The International Sustainability Standards Board (ISSB) has released its final sustainability and climate-related disclosure standards - International Financial Reporting Standard (IFRS) S1 and S2.
IFRS S1 and IFRS S2 are of critical importance to Australian businesses for two reasons:
How (and why) the Global Sustainability Disclosure Standards were developed
The IFRS Foundation announced the creation of the ISSB at the 2021 United Nations Climate Change Conference in Glasgow (COP26). Its aim is to develop sustainability and climate-related disclosure standards to meet investors’ information needs.
On Monday 26 June 2023, the ISSB issued IFRS S1 and IFRS S2 – its inaugural standards – aimed at improving sustainability and climate-related disclosures in global capital markets to improve trust and confidence in company disclosures and to better inform investment decisions.
Both IFRS S1 and S2 were developed with feedback from the market, the Financial Stability Board, the International Organisation of Securities Commissions, and business and investment leaders. The broad consultation in the development of both Standards demonstrates the widespread interest in a more consistent understanding of sustainability impacts on business prospects.
IFRS S1 is a set of disclosure requirements designed to enable companies to communicate the sustainability risks and opportunities they anticipate facing over the short-, medium-, and long-term. IFRS S2 is designed to be used in conjunction with IFRS S1 and sets out specific climate-related disclosures. Both IFRS S1 and S2 incorporate the Task Force on Climate-related Financial Disclosures' recommendations.
General Requirements for Disclosure of Sustainability-related Financial Information: IFRS S1
IFRS S1 is effective for reporting periods beginning on or after 1 January 2024, but it can be used earlier if the reporting entity discloses that fact and also applies IFRS S1 in conjunction with IFRS S2.
Its purpose is to provide useful information to users of general-purpose financial reports in making investment decisions. By providing this information, reporting entities can help investors better understand their sustainability risks and opportunities and make more informed investment decisions.
IFRS S1 requires entities to provide disclosures about the governance processes, management and assessment strategies, and performance in relation to sustainability-related risks and opportunities.
Governance
An entity shall disclose information on body(ies) or individual(s) responsible for governance and the oversight of sustainability-related risks and opportunities, providing specific information on:
- how sustainability-related responsibilities are reflected in policies applicable to the body(ies) or individual(s);
- how the body(ies) or individual(s) determines whether appropriate skills and competencies are available to oversee strategies designed to respond to sustainability-related risks and opportunities;
- the manner and frequency of how the body(ies) or individual(s) is informed about sustainability-related risks and opportunities;
- how the body(ies) or individual(s) considers sustainability-related risks and opportunities when overseeing strategy, decisions, risk management, policies, and associated trade-offs; and
- how the body(ies) or individual(s) sets and monitors progress towards targets.
An entity shall also disclose information on management's role in governance and the oversight of sustainability-related risks and opportunities, providing specific information on:
- the position or committee to whom the role is delegated;
- how oversight is exercised over the position or committee to whom the role is delegated; and
- whether control and procedures are used to support the oversight of risks and opportunities, and how the controls and procedures are integrated with other internal functions.
Strategy
An entity shall disclose information to enable users of general purpose financial reports to understand sustainability-related risks and opportunities that could reasonably be expected to affect its prospects, by specifically providing information on:
- what the sustainability-related risks and opportunities are;
- what the time horizons over which the effects of the risks and opportunities could occur are; and
- how these time horizons are used for strategic decision-making.
An entity shall also disclose information about the current and anticipated effects of those sustainability-related risks and opportunities on its business model and value chain, by specifically providing information on:
- what the sustainability-related risks and opportunities are; and
- where in the business model and value chain the risks and opportunities are concentrated.
There are also requirements to report on the effects of those sustainability-related risks and opportunities on the entity’s strategy and decision-making, by specifically providing information on:
- how it has responded to and intends to respond to sustainability-related risks and opportunities in its strategy and decision-making;
- its progress on plans disclosed in previous reporting periods; and
- trade-offs it has considered.
An entity shall disclose information about the effects of those sustainability-related risks and opportunities on its financial position and performance, by specifically providing information on:
- how sustainability-related risks and opportunities have impacted its financial position, performance and cash flows;
- sustainability-related risks and opportunities that are identified as a significant risk for material adjustment; and
- how it anticipates its financial position, financial performance and cash flows to change over the short- to long-term time horizons.
An entity must report on the resilience of its strategy and business model to those sustainability-related risks.
Risk management
An entity shall disclose information about:
- processes and policies it use to identify, assess, and monitor sustainability-related risks and opportunities; and
- how and to what extent the processes above are integrated into its overall risk management process.
Metrics and targets
An entity shall disclose information about metrics:
- required by an applicable IFRS Sustainability Disclosure Standard;
- used to measure and monitor the sustainability-related risks and opportunities; and
- used to measure and monitor its progress towards any targets set.
Climate-related Disclosures: IFRS S2
IFRS S2 is effective for reporting periods beginning on or after 1 January 2024, but it can be used earlier if the reporting entity discloses that fact and also applies IFRS S1.
IFRS S2 requires an entity to disclose particulars about short- to long-term climate-related physical and transition risks, and opportunities that will provide useful information to guide investment decisions of users of general-purpose financial reports.
IFRS S2 requires disclosures about governance processes, management and assessment strategies, and performance with respect to climate-related risks and opportunities. The specific disclosure requirements for each of these categories are largely the same as the requirements in IFRS S1, however IFRS S2 reporting is from a climate-related risk and opportunities perspective, rather than the broader, sustainability-related perspective adopted by IFRS 1.
IFRS S2 also has the following additional disclosure requirements:
Strategy
An entity shall disclose information to enable users of general purpose financial reports to understand:
- climate-related risks and opportunities that could reasonably be expected to affect its prospects, by specifically providing information on whether the climate-related risk is a physical or transition risk; and
- how its has responded to and intend to respond to climate-related risks and opportunities in its strategy and decision-making, including how it plan to achieve any climate-related targets it has set and any targets it must to meet.
An entity shall also disclose information about the effects of those climate-related risks and opportunities on its strategy and decision-making, by specifically providing information on:
- how the above activities will be resourced;
- current and anticipated changes to its business model to address climate-related risks and opportunities;
- current and anticipated direct and indirect mitigation and adaptation efforts;
- any climate-related transition plan it has; and
- how it plans to achieve any climate-related targets.
An entity must report on the climate resilience of its strategy and business model to those climate-related risks by specifically providing information on its assessment of its own climate resilience, with consideration for:
- the implications of the assessment on the strategy and business model;
- significant areas of uncertainty;
- capacity to adjust its strategy and business model over the short- to long-term;
- how and when the climate-related scenario analysis was carried out; and
- key assumptions made in the analysis.
Metrics and targets
The metrics and targets of IFRS S1 and S2 are different, as would be expected. In IFRS S2, entities shall disclose information about:
- industry and cross-industry metrics related to greenhouse gases, climate-related transition risks, physical risks, opportunities, capital deployment, carbon prices, and remuneration; and
- their own targets to mitigate or adapt to climate-related risks and opportunities.