On 26th June 2023, the International Sustainability Standards Board (ISSB) issued their inaugural standards IFRS S1 and IFRS S2, aiming to improve clarity and consistency in sustainability financial reporting.
IFRS S1 provides disclosure requirements for companies reporting to investors about the sustainability-related risks and opportunities they face.
IFRS S2 provides specific climate-related disclosures.
IFRS S1 and S2 are designed to be used in unison and are effective for periods beginning on or after 1 January 2024. The new standards fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and consolidate the requirements of multiple other leading sustainability reporting frameworks.
The ISSB standards are designed to be applied in the same reporting package as a company’s financial statements and are suitable for all jurisdictions around the world. Currently these standards are not mandatory in the UK but there is increasing emphasis for the standards to be enforced in the UK, in order to provide a framework for consistent and comparable sustainable reporting. This is apparent with the UK Government, who published their revised Green Finance Strategy on March 30th 2023 and outlined intentions to create a formal endorsement of the ISSB disclosure standards.
The ISSB standards released in June 2023 outlined 4 key areas that a company shall provide disclosures about:
1. Governance: Disclosing the governance processes, controls and procedures that are used to monitor and manage sustainability-related risks and opportunities.
2. Strategy: Disclosing the understanding of how sustainability-related risks and opportunities are affecting the business model and how they have been factored into the financial planning of the company.
3. Risk Management: Disclosing the processes the company uses to identify, assess, prioritise and monitor sustainability-related risks and opportunities.
4. Metrics and targets: Disclosures to enable users to understand the company’s performance in progressing towards any targets set by the company or required by law and regulation.
The general requirements for disclosure of sustainability-related financial information include:
- Timing of reporting
A company’s sustainability-related disclosures must cover the same reporting period as the related financial statements to which it is presented in but short-term transitional relief is available.
- Comparative information
A company must disclose comparative information in respect of the prior period to provide better understanding for the user. This could include comparative narrative if necessary. For example if there have been updates for forward-looking estimates.
- Statement of compliance
A company whose disclosures comply with the requirements of IFRS shall make an explicit statement of compliance.
- Judgements, uncertainties and errors
A company must disclose the judgements made in preparing the sustainability disclosures and information to enable users to understand the most significant uncertainties affecting the disclosures.
- Commercially sensitive information
In limited circumstances, allow a company to exclude information from its disclosure where the information is commercially sensitive.
- Current and anticipated financial effects
If any information in an company’s financial statements has been affected by sustainability related risks and opportunities, the entity will be required to disclose quantitative and qualitative information explaining the connections between those risks and opportunities and their current and anticipated financial effects.
IFRS S2 is designed to be used on the principles of IFRS S1 noted above but there key requirements for the S2 climate-related disclosures:
- Emission targets
Disclosure regarding a company’s strategy and decision-making targets in relation to their emissions.
- GHG emissions
Require use of the GHG Protocol: A Corporate Accounting and Reporting Standard (2004) unless required by a jurisdictional authority or an exchange on which the entity is listed to use a different method for measuring its greenhouse gas emissions.
- Industry specific disclosures
Provide disclosures that are specific to the industry of the company.
- Climate resilience
Disclose the company’s analysis of climate resilience (ability to anticipate, prepare for and respond to hazardous events related to the climate) and how this has impacted their strategy towards climate-related risks and opportunities.
For further information on the IFRS Sustainability Disclosure Standards, please visit the IFRS website.