adds that, as part of the strategy, an assessment of a company's ability to respond to uncertainties arising from risks (resilience) should be conducted in principle for each reporting period. *5

The draft climate-related disclosure standards are based on the general disclosure standards, but include some additions and expanded options from IFRS S2, taking into account domestic systems and circumstances (Table 4). Regarding emission amount , in addition to calculations for each scope (Scopes 1 to 3), disclosure of the total value for all scopes is required. Scope 2 (indirect emissions associated with the use of electricity, heat, and steam supplied by other companies) can be calculated using not only the "location-based" method but also the "market-based" method, which applies Emission factor for each power Company and contract, as commonly used by Japanese companies. Scope 3 (emissions of other parties related to a business's activity) is broken down into 15 categories; if breakdown is not possible, the names of the relevant categories must be disclosed. While reporting emission amount based on the Global Warming Countermeasures Promotion Act is also permitted, if the difference between the calculation period and the sustainability disclosure reporting period is more than one year, this fact must be disclosed, along with any significant events or changes that occurred during that period and their impacts. On the other hand, while IFRS standards require the amount or percentage of assets or business activity that are vulnerable to risk (or aligned with opportunities), the SSBJ draft also allows for broad disclosure of "size."

Table 4: Major changes from IFRS S2 in the SSBJ Climate-related Disclosure Standard (Exposure Draft)

Zeroboard Create based on SSBJ's "Request for Comments on Exposure Draft" ( March 29, 2024)

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Scope of SSBJ and required responses

The SSBJ Standards will accept comments on the draft until the end of July 2024 , with a finalization planned for March 2025. The Financial Services Agency is considering adopting these as specific standards for the obligation to disclose sustainability information in financial reports and other documents through amendments to the Financial Instruments and Exchange Act. SSBJ has been developing its standards for Company that submit financial reports, but just as the draft was nearing completion, the agency requested that the scope of application be expanded to "all or part of companies listed on the Tokyo Stock Exchange Prime Prime," and discussions regarding the scope of application are currently being held within a working group of the Financial System Council.

At the May 2024 meeting, the secretariat (FSA) presented a proposal to apply the SSBJ standards to prime listed companies with a market capitalization of 3 trillion yen or more from the fiscal year ending March 2027, to companies with a market capitalization of 1 trillion yen or more one year later, and to companies with a market capitalization of 500 billion yen or more from the fiscal year ending March 2029, and thereafter to expand the scope to all prime listed companies, which currently number more than 1,650. The proposal also stipulates that assurance of disclosed information will also be required one year after the application of the SSBJ standards ^*6 .

While the application of the standard will initially be limited to very large companies (69 companies with a market capitalization of over 3 trillion yen ^*7 ), and other listed companies still have time to prepare, it is expected that some global companies will begin disclosing information in accordance with IFRS standards ahead of time. Rather than waiting for the deadline, they should start making steady preparations now, such as establishing a system for obtaining data from suppliers to more precisely calculate GHG Scope 3 emission amount, and visualizing the relationship between related risks and opportunities and financial indicators.

Furthermore, IFRS and SSBJ standards are financial disclosures aimed at investors, and the need for sustainability reporting and integrated reporting based on the GRI Standards, which many companies have been working on up until now with a wide range of stakeholders in mind, will not disappear. On the contrary, companies subject to the CSRD that have operations in Europe are being forced to comply with the ESRS, which requires disclosure of not only the financial impacts of climate change and sustainability Issue , but also the impact the company has on the environment and society ("double materiality"). I would like to introduce the remaining Issue in sustainability information disclosure, such as GRI, CSRD /ESRS, and assurance of disclosed information, in a separate article at some point.

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＜Reference source＞

*1: IFRS Foundation, "Comparing IFRS S2 Climate-related Disclosures with the TCFD Recommendations,"July 2023
http://www.jpx.co.jp/corporate/sustainability/esgknowledgehub/disclosure-framework/issbseminar2ifrss2comparisontcfd.pdf
*2: In June 2021, SASB merged with the International Integrated Reporting Council (IIRC), which operates the International Integrated Reporting Framework, to form the Value Reporting Foundation (VRF), which was then absorbed into the IFRS Foundation in August 2022 following the establishment of the ISSB .
*3: CDSB's secretariat was previously CDPs, but was absorbed into the IFRS Foundation in January 2022.
*4: SSBJ, "Publication of Exposure Draft,"March 29, 2024
https://www.ssb-j.jp/jp/domestic_standards/exposure_draft/y2024/2024-0329.html
*5: However, if there are no specific provisions in other thematic standards of the SSBJ and the evaluation results are not expected to differ significantly from those of the previous reporting period, disclosure may be made based on the evaluation results of the previous reporting period.
*6: Financial Services Agency website, "Financial System Council's 'Working Group on Disclosure and Assurance of Sustainability Information' (Second Meeting) Agenda,"May 14, 2024
http://www.fsa.go.jp/singi/singi_kinyu/sustainability_disclose_wg/shiryou/20240514.html
*7: Same as above