In the past week, we’ve witnessed a significant milestone in the world of sustainability reporting – the launch of the first-ever IFRS Sustainability Disclosure Standards. These standards are set to establish a global benchmark for sustainability-related disclosures in the capital markets.
The IFRS S1 standard encourages companies to articulate the sustainability-related risks and opportunities they anticipate in the short, medium, and long term. This information is crucial for investors as it directly influences their decision-making process. The IFRS S2 standard focuses on specific climate-related disclosures and is designed to be used in conjunction with IFRS S1. Both standards are rooted in the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Companies in IFRS jurisdictions will be required to disclose their sustainability-related financial information concurrently with their financial statements. These disclosures should encompass the same reporting period as the related financial statements. Starting from 1 January 2024, any company preparing a financial report should adhere to the IFRS 1 & 2 Standard for annual reporting periods. This means that the sustainability-related financial disclosures should be included in the same document that presents the company’s financial information.
The ISSB is actively seeking feedback on future priorities, with a consultation period open until September 1, 2023.
General Requirements of IFRS S1 & S2
The IFRS S1 & S2 standards set out some general requirements for the preparation and presentation of sustainability-related financial disclosures. These include providing your sustainability-related financial disclosures at least annually, presenting comparative information for the preceding period for all amounts reported in the current period’s disclosures, and making an explicit and unreserved statement of compliance if your disclosures comply with all the requirements of IFRS Sustainability Disclosure Standards (In a similar way to how a CFO certifies the accuracy of a 10K).
The Core Content of IFRS S1
The aim of the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information is to mandate an entity to share information about its sustainability-related risks and opportunities. This information is intended to assist the primary users of general purpose financial reports in making informed decisions about resource allocation to the entity.
The IFRS S1 standards require you to provide information about four key areas: governance, strategy, risk management, and metrics and targets.
- The governance body or individual responsible for overseeing sustainability-related risks and opportunities, including their roles, responsibilities, and skills.
- Information on how the governance body considers sustainability-related risks and opportunities in strategy, major decisions, risk management, and target setting, including trade-offs and inclusion of performance metrics in remuneration policies.
- Information on management’s role in monitoring and overseeing sustainability-related risks and opportunities.
- Whether the role is delegated to a specific management position or committee and how oversight is exercised, including the integration of controls and procedures with other internal functions.
Strategy Disclosures: Broken down into Strategy, Sustainability-related risks and opportunities:, Business Model and Value Chain, Decision-Making, Financial Position, & Climate Resilience
- Strategy: Sustainability-related risks and opportunities and the effects of these risks and opportunities on the entity’s business model, value chain, strategy, decision-making, financial position, financial performance, and cash flows.
- Sustainability-related risks and opportunities: A description of sustainability-related risks and opportunities and specify the time horizons over which these risks and opportunities are expected to occur and how the entity defines “short term,” “medium term,” and “long term.”
- Business model and value chain: Describe the effects of sustainability-related risks and opportunities on the entity’s business model and value chain and identify concentrations of these risks and opportunities within the business model and value chain.
- Decision-making: Explain how the entity responds to sustainability-related risks and opportunities in its strategy and decision-making and report progress against previous plans and consider trade-offs associated with these risks and opportunities.
- Financial position, financial performance, and cash flows: Current and anticipated effects of sustainability-related risks and opportunities on the entity’s financial position, performance, and cash flows and provide quantitative and qualitative information, considering short, medium, and long-term perspectives.
- Resilience: Assess and disclose the resilience of the entity’s strategy and business model to sustainability-related risks and provide qualitative and, if applicable, quantitative assessments, including the methodology and time horizon used.
Risk Management Disclosures
- Processes and policies used to identify, assess, prioritize, and monitor sustainability-related risks.
- Information about inputs, parameters, scenario analysis, assessment methods, prioritization, monitoring, and changes in processes.
- Processes used to identify, assess, prioritize, and monitor sustainability-related opportunities.
