A Brief Summary of Sustainability Standards IFRS S1 and IFRS S2
International Financial Reporting Standards (IFRS) on Sustainability
In late June 2023, IFRS released two sustainability-related disclosure Standards, together with related Guidance and Basis for Conclusion documents:
- IFRS Sustainability Disclosure Standard S1 – General Requirements for Disclosure of Sustainability-Related Financial Information
- IFRS Sustainability Disclosure Standard S2 – Climate-Related Disclosures
These Standards are to apply to for-profit and public sector entities for annual reporting periods commencing after 1 January 2024.
Overall, both Standards have been written in plain English and, along with the supporting documents, are quite prescriptive and provide further direction regarding the process of preparing and reporting sustainability and climate-related financial information, including some examples on the application of the Standards.
Background
These Standards were prepared by the International Sustainability Standards Board (ISSB), which was created by the IFRS Foundation Trustees after COP 26 in Glasgow in 2021. Extensive consultation was undertaken with finance leaders around the world, together with organizations such as the Climate Disclosures Standards Board (CDSB), Taskforce for Climate-Related Financial Disclosures (TCFD), the Global Reporting Initiative (GRI) and other stakeholders.
IFRS standards apply to most countries, apart from the United States (which apply Generally Accepted Accounting Principles - GAAP).
In Australia, the Australian Accounting Standards Board are responsible for the review of existing accounting standards and preparation of new standards. For entities reporting under the Corporations Act 2001, Australia has adopted IFRS Standards for annual reporting periods commencing on or after 1 January 2005. This is to ensure reporting by for-profit Australian entities is consistent with IFRS, and compliance with these Standards are required for all reporting entities, including listed companies and financial institutions.
Who are the Primary Users of General Purpose Financial Statements?
IFRS S1 and IFRS S2 are designed to provide additional information regarding an organization’s sustainability related risks and opportunities, which are relevant to primary users of their general purpose financial statements in their decision making as to whether to allocate resources to the entity.
Existing and potential investors, lenders, creditors are the key primary users.
As a result, the Objectives of these disclosure standards are focused on financial risks and opportunities (sustainability and climate related) throughout the organizations’ value chain, and how those risks and opportunities impact an entity’s cashflow, access to finance and/or the cost of capital over the short, medium and long term – basically, how the sustanability and climate-related risks and opportunities impact the future prospects of the organization.
While the Objectives and Scope in each document are Standard specific, the Scope of both Standards are limited to risks and opportunities that impact the entity’s prospects.
Following is an extremely brief summary of the key elements of each Standard – we recommend readers review the sustainability-related Standard documents at www.ifrs.org .
IFRS Sustainability Disclosure Standard S1 – General Requirements for Disclosure of Sustainability-Related Financial Information
From IFRS S1:
The objective of IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information is to require an entity to disclose information about its sustainability-related risks and opportunities that is useful to primary users of general purpose financial reports in making decisions relating to providing resources to the entity.
IFRS S1 sets out general requirements for the content and presentation of sustainability-related information, when reporting in accordance with IFRS sustainability disclosure standards, to aid primary users in their financial decision making relevant to the entity.
Note, IFRS S1 may also be applied where financial statements are prepared in accordance with generally accepted accounting principles (GAAP).
The key elements of the Standard are:
Conceptual Foundation - the usefulness of sustainability-related financial information is enhanced if the information is comparable, verifiable, timely and understandable – all fundamental characteristics of quantitative information, including;
- Fair Presentation – requires the disclosure of relevant information about sustainability-related risks and opportunities that could reasonably be expected to effect the entity’s prospects;
- Materiality - is entity specific and is based on the nature and magnitude of the risk or opportunity. There is a requirement to disclose material information - information is 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;
- Reporting Entity – that the sustainability information provided is for the same reporting entity preparing the general purpose financial statements;
- Connected Information – includes connections between sustainability risks and opportunities as well as connections between core content disclosures – governance, strategy, risk management, metrics and targets. All data and assumptions used should be consistent and presented in the same currency as the financial statements.
Core Content – has four main elements (itallics from the Standard):
- governance - the governance processes, controls and procedures the entity uses to monitor, manage and oversee sustainability-related risks and opportunities;
- strategy - the approach the entity uses to manage sustainability-related risks and opportunities;
- risk management - the processes the entity uses to identify, assess, prioritise and monitor sustainability-related risks and opportunities; and
- metrics and targets - an entity’s performance in relation to sustainability-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation.
When identifying sustainability-relates risks and opportunities that may impact the entities prospects, report preparers are required to consider IFRS sustainability-related disclosure standards, as well as the disclosure topics in the Sustainability Accounting Standards Board (SASB) standards (which are organized by industry). For water and biodiversity matters, the CDSB Framework Application Guidance may be applicable. In addition, standards from other standard setting bodies (such as GRI) may be used, as well as industry standard guidance. All guidance should be disclosed and identified.
Some of the other general requirements include:
- Internal judgement will be required in the presentation of accurate information;
- The location of information in the general purpose financial reports may be within the management commentary, included with information being required by Regulators, or cross-referenced to an external report;
- The timing of the disclosures should be the same and the general purpose financial reports, with any adjustments for post balance date events;
- All information must be comparable from one year to the next;
- Where IFRS sustainability related disclosures have been applied, the entity will make an unreserved statement of compliance with the Standards;
- Where any law prohibits information from being released, there is no obligation to disclose.
