IFRS S1 Disclosure: 20+ Essential Sustainability Disclosures

IFRS S1 Disclosures in Financial Statements

In today’s rapidly evolving business landscape, sustainability is no longer a fringe concern—it’s a central focus for companies worldwide. The IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information ensures that entities disclose relevant and material sustainability-related risks and opportunities. These disclosures are vital for investors and other stakeholders who rely on this information to make informed decisions.

In this blog, we’ll explore the importance of IFRS S1 and provide real-world examples from leading companies to illustrate how these disclosures are integrated into financial statements.

What is IFRS S1?

IFRS S1 requires entities to provide comprehensive disclosures about sustainability-related risks and opportunities that could reasonably be expected to affect their financial prospects. The standard covers several key areas:

• Governance: The processes, controls, and procedures in place to manage sustainability-related risks and opportunities.
• Strategy: How sustainability-related risks and opportunities impact the entity’s business model and strategic decisions.
• Risk Management: The methods used to identify, assess, and manage sustainability-related risks.
• Metrics and Targets: Specific metrics used to measure sustainability performance and progress toward targets.
• Materiality: Information is considered material if its omission or misstatement could influence decisions made by stakeholders.

Let’s dive into some examples from corporate financial statements to see how companies apply these principles.

Governance Disclosures- Samples for IFRS S1

Governance: The processes, controls, and procedures in place to manage sustainability-related risks and opportunities

Example 1: Company A - Sustainability Committee Oversight

Company A has established a dedicated Sustainability Committee within its Board of Directors. The Committee meets quarterly to oversee the company’s sustainability initiatives, including reviewing climate-related risks and opportunities and ensuring alignment with the overall business strategy. The Committee is responsible for integrating sustainability considerations into corporate governance and ensuring that these are reflected in decision-making processes across the organization.

Example 2: Company B - Executive Compensation Linked to Sustainability Goals

Company B has integrated sustainability targets into its executive compensation plans. The Board’s Remuneration Committee evaluates progress towards sustainability goals, such as reducing carbon emissions, and these results directly impact the performance-based bonuses awarded to senior management. This approach ensures that the company’s leadership is incentivized to achieve sustainability objectives, promoting long-term value creation.

Example 3: Company C - Cross-functional Sustainability Task Force

Company C has implemented a cross-functional Sustainability Task Force that includes members from finance, operations, and legal departments. This task force is responsible for identifying and managing sustainability risks and opportunities across the organization. The task force reports directly to the Board of Directors. It ensures that sustainability is integrated into the company’s risk management and strategic planning processes.

Governance and Strategy: Unilever’s Commitment to Sustainability

Unilever is a prime example of a company that has embedded sustainability into its governance structure. In its annual report, Unilever highlights how its Board of Directors oversees its sustainability agenda. The Board reviews sustainability risks and opportunities at each meeting, ensuring these considerations are integrated into the company’s overall strategy.

"The Unilever Board is responsible for overseeing the company’s sustainability agenda, which is integrated into our overall business strategy. The Board reviews sustainability risks and opportunities at each of its meetings. It considers how these are integrated into Unilever’s strategy. We have committed to becoming a net-zero emissions company by 2039, and this target is embedded into our corporate decision-making processes."

This approach ensures that sustainability is not an afterthought but a core component of Unilever’s business model, aligning with the governance disclosure requirements of IFRS S1.

Strategy Disclosures in IFRS S1

How sustainability-related risks and opportunities impact the entity’s business model and strategic decisions

Example 1: Company D - Transition to Renewable Energy

Company D recognizes that climate change poses a significant risk to its energy-intensive operations. To mitigate this risk, the company has developed a strategy to transition its energy usage to 100% renewable sources by 2030. This strategic shift is expected to reduce operational costs in the long term and mitigate the risks associated with regulatory changes on carbon emissions.

Example 2: Company E - Sustainable Product Innovation

Company E has identified the growing consumer demand for sustainable products as a critical opportunity. As part of its strategic plan, the company invests in developing eco-friendly products made from recycled materials. This strategic focus is anticipated to enhance the company’s market share and reduce its environmental footprint.

Example 3: Company F - Supply Chain Resilience

Company F’s strategy includes diversifying its supply chain to mitigate the risks of resource scarcity and geopolitical instability exacerbated by climate change. The company has invested in local sourcing and alternative materials to ensure continuity in supply, which is expected to enhance resilience and reduce dependency on vulnerable supply chains.

Risk Management and Materiality: BP’s Climate Strategy

BP provides a robust example of how companies can disclose their risk management processes regarding sustainability. In its financial statements, BP discusses the significance of climate change as a material risk to its business model. The company employs scenario analysis to understand the potential financial impacts of various climate policies, which informs its long-term strategy.

"Climate change presents significant risks to BP’s business model, particularly in regulatory changes and shifts in consumer demand towards low-carbon energy sources. Our risk management framework includes the assessment of these climate-related risks, which are deemed material due to their potential impact on our future cash flows and profitability. We conduct scenario analysis to assess the impact of different climate policies and incorporate the results into our long-term strategic planning."

This disclosure aligns with IFRS S1’s emphasis on the importance of materiality and risk management in sustainability-related financial reporting.

Risk Management Disclosures on IFRS S1

The methods used to identify, assess, and manage sustainability-related risks

Example 1: Company G - Climate Scenario Analysis

Company G conducts annual climate scenario analyses to assess the potential impacts of different climate-related risks on its operations. These analyses consider various scenarios, including regulatory changes, extreme weather events, and shifts in consumer behavior. The results of these analyses are integrated into the company’s risk management framework and strategic planning.