- Disclose the extent to which sustainability-related risk and opportunity processes are integrated into and inform the entity’s overall risk management process.
Metrics & Targets Disclosures
- Targets set to monitor progress towards strategic goals and compliance with legal or regulatory requirements.
- Metrics used for the target, specific quantitative or qualitative targets, period, base period, milestones, and interim targets.
- Report performance against each target and analyze trends or changes in performance.
- Explain any revisions to targets and provide clear labels and definitions for metrics and targets.
The Core Content of IFRS S2
The purpose of the IFRS S2 Climate-related Disclosures is to mandate a company to share information about any climate-related physical and transition risks and opportunities that could reasonably be expected to influence the entity’s cash flows, its ability to secure financing, or its cost of capital in the short, medium, or long term. .
The IFRS S2 standards require you to provide information from the same four key areas as IFRS S1: governance, strategy, risk management, and metrics and targets.
- The governance body or individuals responsible for oversight of climate-related matters, including their responsibilities, skills, frequency of information updates, and how they incorporate climate-related risks and opportunities into the entity’s strategy and risk management.
- How these individuals oversee the setting of climate-related targets and monitor progress, including the role of performance metrics in remuneration policies.
- Management’s role in these processes, including any delegation of roles and the use of controls and procedures to support oversight.
Strategy Disclosures: Broken down into Strategy, Climate-Related Risks and Opportunities, Business Model and Value Chain, Decision-Making, Financial Position, & Climate Resilience
- Strategy: Climate-related risks and opportunities and their impact on the entity’s prospects, business model, value chain, strategy, decision-making, and financial planning.
- Climate-Related Risks and Opportunities: Describe identified climate-related risks and opportunities, classify them as physical or transition risks, and specify their expected time horizons.
- Business Model and Value Chain: Explain the current and anticipated effects of climate-related risks and opportunities on the business model and value chain, including identifying concentrations within them.
- Decision-Making: Information on how the company responds to climate-related risks and opportunities, including plans, resource allocation, and progress towards climate-related targets and compliance.
- Financial Position, Financial Performance, and Cash Flows: Impact of climate-related risks and opportunities on the entity’s financial position, performance, and cash flows, both currently and anticipated over short, medium, and long terms.
- Climate Resilience: Share the company’s assessment of climate resilience, considering its implications for strategy, business model, financial resources, asset flexibility, and investments in climate-related mitigation, adaptation, and resilience.
Risk Management Disclosures:
- Processes, policies, and parameters used to identify, assess, prioritize, and monitor climate-related risks and opportunities, including the use of climate-related scenario analysis and integration into the overall risk management process.
- Information on changes in the processes compared to the previous reporting period, identification and assessment of climate-related opportunities, and integration of climate-related risk management into the overall risk management process.
Metrics & Targets Disclosures: Broken down into Climate-Related Metrics & Climate-Related Targets
- Climate-Related Metrics: Greenhouse gas emissions, including Scope 1, Scope 2, and Scope 3 emissions, measured in metric tonnes of CO2 equivalent. Provide information on climate-related transition risks, physical risks, opportunities, capital deployment, internal carbon prices, and the consideration of climate-related factors in remuneration.
- Climate-Related Targets: Quantitative and qualitative climate-related targets aligned with strategic goals, including greenhouse gas emissions targets. Provide information on the metric used, target objective, applicability, target period, base period, milestones, methodology validation, progress monitoring, and performance analysis.
Using Floodlight to Meet IFRS Requirements
Floodlight’s comprehensive data offerings can ensure complete adherence to IFRS disclosure requirements. Built upon the sturdy foundation of academically and scientifically verifiable sources, the integrity and dependability of Floodlight’s data remains unquestionable. Floodlight uses cutting-edge geospatial technologies, which include satellites and ground sensors, to precisely measure climate and physical risk data. This advanced methodology provides stakeholders with the utmost confidence when certifying their annual data disclosure, reinforcing Floodlight’s unwavering commitment to data precision, transparency, and regulatory compliance.