IFRS S1 and IFRS S2: Pioneering Sustainability Reporting
IFRS S1 and IFRS S2
The International Sustainability Standards Board (ISSB) has marked a transformative moment in sustainability reporting with the release of IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) on June 26, 2023.
These standards respond to the growing demand for consistent, complete, and comparable sustainability-related financial information. This nuanced overview explores these groundbreaking standards, their implications, and relevant insights from recent research.
Background
The ISSB's introduction of IFRS S1 and IFRS S2 is a significant step towards enhancing sustainability reporting. These standards are designed to meet the needs of primary users of general-purpose financial reporting, enabling better assessment of an entity's enterprise value.
IFRS S1 provides general requirements for disclosing material information about sustainability-related financial risks and opportunities, while IFRS S2 focuses on climate-related disclosures.
Executive Summary
Effective for annual periods beginning on or after January 1, 2024, IFRS S1 and S2 aim to provide high-quality, decision-useful information about sustainability-related risks and opportunities. They are designed to enhance transparency and accountability, promoting better decision-making among investors and other stakeholders.
IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information
Fundamental Concepts
- They are intended for general-purpose financial reporting, using the exact definition of materiality as IFRS Accounting Standards.
- Employs a four-pillar framework from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD): Governance, Strategy, Risk Management, and Metrics and Targets.
Key Requirements of IFRS S1
- Governance: Disclose the governance processes, controls, and procedures used to monitor and manage sustainability-related risks and opportunities.
- Strategy: Describe the approach to managing these risks and opportunities, including their impact on the business model, strategy, and financial planning.
- Risk Management: Outline the processes for identifying, assessing, prioritizing, and monitoring sustainability-related risks and opportunities.
- Metrics and Targets: Report performance metrics related to sustainability risks and opportunities, including progress towards set targets.
Comparative Information and Timing of Reporting
- Comparative information should reflect updated assumptions only if related to past reporting periods.
- Sustainability-related disclosures must be reported simultaneously as financial statements, with short-term transitional reliefs available.
Current and Anticipated Financial Effects
- Disclose quantitative information about the current and anticipated effects of sustainability-related risks and opportunities on financial performance, position, and cash flows.
- Include a qualitative and, where applicable, quantitative assessment of the resilience of the entity’s strategy and business model.
Judgements and Estimates
- Provide information about judgements and estimates made in preparing disclosures, ensuring consistency with the assumptions used in financial statements.
Commercially Sensitive Information
- Entities may exclude certain commercially sensitive information from disclosures about sustainability-related opportunities if specific criteria are met.
Sources of Guidance
- Without a specific IFRS Sustainability Disclosure Standard, entities should consider guidance from other standard-setting bodies, such as the Sustainability Accounting Standards Board (SASB).
IFRS S2: Climate-related Disclosures
Strategy and Targets
- Disclose emissions targets, distinguishing between net and gross targets and the intended use of carbon credits.
- Provide detailed assumptions and dependencies related to transition plans.
Financial Impacts
- Report the effects of climate-related risks and opportunities on financial statements, including disclosing assets subject to these risks and opportunities.
Climate Resilience
- Disclose the results of climate resilience analyses and how they are conducted, including climate-related scenario analysis.
GHG Emissions
- Measure and disclose greenhouse gas (GHG) emissions using the GHG Protocol unless jurisdictional authorities require another method.
- Report absolute gross GHG emissions for Scope 1, 2, and, where relevant, Scope 3 emissions.
Industry-based Requirements
- Provide industry-specific disclosures as per the Industry-based Guidance on Implementing IFRS S2.
Adoption and Transitional Relief of IFRS S1 and IFRS S2
While the IFRS Foundation cannot mandate the application of these standards, many jurisdictions are expected to adopt them or develop similar requirements. Transitional reliefs include allowing entities to focus initially on climate-related disclosures, with complete sustainability-related disclosures required in the second year of adoption.
Conclusion
The introduction of IFRS S1 and IFRS S2 marks a pivotal moment in the realm of sustainability reporting. As these standards become integral to financial reporting, it’s essential to stay ahead of the curve.
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For further reading and detailed analyses on IFRS S1 and IFRS S2, refer to the following sources:
IFRS S1 and S2. Questions? Answers.
Materiality in IFRS S1 is defined similarly to IFRS Accounting Standards, focusing on information that could influence the economic decisions of primary users. It requires companies to assess which sustainability-related risks and opportunities are material to their business and disclose relevant information accordingly.
IFRS S2 requires companies to use scenario analysis to assess their resilience to climate-related changes. This involves evaluating various climate scenarios, including a 2°C or lower scenario, to understand potential impacts on their business strategy and financial performance.
IFRS S1 and S2 are expected to harmonize global sustainability reporting, providing a consistent framework that enhances comparability and reliability of sustainability-related financial information. This will enable investors and stakeholders worldwide to make more informed decisions.
Unlike previous standards, IFRS S1 and S2 provide a comprehensive, globally consistent framework specifically designed to integrate sustainability and financial reporting. They emphasize materiality, comparability, and the use of scenario analysis, setting a higher bar for transparency and accountability.
Case studies include companies like Unilever and Shell, which have integrated sustainability disclosures into their financial reporting. They have adopted robust data management systems, clear governance structures, and comprehensive scenario analyses to comply with IFRS S1 and S2 requirements.
Companies should ensure that sustainability disclosures are consistent with the financial data presented in their traditional financial statements. This involves aligning assumptions, estimates, and methodologies used in both reports. Disclosures should also explain the connections between sustainability-related risks and opportunities and their financial implications.
Best practices include selecting relevant and diverse scenarios, involving key stakeholders in the process, using a mix of qualitative and quantitative analysis, and regularly updating the scenarios to reflect new data and insights. It's also important to document the methodology and assumptions used for transparency.
Effective stakeholder engagement involves identifying key stakeholders, understanding their information needs, involving them early in the reporting process, and maintaining ongoing dialogue. Companies should use feedback to refine their reporting and ensure it meets stakeholder expectations.
Companies can omit commercially sensitive information if its disclosure would seriously prejudice the economic benefits they could realize. However, they must provide sufficient context to explain why the information is sensitive and ensure that non-disclosure does not obscure material risks and opportunities
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