Example 2: Company H - ESG Risk Integration

Company H has integrated Environmental, Social, and Governance (ESG) risks into its overall risk management process. The company’s risk management team collaborates with sustainability experts to regularly assess ESG risks, such as water scarcity and labor rights issues. It implements mitigation strategies that are reviewed by senior management and the Board.

Example 3: Company I - Regular Sustainability Audits

Company I conducts regular sustainability audits to identify and assess sustainability-related risks. These audits are performed by an independent third party that covers areas such as energy consumption, waste management, and social impacts. The findings from these audits are used to inform risk management strategies and improve sustainability performance.

Metrics and Targets disclosures on IFRS S1

Specific metrics used to measure sustainability performance and progress toward targets

Example 1: Company J - Greenhouse Gas Emissions Reduction Target

Company J has set a target to reduce its Scope 1 and Scope 2 greenhouse gas emissions by 30% by 2025 compared to a 2018 baseline. The company measures its progress using industry-standard carbon accounting methods and discloses the percentage reduction achieved yearly in its sustainability report.

Example 2: Company K - Water Usage Efficiency Metric

Company K monitors its water usage across all manufacturing sites and has established a target to improve water efficiency by 20% by 2024. Progress is tracked through monthly water usage reports, which are disclosed in the company’s annual sustainability report, along with the percentage of sites that have met the efficiency target.

Example 3: Company L - Waste Diversion from Landfill

Company L has committed to diverting 90% of its operational waste from landfills by 2026. To provide transparency on its progress towards this target, the company reports on the percentage of waste diverted each year, breaking it down by type (e.g., recycling, composting) and by facility.

Metrics and Targets: Nestlé’s Sustainable Packaging Goals

Nestlé provides clear and measurable goals in its sustainability disclosures regarding metrics and targets. Nestlé has set an ambitious target of making 100% of its packaging recyclable or reusable by 2025. This target is tracked and reported in the company's annual financial statements, showcasing the company’s progress and commitment to sustainability.

"Nestlé has set a target to achieve 100% recyclable or reusable packaging by 2025. As of the end of the reporting period, 65% of our packaging is already recyclable or reusable. We track this metric through our internal sustainability reporting system, audited annually to ensure accuracy. Progress towards this target is a key component of our sustainability strategy, reflecting our commitment to reducing plastic waste and minimizing our environmental footprint."

This type of disclosure provides stakeholders with transparency and accountability, crucial elements of the IFRS S1 requirements.

Materiality disclosures on IFRS S1

Information is considered material if its omission or misstatement could influence decisions made by stakeholders.

Example 1: Company M - Materiality of Climate Risk

Company M determined that climate risk is material to its business operations due to its potential impact on the availability of raw materials and production costs. As a result, the company discloses detailed information on how climate change could affect its financial performance and its measures to mitigate these risks.

Example 2: Company N - Impact of Regulatory Changes on Materiality

Company N identified upcoming regulatory changes regarding carbon emissions as material, given their potential to significantly affect operational costs. This information is disclosed in the financial statements, including the anticipated financial impact and the company’s strategies to comply with these regulations.

Example 3: Company O - Materiality of Social Risks

Company O has recognized that labor practices in its supply chain are material, especially in regions with weak labor regulations. The company discloses the steps to address these social risks, such as implementing supplier audits and enhancing worker protections, to ensure stakeholders are informed about potential impacts on the company’s operations and reputation.

Connected Information and Financial Impact: Iberdrola’s Renewable Investments

Iberdrola, a leader in renewable energy, demonstrates how sustainability-related financial disclosures can be closely connected to an entity’s financial performance. The company’s investment in renewable energy projects is not only part of its sustainability strategy but also directly reflected in its financial statements.

"Our investment in renewable energy projects directly supports our commitment to reducing greenhouse gas emissions. During the reporting period, we invested €4.5 billion in wind and solar energy projects, which are expected to reduce our carbon emissions by 15% over the next five years. This investment is reflected in our financial statements, under capital expenditures, and our sustainability disclosures, where we track the progress of emissions reductions."

By connecting financial investments with sustainability outcomes, Iberdrola provides a comprehensive view of how sustainability initiatives impact financial health, as encouraged by IFRS S1.

Resilience and Scenario Analysis: HSBC’s Climate Risk Assessment

In their sustainability disclosures, HSBC offers an excellent example of resilience and scenario analysis. The bank has conducted extensive climate scenario analysis to assess the resilience of its lending portfolio under different climate conditions, providing valuable insights into potential risks and opportunities.

"HSBC has conducted climate scenario analysis to assess the resilience of our lending portfolio under different climate-related scenarios, including a two °C and four °C global temperature increase. The analysis revealed potential risks in sectors such as energy and agriculture, where clients may face increased costs or reduced profitability. We have mitigated these risks by adjusting our lending criteria and increasing our focus on financing sustainable projects."

This proactive approach to risk management aligns with IFRS S1’s requirements for disclosing how an entity’s strategy is resilient to sustainability-related risks.

Conclusion

As sustainability becomes increasingly integral to corporate strategy, comprehensive and transparent sustainability-related financial disclosures cannot be overstated. IFRS S1 provides a framework for companies to disclose their governance, strategy, risk management, metrics, and targets related to sustainability, ensuring that stakeholders have the information they need to make informed decisions.

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