Where judgements are made in relation to measurement uncertainties, the basis of these judgements and assumptions may need to be explained to the primary users. Over time, more reasonable and accurate estimates may be used in relation to future events. Where errors are detected, an entity will correct prior period amounts in comparatives unless it is impractical to do so.
The Standard contains the following five appendices:
Appendix A - Defined Terms.
Appendix B - Application Guidance
Appendix C - Sources of Guidance
Appendix D - Qualitative Characteristics of Useful Sustainability-Related Financial Information
Appendix E – Effective Date and Transition
and two additional documents have been released to support the Standard:
Accompanying Guidance on General Requirements for Sustainability-related Financial Information
Basis for Conclusions on General Requirements for Sustainability-related Financial Information
IFRS Sustainability Disclosure Standard S2 – Climate Related Disclosures
From IFRS S2:
The objective of IFRS S2 Climate-related Disclosures is to require an entity to disclose information about its climate-related risks and opportunities that is useful to primary users of general purpose financial reports in making decisions relating to providing resources to the entity.
The focus of IFRS S2 is on climate related physical and transition risks, and climate related opportunities. Only the climate risks and opportunities that impact the entity’s prospects are to be reported.
The Core Content of IFRS S2 mirrors the four topics from IFRS S1, but with further detail required to report in accordance with the Standard:
- governance - the governance processes, controls and procedures the entity uses to monitor, manage and oversee climate-related risks and opportunities;
- strategy - the approach the entity uses to manage climate-related risks and opportunities. Further disclosure is required regarding each of the climate-related risks and opportunities, and the impact these risks and opportunities have on the entity’s business model and value chain. Disclosure is also required regarding the effects of climate-related risks and opportunities on decision making in relation to the organisations strategy, and the resulting financial and cashflow impacts of the effects. Further, the entity is required to detail the resilience of the entity’s business strategy and model to the climate related risks and opportunities identified;
- risk management - the processes the entity uses to identify, assess, prioritise and monitor climate-related risks and opportunities. While not duplicating the requirements of IFRS S1, the entity will detail their data sources and scope of operations included in the processes; whether scenario analysis has been used; qualitative and quantitative factors considered in assessing the nature, likelihood and magnitude of events; how the entity prioritises and monitors climate-related risks; and how the processes are integrated into the overall risk management system;
- metrics and targets - an entity’s performance in relation to climate-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation. This section of the Standard contains the detail of the climate-related metrics and targets used and the progress achieved, including across industries, industry specific and entity specific, some of which are:
Climate-Related metrics - including:
- Greenhouse Gas (GHG) - disclosure of an entity’s absolute gross GHG emissions generated during the reporting period, expressed as metric tonnes of CO2 equivalent under Scope 1, 2 and 3, measured in accordance with the GHG Protocol – 2004;
- the measurement approach input and assumptions used, the reasons the approach was chosen and reasons for any changes made to the choice over time;
- For Scope 1 and 2 GHG emissions, dis-aggregate consolidated financial statements from associates, joint ventures and unconsolidated subsidiaries;
- Disclose the location of Scope 2 GHG emissions and any contractual obligations;
- For scope 3 GHG emissions, disclose the categories within the entity’s measure, as described in Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011) including additional information on the entity’s Category 15 GHG emissions, as well as those of its investments;
- The amounts and percentage of assets or business activities impacted by both climate-related physical and transition risks, and climate-related opportunities;
- Capital invested in climate-related risks and opportunities;
- The internal carbon price for each metric tonne of GHG and how this impacts decision making;
- How climate-related matters impact executive remuneration and the percentage of this remuneration linked to climate-related considerations;
- Reasonable and supportable information should be used, including the disclosure of the use of industry based metrics in accordance with the Industry-Based Guidance on Implementation of S2.
Climate-Related targets, including disclosure of qualitative and quantitative targets to monitor strategic goals, and any targets an entity is required to meet by law or regulation, including any GHG emissions targets. For each target, disclosure is required for:
- The metrics used to set the targets and the objectives of the targets;
- Part or all of the entity that the targets apply to, and the applicable time period;
- Base period against which progress is measured and any milestones or interim targets. Where the target is qualitative, identify if it is an absolute or intensity based target;
- Whether changes in international standards have informed the target;
- Identify the entity’s process in setting and reviewing each target, and how it monitors progress against each target;
- disclose information about its performance against each climate-related target and an analysis of trends or changes in the entity’s performance;
- For each GHG target, disclose which greenhouse gases are covered by the target, and whether the GHG emissions target covers Scope 1,2 or 3. The entity must disclose both gross and net GHG targets;
- whether the target was derived using a sectoral decarbonisation approach (a Science Based Target initiative);
- The planned use of carbon credits to offset GHG emissions, including how achieving the GHG targets relies on the use of carbon credits; which third parties will verify the carbon credits; the type of carbon credits - nature-based or based on technological carbon removals; and whether the underlying offset is achieved through carbon offset or removal, as well as any other relevant factors;
- Any extra information regarding the integrity of the carbon credits/offsets the entity expects to use;
- Identify and disclose the metrics used to set and monitor progress towards meeting targets – consider cross industry metrics, industry-based metrics and any other metrics that satisfy IFRS S1.
The Standard contains the following three appendices:
Appendix A - Defined Terms.
Appendix B - Application Guidance
Appendix C - Effective Date and Transition
and two additional documents have been released to support the Standard:
Accompanying Guidance on Climate-related Disclosures
Basis for Conclusions on Climate-related Disclosures
