Sustainability considerations have become an integral component to be clearly addressed in the notes to the financial statements. These disclosures are intended to highlight how a business entity contributes to achieving global green environmental goals. The focus on these matters has expanded beyond mere disclosure; investment decisions are increasingly linked to evaluating the entity’s commitment to supporting environmental initiatives and promoting sustainability within the community where it operates. This reflects its responsible role in achieving sustainable development and reinforcing environmental values.
In this context, the IFRS Foundation took a significant initiative on 3 November 2021 to support this approach, as it announced the formation of the International Sustainability Standards Board (ISSB). The ISSB is an independent standard-setting board that develops standards that will result in a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets, ensuring enhanced transparency and building trust in sustainability-related business reports worldwide.
Release of IFRS S1 and S2
In June 2023, the International Sustainability Standards Board (ISSB) introduced two pivotal standards: IFRS S1 and IFRS S2. These standards aim to establish a comprehensive framework for sustainability-related financial disclosures, enhancing transparency and comparability across organizations worldwide.
IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information
IFRS S1 sets out the general requirements for a complete set of sustainability-related financial disclosures. It mandates entities to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, access to finance, or cost of capital over the short, medium, or long term.
IFRS S1 is intended to be applicable to all entities that prepare general-purpose financial reports.
Key aspects of IFRS S1 include:
- Integrated Reporting: Aligns sustainability disclosures with financial reporting to provide a holistic view of the entity’s performance.
- Materiality Focus: Emphasizes the disclosure of information that is material to investors and other stakeholders.
- Global Applicability: Designed for use across various jurisdictions, promoting consistency in sustainability reporting.
IFRS S1 Effective Date:
IFRS S1 is effective for annual reporting periods beginning on or after 1 January 2024, with earlier application permitted as long as IFRS S2 Climate-related Disclosures is also applied.
IFRS S2: Climate-related Disclosures
IFRS S2 focuses specifically on climate-related risks and opportunities. It requires entities to provide disclosures that enable users to assess the effects of climate-related risks and opportunities on the entity’s financial position, performance, and cash flows.
IFRS S2 applies to:
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climate-related risks to which the entity is exposed, which are:
- climate-related physical risks, and
- climate-related transition risks, and
- climate-related opportunities available to the entity.
The standard addresses four key areas:
- Governance: Disclosures about the organization’s governance around climate-related risks and opportunities.
- Strategy: Information on the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
- Risk Management: Descriptions of how the entity identifies, assesses, and manages climate-related risks.
- Metrics and Targets: Details on the metrics and targets used to assess and manage relevant climate-related risks and opportunities.
IFRS S2 effective date:
IFRS S2 is effective for annual reporting periods beginning on or after 1 January 2024, with earlier application permitted as long as IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information is also applied.
Importance of IFRS S1 and S2
The adoption of these standards offers several benefits:
- Enhanced Transparency: Provides stakeholders with clear and comparable information on sustainability-related risks and opportunities.
- Improved Risk Management: Assists business entities in identifying and managing sustainability-related risks, thereby enhancing resilience.
- Informed Decision-Making: Enables investors and other stakeholders to make better-informed decisions regarding resource allocation.
- Regulatory Compliance: Aligns with global regulatory trends towards mandatory sustainability disclosures, aiding compliance efforts.
Implementation Challenges
Entities may encounter several challenges when implementing IFRS S1 and S2:
- Data Collection: Gathering accurate and comprehensive sustainability data can be resource-intensive.
- Expertise and Training: Developing the necessary expertise to understand and apply the standards effectively.
- System Integration: Integrating new reporting requirements into existing financial reporting systems.
- Consistency and Comparability: Achieving consistency and comparability in sustainability-related disclosures across different reporting periods and entities can be difficult.
Conclusion
The introduction of IFRS S1 and S2 marks a significant advancement in global sustainability reporting. By adhering to these standards, organizations can enhance transparency, improve risk management, and meet the growing demand for sustainability-related information from investors and other stakeholders. While implementation may pose challenges, the long-term benefits of adopting these standards are substantial, positioning organizations for success in an increasingly sustainability-conscious market.