The International Financial Reporting Standards Foundation (IFRS) is a not-for-profit organisation established to develop a single set of high-quality, understandable, enforceable and globally accepted accounting standards. At the UN Climate Change Conference (COP26) in November 2021, the IFRS announced the creation of a new standard-setting board within the Foundation – the International Sustainability Standards Board, or ISSB.
The ISSB has released its first proposals for IFRS Sustainability Disclosure Standards (SDS), known as IFRS S1 and IFRS S2, which have been developed in line with recommendations from the FSB Task Force on Climate-related Financial Disclosures (TCFD) and derived from SASB standards.
There are two separate proposals:
- IFRS S1: General requirements for disclosure of sustainability-related financial information
- IFRS S2: Climate-related disclosures
The ISSB notes that, once finalised, these standards “will form a comprehensive global baseline of sustainability disclosures designed to meet the information needs of investors when assessing enterprise value.”
Both draft proposals are now open for comments. This consultation period ends 29 July 2022.
The draft for IFRS S1 lays out the recommended core content for sustainability-related financial disclosures, which should include information about “a company’s impacts and dependencies on people, the planet and the economy when relevant to the assessment of the company’s enterprise value”.
These would need to be included as part of a company’s general purpose financial reporting, and published at the same time as the financial statements.
The General Requirements include information on four distinct metrics aimed to help investors understand a company’s:
- Governance: the processes, controls and procedures used to monitor and manage sustainability-related aspects.
- Strategy: for addressing sustainability-related risks and opportunities, be it through strategy planning and/or financial planning, and whether the company considers sustainability at its core.
- Risk Management: define the process by which a company identifies, assesses and manages current and anticipated sustainability-related risks, and how this is integrated into a firm’s overall risk profile.
- Metrics and Targets: define how a company measures and monitors sustainability-related risks and opportunities, including assessing performance on targets.
IFRS S1 expands on disclosures already in use by many firms.
Full IFRS S1 documents can be found on the IFRS website.
The Climate Exposure Draft proposal uses the same approach as IFRD S1 (above), using Governance, Strategy, Risk Management, Metrics and Targets.
IFRS S2, though, contains a far-reaching and comprehensive list of disclosures, covering every climate-related aspect of the firm’s operations.
It includes a requirement for companies to disclose information about climate-related physical and transition risks and opportunities, and how these could affect a company’s current and future business model, strategy and cash flows.
Companies would be required to identify short, medium and long term physical and transition risks. Physical risks should be categorised as Acute (extreme weather events) or Chronic (rising sea levels).
|Physical risks||Transition risks|
|Acute physical risks could include the increased severity of extreme weather events such as cyclones and floods, putting a company’s assets at risk or disrupting its supply chain (such as disruption to a just-in-time delivery process).
Chronic physical risks include rising sea levels or rising mean temperatures. These changes in the climate could affect a company’s strategy, tor example, it may need to consider moving its production facilities.
|Risks associated with a company’s transition to a lower-carbon economy.
Transition risk includes policy or legal, market, technology and reputation.
An example of a market risk is reduced demand for high-carbon-based products, a legal risk is regulatory action banning the sale of a company’s products–gas water heaters or diesel vehicles. A technology risk or opportunity could be lower-emission substitutes for diesel vehicles.
Source: ISSB Snapshot of Exposure Draft.
IFRS S2 includes detailed requirements for disclosing:
- plans to achieve climate targets, including resourcing and review,
- plans to adapt or mitigate climate-related risks (e.g. changes in workforce, materials used, product specifications, etc.),
- plans to adapt or mitigate climate-related risks in its supply and value chains,
- whether carbon-offsetting is part of the company plan,
- whether companies are subject to climate-related risks (e.g. flooding or wildfire risk), whether such would likely cause the company to relocate, decommission or upgrade assets, and whether the company has the resources required to do so,
Companies will also need to disclose their greenhouse gas emissions and that of their supply and value chains.
Essentially, IFRS S2 will require companies to use climate-related scenario analysis to assess its risks and opportunities. However, it also requires firms to disclose how its climate-related analysis aligns with the latest international agreement on climate change, i.e. The Paris Agreement which sets goals of limiting global temperature rises in this century to 2 degrees.
Full IFRS S2 documentation can be found on the IFRS website.
It is noted that firms adhering to IFRS Accounting Standards for their financial reports are only required to comply with the SDS if their jurisdiction requires it
How will the standards apply?
It is noted that firms adhering to IFRS Accounting Standards for their financial reports are only required to comply with the SDS if their jurisdiction requires it. Jurisdictions themselves will decide whether SDS will be required, but companies can choose to apply them, regardless.
The Sustainability Disclosure Standards are designed to work with GAAP and IFRS, but to achieve full compliance companies will be required to adhere to both IFRS S1 and IFRS S2.
The consultation period ends on 29 July 2022, after which the ISSB will aim to finalise the SDS by the end of 2022 – at which time companies will be free to voluntarily adopt them.
Auxadi will keep you updated on developments.
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