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.
Why do we need sustainability disclosures?
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 organizations, 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.
What is the IFRS Foundation?
The International Financial Reporting Standards Foundation or IFRS is a nonprofit organization 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.
What is the ISSB?
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.
The IFRS Sustainability Disclosure Standards
On June 26th, 2023, the International Sustainability Standards Board (ISSB) issues its first two standards:
IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information - these standards require a company to disclose information regarding its sustainability related risks and opportunities, that may be considered useful to users of general purpose financial reports, when making decisions relating to providing resources to the company (ie. when considering investing).
IFRS S2 Climate Related Disclosures - these standards set out the requirements for a company to disclose information about its climate related risks and opportunities while also building on the requirements of IFRS S1. IFRS S2 incorporates the recommendations of the Task force on Climate-related Financial Disclosures (TCFD) and requires the disclosure of information about both cross-industry and industry-specific climate related risks and opportunities.
👉 To find out more about the TCFD Standards, check out our article that details everything you need to know.
IFRS S1 in more detail
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 disclosure information
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.
Governance - information disclosed helps investors to better understand the company’s governance process, controls, and the producers used to regulate sustainability-related risks and opportunities.
Strategy - information disclosed helps investors to understand the strategy used by the company to manage its sustainability related risks and opportunities.
Risk management - information disclosed allows investors to understand how a company identifies, assesses, prioritizes and monitors sustainability related risks and opportunities.
Metrics and targets - information disclosed helps investors to understand the sustainability related targets set by the company (or required by law) and how it is progressing against these targets.
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.
The IFRS S1 Standard sets out the requirements for companies and details what is required in terms of reporting frequency, use of financial data, comparative information, sources of estimation, errors and statement compliance etc. Much of the requirements reflect existing IFRS accounting standards and will be somewhat familiar to organizations who prepare IFRS financial statements.
IFRS S2 disclosure information
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.
Governance - a company must disclose information to allow investors to understand the company’s governance processes, controls and procedures used to monitor and manage climate related risks and opportunities.
Strategy - climate change represents risks and opportunities for nearly all companies, and so companies are required to disclose the climate related risks and opportunities that can be reasonably expected to impact the company’s outlook. Information required to be disclosed includes anticipated changes to the business, mitigation and adaptation strategies, low carbon transition plans, climate related targets and how it intends to achieve these targets. Additionally, a company must disclose any financial impacts (positive or negative) resulting from climate related risks and opportunities, as well as any anticipated future impacts on the company’s financial position. It must also provide information on company resilience including its operational and financial capacity to adjust to the impacts of climate change.
Risk management - information must be disclosed to help investors understand how the company identifies, assesses, prioritizes, and monitors climate related risks and opportunities. Including how these processes are incorporated into the company’s overall risk management strategy.
Metrics and targets - information must be disclosed regarding a company’s climate related targets (either voluntary or legal), and any industry or cross-industry metrics (for example climate related transition risk, physical risks, opportunities etc), as well as how it measures progress against these targets and metrics. IFRS S2 also requires that a company disclose its greenhouse gas emissions (scope 1, 2 and 3).
When are the IFRS Sustainability Disclosure Standards effective from?
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.
Benefits of adopting the IFRS S1 and S2 standards
The new IFRS S1 and S2 standards have been welcomed by stakeholders and offer a number of different advantages:
Global baseline - the standards promote the global standardization of a single sustainability disclosure, helping to align international markets and allowing for the fair comparison of ESG related financial information.
International support - investors, companies, policy makers, market regulators and other organizations around the world (including the G20 and G7 Leaders) have all signaled their support for the standards.
Useful disclosure information - the standards are designed to be phased in, with companies being able to focus on climate disclosures only in year 1. Moreover the information required is proportionate, useful and material - this brings value to investors and stakeholders, while also minimizing the reporting requirement for companies.
Builds on existing best practices - the standards build on and consolidate international standards such as the TCFD recommendations, SASB standards, CDSB Framework, and World Economic Forum metrics in order to streamline sustainability disclosures. It reduces the complex reporting landscape for companies while also ensuring that any work to comply with these existing standards is not lost.
Reduces reporting requirements - by establishing a global baseline, we can reduce duplication of reporting requirements where companies operate in multiple jurisdictions.
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. .
What about Greenly?
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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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