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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). It was established for the purpose of developing a set of international guidelines for sustainability disclosures for the capital markets.
The IFRS Sustainability Disclosure Standards are 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:
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 climate-related risks and opportunities, distinguishing between physical and transition risks.
The draft also covers governance, strategy, and risk management of a business in relation to climate-related aspects.
Additionally, it addresses 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, or climate reporting in general, should prepare to invest more resources into this area of disclosures. In particular, the four pillars of TCFD reporting clearly guide the requirements of both IFRS S1 and S2:
The proposed IFRS Sustainability Disclosure 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 impact 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 suggested IFRS Sustainability Disclosure Standards are in the public consultation phase until the end of July. It would be wise for companies to start reporting on climate and general sustainability and get familiar with the upcoming IFRS Sustainability Disclosure Standards. The adoption of these standards by capital markets or regulators is likely to happen soon, so companies should be prepared.