The International Financial Reporting Standards (IFRS) Foundation has been actively working on developing global sustainability reporting standards through its newly established International Sustainability Standards Board (ISSB). This initiative aims to provide a comprehensive framework for ESG reporting that can be applied internationally, complementing the financial reporting standards that IFRS is known for. Significant progress has been made in this area, particularly with IFRS S1 and IFRS S2 taking effect in January 2024. Here’s an overview of these standards and what is involved:
IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information
Objective: IFRS S1 establishes the foundational requirements for companies to disclose sustainability-related financial information. The goal is to ensure that investors and other capital market participants have access to information that is relevant for assessing the enterprise value of a company.
Key Requirements:
- Materiality: Companies are required to disclose information that is material to the assessment of their enterprise value. This involves considering both the impact of sustainability-related risks and opportunities on the company and the company’s impact on the environment and society.
- Holistic Approach: IFRS S1 encourages an integrated approach to reporting, where sustainability-related disclosures are connected with financial statements to provide a comprehensive view of the company’s performance and prospects.
- Consistency and Comparability: The standard emphasizes the need for consistent and comparable information across reporting periods and among companies, facilitating better decision-making by investors.
- Governance and Risk Management: Companies must disclose their governance structure and processes for managing sustainability-related risks and opportunities.
IFRS S2: Climate-related Disclosures
Objective: IFRS S2 focuses specifically on climate-related disclosures, building on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The aim is to provide investors with clear, comprehensive, and comparable information about the climate-related risks and opportunities that companies face.
Key Requirements:
- Governance: Disclosures should include the organization’s governance around climate-related risks and opportunities, detailing the board’s oversight and management’s role.
- Strategy: Companies must describe the actual and potential impacts of climate-related risks and opportunities on their business model, strategy, and financial planning.
- Risk Management: Information on how climate-related risks are identified, assessed, and managed must be disclosed, integrating these processes into the company’s overall risk management framework.
- Metrics and Targets: Companies are required to disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities, including Scope 1, Scope 2, and, where applicable, Scope 3 greenhouse gas emissions.
Progress and Implementation
The development of IFRS S1 and S2 marks a significant step towards a global baseline for sustainability reporting. These standards are designed to be applicable across different jurisdictions and industries, providing a consistent framework for companies worldwide. The ISSB is working closely with other international standard-setters, such as the Global Reporting Initiative (GRI) and the European Union, to ensure alignment and reduce the reporting burden for multinational companies.
The ISSB continues to engage with stakeholders globally to refine these standards and support their adoption, ensuring they meet the needs of capital markets and contribute to a more sustainable global economy. Many international jurisdictions, such as Canada, Australia, Japan and the UK, are expected to closely align their sustainability disclosure requirements with IFRS S1 and S2.
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