In an era of increasing emphasis on sustainability and responsible business practices, the International Financial Reporting Standards (IFRS) have evolved to incorporate sustainability disclosure requirements. Understanding and complying with IFRS sustainability disclosure is crucial for companies seeking to demonstrate their commitment to environmental, social, and governance (ESG) factors. This blog article provides an overview of IFRS sustainability disclosure, including compliance steps and the required elements to disclose.
1. Familiarize yourself with the IFRS Foundation: The IFRS Foundation is a not-for-profit organization that develops and promotes the adoption of IFRS globally. To comply with IFRS sustainability disclosure, companies should acquaint themselves with the IFRS Foundation and its objectives. (source: [IFRS Foundation website])
2. Identify applicable IFRS sustainability standards: Determine the specific IFRS sustainability standards that apply to your business. These standards may include International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), or International Financial Reporting Interpretations Committee (IFRIC) interpretations. (source: [IFRS Foundation website])
3. Assess reporting requirements: Evaluate the reporting requirements outlined by the applicable IFRS sustainability standards. This assessment involves considering factors such as the company's size, industry, and regulatory obligations in the jurisdictions where it operates. (source: [IFRS Foundation website])
4. Gather relevant data: Collect and analyze data necessary for accurate and comprehensive sustainability reporting. This includes identifying key sustainability indicators, such as greenhouse gas emissions, energy consumption, water usage, social impact metrics, and governance practices. (source: [IFRS Foundation website])
5. Establish internal controls: Implement robust internal controls and processes to ensure the accuracy, reliability, and consistency of sustainability data. Effective internal controls enhance the credibility and transparency of the reported information. (source: [IFRS Foundation website])
6. Engage stakeholders: Communicate with relevant stakeholders, including investors, regulators, customers, and employees, about the company's commitment to IFRS sustainability disclosure. Engaging stakeholders helps build trust, demonstrate transparency, and showcase the company's sustainable practices. (source: [IFRS Foundation website])
There are two types of standards published by IFRS.
As noted on the IFRS website, 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 S1 was published in June 2023.
The objective of IFRS S1 is to require an entity to disclose information about its sustainability-related risks and opportunities that is useful to users of general purpose financial reports in making decisions relating to providing resources to the entity.
IFRS S1 requires an entity to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term (collectively referred to as ‘sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects’).
IFRS S1 prescribes how an entity prepares and reports its sustainability-related financial disclosures. It sets out general requirements for the content and presentation of those disclosures so that the information disclosed is useful to users in making decisions relating to providing resources to the entity.
IFRS S1 sets out the requirements for disclosing information about an entity’s sustainability-related risks and opportunities. In particular, an entity is required to provide disclosures about:
1. The governance processes, controls and procedures the entity uses to monitor, manage and oversee sustainability-related risks and opportunities;
2. The entity’s strategy for managing sustainability-related risks and opportunities;
3. The processes the entity uses to identify, assess, prioritise and monitor sustainability-related risks and opportunities;
4. The entity’s performance in relation to sustainability-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation.
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.
The objective of IFRS S2 is to require an entity to disclose information about its climate-related risks and opportunities that is useful to users of general purpose financial reports in making decisions relating to providing resources to the entity.
IFRS S2 requires an entity to disclose information about climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term (collectively referred to as ‘climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects’).
IFRS S2 applies to:
1. climate-related risks to which the entity is exposed, which are:
- climate-related physical risks; and
- climate-related transition risks; and
2. climate-related opportunities available to the entity.
IFRS S2 sets out the requirements for disclosing information about an entity’s climate-related risks and opportunities. In particular, IFRS S2 requires an entity to disclose information that enables users of general purpose financial reports to understand:
1. the governance processes, controls and procedures the entity uses to monitor, manage and oversee climate-related risks and opportunities;
2. the entity’s strategy for managing climate-related risks and opportunities;
3. the processes the entity uses to identify, assess, prioritise and monitor climate-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process; and
4. the entity’s performance in relation to its climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation.
Both IFRS S1 and IFRS S2 include requirements structured around the core content of governance, strategy, risk management, and metrics and targets.
1. IFRS S1 includes general requirements for the disclosure of sustainability-related financial information, whereas IFRS S2:
2. (a) includes the disclosure requirements which are also in IFRS S1 that are relevant to climate-related risks and opportunities (referred to as ‘corresponding requirements’).
3. (b) requires specific disclosures applicable to climate-related risks and opportunities.
The ISSB proposes creating a single set of elements to reflect the corresponding disclosure requirements in IFRS S1 and IFRS S2. This set of elements includes reference to requirements in both IFRS S1 and IFRS S2 to reflect their intended interaction and explain their correct use. The proposed approach:
1. Reflects that the corresponding requirements in IFRS S1 and IFRS S2 might result in the disclosure of common items of information; and
2. Avoids the perceived complexity involved in using two sets of elements to tag information about climate-related risks and opportunities (referred to as ‘double tagging’).
(IFRS Sustainability. (July 2023). [Proposed IFRS Taxonomy]. IFRS Foundation.)
The International Sustainability Standards Board (ISSB) proposes creating an IFRS Sustainability Disclosure Taxonomy to reflect disclosure requirements arising from:
1. IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, issued in June 2023; and
2. IFRS S2 Climate-related Disclosures, issued in June 2023.
The ISSB published the Proposed IFRS Sustainability Disclosure Taxonomy on 27 July 2023.
The Proposed IFRS Sustainability Disclosure Taxonomy is designed to facilitate users of general purpose financial reports to consume sustainability-related financial information digitally, regulators to require the digital reporting of sustainability-related financial information, and preparers to implement digital reporting of sustainability-related financial information, enabling tagging without undue cost.
In developing the Proposed IFRS Sustainability Disclosure Taxonomy, the ISSB considered feedback staff received on fundamental matters discussed in a prior request for feedback, including comments from external groups of experts, including the IFRS Taxonomy Consultative Group (ITCG).
The consultation is open for comment until 26 September 2023. The ISSB will consider feedback on the Proposed IFRS Sustainability Disclosure Taxonomy and the need for further changes before publishing the IFRS Sustainability Disclosure Taxonomy.
Thereafter, the IFRS Sustainability Disclosure Taxonomy will be updated after public consultations to reflect any amendments to IFRS Sustainability Disclosure Standards, common reporting practice and emerging reporting issues.
Complying with IFRS sustainability disclosure is essential for companies that aim to demonstrate their commitment to sustainability and responsible business practices. By following the outlined steps and disclosing the required elements, companies can enhance transparency, build stakeholder trust, and contribute to a more sustainable future.
It is important to note that specific reporting requirements and elements may vary based on regional regulations and industry-specific guidelines. For accurate and up-to-date compliance, companies should refer to the official IFRS resources and seek professional advice.
