ESG / CSR
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On June 26th, 2023, the International Financial Reporting Standards Foundation (IFRS) announced a new set of disclosure requirements, designed to provide investors with clear and transparent information on a company’s sustainability and climate related risks and opportunities.
Stakeholders and investors increasingly take sustainability and climate related considerations into account when making financial decisions, and the IFRS S1 and S2 standards aim to create a global baseline that facilitates transparency and comparability.
👉 In this article we’ll explore what the IFRS Foundation is, why it created IFRS S1 and S2, and what the standards require from companies.
Many stakeholders - including investors - now expect companies to disclose information pertaining to their sustainability and climate change policies and performance. And in fact, there are a range of different frameworks and standards, from a variety of different organisations, from which to choose. However, the “alphabet soup of ESG framework” makes it difficult for companies to know where to start, and raises issues regarding the reliability and comparability of information
This is why the IFRS Foundation issued a formal consultation paper in 2020, posing the question as to whether or not there is a need for global sustainability standards.
The response to the consultation paper showed a global demand for the creation of international standards, and support for the IFRS Foundation to take the lead in their development.
The International Financial Reporting Standards Foundation or IFRS is a nonprofit organisation responsible for the development of global accounting and sustainability disclosure standards - otherwise known as IFRS Standards.
The IFRS Foundation is founded on the fundamental belief that better information supports better economic investment decisions. The primary goal of the IFRS Foundation is to develop high quality, global IFRS Standards that promote transparency, accountability and efficiency in global financial markets.
The IFRS Foundation is credited with developing high quality, understandable, and globally accepted accounting standards that help to make financial statements consistent and easily comparable around the world. Many jurisdictions mandate compliance with IFRS and require that company accounts align with their standards.
Following on from the positive response to their consultation paper, the IFRS Foundation created the International Sustainability Standards Board (ISSB) - a sister board to their accounting standards setting board, the IASB.
The ISSB is responsible for creating a global baseline of sustainability related financial reporting disclosures in an effort to inform investment decisions.
On June 26th, 2023, the International Sustainability Standards Board (ISSB) issues its first two standards:
👉 To find out more about the TCFD Standards, check out our article that details everything you need to know.
IFRS S1 requires a company to disclose information concerning its sustainability related risks and opportunities.
IFRS S1 was created to help investors judge the short, medium, and long term ability of a company to generate cash. This is because the financial performance of a company is linked to its interactions with stakeholders, society, and the environment via the company’s value chain.
👉 The company’s reliance and impact on its value chain create sustainability related risks and opportunities.
IFRS S1 is not so onerous as to ask a company to provide information on every single sustainability related risk and opportunity, instead it asks for information where the sustainability related risks and opportunities could be reasonably expected to affect the company’s cash flows, access to finance, or cost of capital.
IFRS S1 requires that companies disclose information regarding their governance, strategy, risk management, and the metrics and targets used to measure and manage sustainability related risks and opportunities. These four areas align with, and build on, the TCFD Recommendations by extending beyond climate related risks and opportunities to sustainability related risks and opportunities.
In order to comply with the requirements on IFRS S1, a company must disclose ‘material information’ about its sustainability related risks and opportunities. Information is considered to me material “if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports.”
IFRS S1 also requires that the information provided provides a “complete, neutral and accurate depiction” of sustainability related risks and opportunities.
IFRS S2 requires that companies disclose information regarding its governance, strategy, risk management, and climate related metrics and targets.
For the purpose of the standard climate related risks are considered to be those that have the potential to cause negative effects on the company, this may be physical and transitional risks (transitional risks refer to those that arise as a result of technology change or the adoption of new policies).
Climate related opportunities on the other hand refer to the positive effects that a company may experience as a result of climate change - for example, this may include business opportunities created through new product lines etc.
The IFRS S1 and IFRS S2 are effective for annual reporting periods beginning from January 1st, 2024. This means that where a company applies the standards to their 2024 accounting cycle, investors will be able to see information in 2025.
👉 The IFRS S1 and IFRS S2 standards are not mandatory and the ISSB cannot require that companies adopt them. It’s up to national authorities as to whether or not companies within their jurisdiction are mandated to apply the standards. Companies may also choose to voluntarily apply the standards.
The new IFRS S1 and S2 standards have been welcomed by stakeholders and offer a number of different advantages:
The new IFRS S1 and S2 sustainability reporting standards are an important step in the evolution of global ESG and sustainability frameworks. They build on the multitude of pre-existing standards by consolidating best practices. The intention is that these two new standards create an effective global benchmark for corporate sustainability reporting. .
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If reading this article has inspired you to consider your company’s own carbon footprint, Greenly can help. Learn more about Greenly’s carbon management platform here.
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