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The International Financial Reporting Standards (IFRS) is an accounting and sustainability disclosure standard used globally. The IFRS is supported by the International Sustainability Standards Board (ISSB), established for the purpose of developing a set of international guidelines for sustainability disclosures for the capital markets. The IFRS Sustainability Disclosure Standards is expected to have a significant bearing on disclosure and reporting requirements for G20 nations, members of the International Organisation of Securities Commissions (IOSCO), and more than 140 member jurisdictions of the IFRS Standards.
On 31 March 2022, the IFRS proposed two new disclosure standards with the objective of helping investors make better-informed judgements on enterprise value that incorporates sustainability considerations. For companies, the standards - called exposure drafts - provide a set of guidelines to improve the quality of material sustainability information.
Exposure Draft IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information would require disclosures about a company’s exposure to general sustainability‑related risks and opportunities and the governance and management strategies. The general sustainability criteria under IFRS S1 is influenced by the Sustainability Accounting Standards Board (SASB) Standards. Companies stand to benefit from enhancing SASB reporting experience focusing on the financial impacts of sustainability.
The second Exposure Draft, IFRS S2 Climate-related Disclosures, includes requirements consistent with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations on the climate-related risks and opportunities (distinction is made to physical and transition risks), the governance, strategy and risk management of a business, and monitoring and management approaches to climate-related risks and opportunities. Disclosure of all Scope 1, 2, and 3 emissions based on GHG Protocol methodology is required, reflecting the importance of reporting impacts along the value chain.
Companies that are new to TCFD - from which S2 follows closely - or climate reporting in general, should prepare to invest more resources into this area of disclosures. In particular, the four pillars of TCFD reporting - governance, strategy, risk management, and metrics and targets - clearly guide the requirements of both IFRS S1 and S2.
The proposed standards require that sustainability-related financial information be presented in a company’s financial statements. In other words, report publishers will need to state how relevant sustainability risks and opportunities affect profits. This would put considerable pressure on management and finance teams to incorporate green finance and carbon accounting concepts such as stranded assets and GHG Protocol into annual financial reporting practices.
The proposed standards are in the public consultation phase until the end of July. Companies would be well-advised to embark on climate and general sustainability reporting and become acquainted with the proposed IFRS Sustainability Disclosure Standards, as it won’t be long before adoption by capital markets or regulators.