The ISSB IFRS Chronicles: Transition Reliefs And Proportionality Mechanisms

The ISSB IFRS standards have in recent months taken a significant step forward in the UK regulatory process. After receiving endorsement from the UK Sustainability Disclosure Technical Advisory Committee (TAC) in late 2024, they are now on the desk of the Secretary of State for Business and Trade.

These standards are set to become the first two Sustainability Reporting Standards (SRS), based on IFRS S1 and S2, forming a core part of the HM Treasury Sustainability Disclosure Reporting (SDR) framework. If everything stays on track, the UK government’s consultation on the SRS exposure drafts should conclude by the end of this quarter. 

The UK Sustainability Disclosure Policy and Implementation Committee (PIC), which comprises of the government and regulatory representatives, will then oversee the transition. While no formal implementation date has been set, a tentative timeline suggests that mandatory sustainability-related financial reporting for listed UK companies could begin for accounting periods starting on or after January 1, 2026.

Given this, an early understanding of the available transition reliefs and proportionality mechanisms will help UK companies prepare for IFRS S1 and S2 adoption, aiding a smooth transition.

Making ISSB Standards Work For Companies Of All Sizes
To support adoption, transition reliefs will help by allowing a phased approach to meeting reporting requirements, enabling companies to develop their reporting capabilities while still maintaining consistency and comparability for primary users of their general-purpose financial reports.

Companies can utilise these transition reliefs while remaining compliant. However, if they delay disclosures beyond the transition period or fail to provide the required information under IFRS S1 and S2, they won’t be able to assert full compliance. Keeping stakeholders updated on reporting and adoption progress is good practice and should remain a key reporting priority.

Alongside transition reliefs, the ISSB standards include proportionality mechanisms to help adoption. These allow companies to use reasonable and supportable information available at the reporting date without undue cost or effort and to consider their skills, capabilities, and resources when meeting certain requirements.

These mechanisms benefit all companies, but particularly those new to ISSB reporting or struggling with complex data and reporting requirements. Like transition reliefs, they are part of the ISSB standards, meaning companies can still assert compliance while relying on them.

Transition Reliefs: A Phased Approach
Below are key built-in transition reliefs in IFRS S1 and S2, alongside relevant TAC recommendations which formed part of their technical assessment and endorsement submitted to the Secretary of State for Business and Trade in December 2024.

• Comparative Information
  IFRS S1 Appendix E, paragraph 3 exempts companies from providing comparative sustainability disclosures in their first year of applying IFRS S1 and S2. In the second year, companies only need to provide comparative climate-related disclosures if that was the sole focus in year one.
• Delayed Reporting
  IFRS S1 Appendix E, paragraph 4(a-c) allows companies to publish sustainability disclosures after financial statements in the first reporting year, provided they do so with their next interim report or within nine months of the reporting period.
• Climate-First Reporting
  IFRS S1 Appendix E, paragraph 5 allows companies to initially focus on climate-related risks and opportunities (in line with IFRS S2), deferring other sustainability disclosures until the second year.
• Greenhouse Gas Protocol
  IFRS S2 paragraph 29(a)(ii) requires companies to measure emissions using the Greenhouse Gas Protocol unless a jurisdictional authority mandates another approach. IFRS S2 Appendix C, paragraph 4(a) allows the continuation of using an existing method for the first year of reporting.
• Scope 3 Emissions
  IFRS S2 Appendix C, paragraph 4(b) exempts companies from disclosing Scope 3 emissions in their first year, and if applied, companies can continue this approach for comparative reporting.

Transition Reliefs: Key Recommendations From The TAC
As part of its technical review the TAC proposed some modifications to transition reliefs in order to improve the UK’s SRS exposure drafts. These include:

• Removing Timing Relief
  The TAC recommended removing the IFRS S1 transition relief (Appendix E paragraph E4) that allows delayed sustainability disclosures in the first year, as it feels it weakens the link between financial and sustainability reporting.
• Extending ‘Climate-First’ Reporting Relief
  The TAC proposed extending the transition period for non-climate disclosures to up to two years, allowing companies to focus on climate-related disclosures (including Scope 3 emissions) first and introduce broader sustainability disclosures by the third year.
• Balancing Implementation Challenges
  Some companies had requested a gradual rollout due to the significant changes in data collection and reporting. The TACs preference being to extend transition reliefs, as it was seen as a more practical approach than setting different effective dates.
• Scope 3 Emissions Challenges
  The TAC advised against extending transition reliefs for Scope 3 emissions, as in their view postponing them could complicate reporting for companies relying on value chain data.
• Global Consistency
  The TAC confirmed that extending transition reliefs in the UK wouldn’t be considered a “jurisdictional modification” meaning alignment with global ISSB standards remains intact.

Proportionality Mechanisms: Tailored Implementation
Recognising that companies vary in their readiness to implement IFRS S1 and S2, the ISSB has introduced two proportionality mechanisms to balance businesses’ preparedness with investor demands for transparency.

• Reasonable and Supportable Information Available At The Reporting Date Without Undue Cost Or Effort 
  Similar to the IFRS Accounting Standards, this mechanism supports disclosure in areas with a high level of measurement and outcome uncertainty, including financial effects, climate scenario analysis, Scope 3 emissions, risk identification, and value chain assessments.
• Available Skills, Capabilities, And Resources
  This enables companies to take a qualitative approach in the early stages of reporting, particularly in areas like financial effects and scenario analysis, making it easier to meet requirements while still delivering valuable insights for users of the disclosures.

Communicating Partial Application
IFRS S1 paragraph 72 requires companies using ISSB standards to make an explicit and unreserved statement of compliance. Compliance can only be asserted if all standard requirements are met. However, appropriate use of transition reliefs and proportionality mechanisms does not prevent companies from making a compliance statement.

A Balanced Approach To Adoption
The ISSB standards represent a major shift in sustainability reporting, enhancing transparency, consistency, and comparability. However, transitioning to these requirements will be a complex process for many companies. Transition reliefs and proportionality mechanisms will play a critical role in making adoption more manageable while maintaining reporting integrity.

By phasing in requirements, these reliefs allow companies time to develop reporting systems without compromising compliance. Proportionality mechanisms further support companies by aligning requirements with their current capabilities and available data.

As the UK’s regulatory adoption process continues, transition reliefs and proportionality mechanisms must remain a key focus. Their effective implementation is critical for companies to ensure compliance, enabling them to produce decision-useful disclosures, effectively manage the ever-increasing reporting burdens placed on them, and to remain competitive in a complex, unpredictable and fast-evolving global economy.