Introduction
One of the most important and widely used concepts is that around sustainability. If you are wondering how this can be related to the business world, then a good starting point is to look at the new International Financial Reporting Standards (IFRS) on sustainability – IFRS S1 and IFRS S2. The aim of this article is to explain the frameworks within the standards that inform how they operate. The focus in the article is of the main principles forming the frameworks for the standards. The details of the standards can be found at the IFRS website. This article should, therefore, provide a clearer understanding of how sustainability is viewed by business leaders.
The IFRS are the global body that has developed and curated the IFRS standards – the standards which many countries across the globe use to guide financial statement creation. From 2021, the IFRS held several consultation exercises from which the need and details of sustainability standards emerged and were finally issued in June 2023.
There are two standards, and so we will look at them separately. Both standards are for reporting periods after 1 January 2024.
IFRS S1 – General requirements for disclosure of sustainability-related financial information
This standard provides the initial building block for sustainability standards and reporting and provides general guidance and rules.
The main aim of the standard is to require firms to disclose any risks and opportunities that financial statement users should know about. This is explained as anything from the ‘value chain’ that could specifically affect the cash flow over time. The value chain is used here to show the connection between all firm stakeholders, including the natural environment. As the data is likely to be more qualitative to help guide the information creation to be of use to stakeholders, all risks and opportunities that can be reasonably predicted must be included and should be comparable, verifiable, timely and understandable. The standard is intended to support stakeholders in understanding the most significant (material) risks and opportunities.
Disclosure around sustainability risks and opportunities should refer to changes around governance, strategies, risk management and metrics and targets. Much of the reporting has been connected to the financial statements – so the location and timing will be the same as those used in terms of the firm’s financial disclosures.
IFRS S2 – Climate-related disclosure
The aim of this standard is, in addition to IFRS S1, it provide specific guidance on climate risk disclosure. The standard directs firms to disclose any specific climate disclosure risk or opportunity that could affect the firms cash flow over time. This is to provide information to stakeholders in making decisions around the firm’s financial disclosures and their resources (investments) in the firm. The climate risks are split into physical risk and transition risk.
Like IFRS S1, the IFRS S2 standard is structured around reporting on issues of governance, strategy, risk management and metrics. The strategy section is the most developed, with details around the financial impact of climate change and risk and how, if this is quantified and reported, this can be a single figure or a range. There is a section on climate resilience and how the firm’s business model can cope with climate change risks, and this needs to be linked to international climate change trends and agreements.
Under the climate-related metrics, the Greenhouse Gas (GHG) emissions protocol is introduced around scope 1, 2 and 3 emissions. The scopes can broadly be seen as connected to GHG emissions as a direct result of the firm, in relation to the purchasing strategies of the firm, or the wider supply chain the firm works with and GHG emission data. The GHG guidance is further developed into targets for the firm.
Summary comment
Overall, this brief analysis of the sustainability standards, IFRS S1 and IFRS S2, demonstrates the development and importance of sustainability in the business community. The two standards must be seen together, and as with the IFRS, financial reporting standards will apply to larger firms and apply from the 1st of January 2024. The details in the standards provide a framework for firms to report on the risks and opportunities in relation to sustainable issues and climate change. It must be remembered that this is to provide information to business stakeholders, especially investors. The standards don’t add to ethical debates around firms and sustainability but provide a clearer framework for the reporting of sustainability and climate-related risks and opportunities to firm stakeholders. These standards are of value in terms of them signifying the importance of these issues as much as the IFRS S1 and IFRS S2 standard disclosure details.
