Mastering Sustainability Reporting with IFRS S1: IFRS Webinar Recap
Authored By Celia Le Lievre, Senior Regulatory Compliance Specialist, Compliance & Risks
Following the release of IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures on 26 June 2023, the IFRS Foundation hosted two webinars on 12th and 18th of July 2023 to present these major disclosure standards.
This blog summarizes the key takeaways from the first webinar on IFRS S1. A separate blog will discuss the details of IFRS S2.
1. IFRS S1: Global Baseline For Sustainability Disclosures
IFRS S1 requires companies to disclose information on sustainability-related risks and opportunities to help investors make informed capital allocation decisions. To that end, IFRS S1 establishes a common and consistent approach to sustainability reporting to support comparable and assurable sustainability disclosures on the financial markets.
IFRS S1 integrates the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), which already serve as a basis for existing jurisdictional requirements, such as the draft European Sustainability Reporting Standards. This structure will facilitate interoperability for companies applying IFRS standards and other national sustainability reporting requirements. Companies that already apply the TCFD recommendations will thus be in a better position to meet the reporting requirements of IFRS S1 and S2.
2. Sustainability-Related Risks & Opportunities
Sustainability-related information refers to all sustainability-related risks and opportunities that could reasonably be expected to affect the companies’ prospects such as its cash flow, access to finance or cost of capital over the short, medium or long term. IFRS S1 specifies sources of guidance to help companies identify sustainability-related risks and opportunities and related disclosures (see paragraphs B1 to B12).
In identifying sustainability-related risks and opportunities, companies must consider disclosure topics in the industry-based SASB Standards. In addition, companies may also refer to other instruments, including the CDSB framework application guidance, GRI standards, European Sustainability Reporting Standards, industry practice and materials of other investors-focused standard-setting bodies.
3. Why Are Sustainability Disclosures Important?
Information on sustainability-related risks and opportunities is necessary to assess a company’s ability to generate cash flow over the short, medium and long-term. IFRS S1 explains that a company’s prospect is inextricably linked to its interactions with stakeholders, the society in which it operates and the natural resources it draws upon throughout its value chain.
Companies that are able to communicate effectively on how they interact with, assess and manage their dependencies with these factors are in a better position to attract capital.
4. Focus On Single Materiality
The concept of materiality is critical to determine which type of information must be reported. IFRS S1 integrates the International Accounting Standards Board (Board)’s Definition of Material, which states that information is material “if omitting, misstating or obscuring that information could reasonably be expected to influence investors’ decisions” as to whether resources should be allocated to the entity. More specifically, Information is considered material when it influences decisions about (a) buying, selling or holding equity and debt instruments; (b) providing or selling loans and other forms of credit; or (c) exercising rights to vote on, or otherwise influence, the entity’s management’s actions that affect the use of the entity’s economic resources. The focus on materiality aims to ensure that companies communicate information to investors efficiently and effectively.
Unlike the European draft Sustainability Reporting Standards (ESRS), IFRS S1 and S2 embrace a restricted approach to materiality (“single materiality”). Single materiality in IFRS S1 and S2 focuses exclusively on what is material to the company from a financial perspective and requires information that is only useful to investors.
By contrast, the European Union has taken a broader approach to materiality by requiring companies to report not only on their exposure to sustainability-related financial risks and opportunities issues but also on how they affect people and the environment in general. The information is intended to a broader range of stakeholders, including investors, non-government organizations, business partners and employees.
5. Alignment With Financial Statements
Sustainability financial disclosures must be part of the company’s general purpose financial reports, which include the company’s financial statements. The integrated approach to reporting aims to ensure that investors have a complete and holistic understanding of the company.
IFRS S1 contains a number of mechanisms to ensure connection between sustainability-related information and financial statements. Firstly, IFRS S1 requires that sustainability-related financial information must be for the same reporting entity and prepared for the same reporting period as the financial statement. Moreover, financial data and assumptions within sustainability-related financial disclosures must – to the extent possible – be consistent with corresponding financial data and assumptions in the financial statement.
This may be achieved by using cross-references and explaining connections and differences between the data and assumptions used in preparing the sustainability-related financial disclosures and related financial statements.
6. Core Content: Consistency With TCFD Recommendations
The core content sets out what must be disclosed by companies for a complete set of disclosures. The core content of IFRS S1 is largely aligned with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). Similar to TCFD recommendations, the information required by IFRS S1 relates to the following general aspects:
- Governance – governance processes, controls and procedures used by the companies to monitor and oversee sustainability-related risks and opportunities
- Strategies – the approach the company uses to manage sustainability-related risks and opportunities,
- Risk management – the processes the entity uses to identify, assess, prioritize and monitor sustainability-related risks and opportunities; and
- Metrics and targets used to monitor, measure and assess the company’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
7. Consolidated Reporting Package
IFRS S1 requires disclosures to be provided as part of the same reporting package as a financial statement. However, it does not dictate where in the general purpose financial report the sustainability information must appear. This flexibility aims to accommodate jurisdictions with specific requirements on the exact location of sustainability financial reporting. Likewise, IFRS S1 allows companies to provide additional information on sustainability related matters to meet jurisdiction laws and regulation as long as this additional information does not obscure “material” information.
8. Mechanisms Of Proportionality
Proportionality is reflected in a number of ways in the concepts of the standard. IFRS S1 does not require companies to report on every single sustainability-related risk and opportunity. Instead, it requires companies to disclose information about sustainability-related risks and opportunities that could reasonably be expected to affect the company’s prospects over the short, medium or long term. Likewise, IFRS only requires companies to use “reasonable and supportable information” that is available at the reporting date without undue cost or effort. In other words, companies do not need to undertake exhaustive search of information but consider information that is readily available to them at the time of reporting.
This concept of “reasonable and supportable” will facilitate application of requirements by smaller companies with less skills and resources. Smaller entities must still gather reasonable and supportable information which includes information about “past events, current conditions and forecasts of future financial conditions”. Reasonable and supportable information is further defined in other IFRS instruments, including IFRS 9 Financial Instruments and Staff paper on “Reasonable and supportable information that is available at the reporting date without undue cost or effort”.
Finally, the standard requires that disclosures be prepared using an approach that is commensurate with the skills, capabilities and resources that are available to the reporting entity.
9. Date Of Application
IFRS S1 and IFRS S2 will apply to the annual reporting periods beginning on or after January 1st 2024. Earlier application is nonetheless possible as long as IFRS S1 and S2 are applied simultaneously. Companies that decide to use the standards before January 2024 must disclose that fact.
10. Temporary Relief
Transition periods are provided in the first annual reporting period. In the first year of reporting, companies may choose to:
- Report only on climate-related risks and opportunities, in accordance with IFRS S2, in the first annual reporting period; information about its other sustainability-related risks and opportunities must be provided in the second year of application of IFRS S1 and S2.
- Report sustainability-related financial disclosures after the publication of the financial statement; in applying this transition relief, companies must consider the timelines of paragraph E4 of IFRS S1.
- Delay disclosure of Scope 3 GHG emissions in the first year of applying IFRS S1 and S2;
- Omit to provide comparative information in respect of the preceding reporting period.
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