7.1 Understanding the IFRS Sustainability Disclosure Standards
In June 2023, the International Sustainability Standards Board (ISSB) made a groundbreaking move with the introduction of IFRS S1 and IFRS S2, setting the stage for a significant transformation in sustainability-related disclosures across global capital markets. As these standards prepare to take centre stage in January 2024, the business landscape is poised for a paradigm shift, impacting companies both large and small.
The ISSB's vision goes beyond just standards; it aims to create a universal baseline for sustainability reporting, one that resonates with investors globally and allows local jurisdictions to build upon a shared foundation. This marks a pivotal moment in the journey towards transparency, as the ISSB Standards aim to improve trust and confidence in company disclosures related to sustainability, thereby informing more robust investment decisions.
No longer viewed merely as a gesture for socially conscious investors, the ISSB Standards, IFRS S1 and IFRS S2, challenge the traditional perception of Environmental, Social, and Governance (ESG) factors. The introduction of these standards is set to redefine ESG, positioning it as a fundamental aspect of business transparency rather than a mere checkbox for corporations.
The ISSB's approach involves the integration of IFRS S1 and IFRS S2, working in harmony to support companies in identifying and reporting information critical for investor decision-making. IFRS S1 focuses on broader sustainability-related risks and opportunities over different time frames, while IFRS S2 delves specifically into climate-related disclosures, both aligning with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
IFRS 1 - General Requirements for Disclosure of Sustainability-related Financial Information:
IFRS 1 focuses on providing a comprehensive framework for disclosing material information regarding significant sustainability-related risks and opportunities across an entity's value chain. It adopts a four-pillar core content framework, encompassing governance, strategy, risk management, and metrics and targets. Under IFRS 1, entities are required to disclose their approach to sustainability-related considerations, including governance processes, strategic responses to sustainability risks and opportunities, risk management practices, and metrics and targets used to assess and monitor performance. This standard serves as a foundational pillar for sustainability reporting and sets the stage for more specific topic-specific standards, such as IFRS 2.
IFRS 2 - Climate-related Disclosures:
IFRS 2 is the ISSB's first thematic Sustainability Disclosure Standard, focusing specifically on climate-related disclosures. The objective of IFRS 2 is to require entities to disclose information about their exposure to significant climate-related risks and opportunities, enabling users of General Purpose Financial Reports (GPFR) to assess the impacts of these factors on the entity's financial position, performance, cash flows, enterprise value, strategy, and business model. IFRS 2 covers a range of climate-related risks, including physical risks from climate change and transition risks associated with transitioning to a lower-carbon economy, as well as opportunities related to climate initiatives. This standard follows the same four-pillar framework as IFRS 1, covering governance, strategy, risk management, and metrics and targets, thereby providing a comprehensive approach to climate-related disclosures.
7.2 What is Required to Report?
Under the General Requirements Standard (IFRS S1), entities are mandated to provide detailed disclosures across various facets of their governance, strategy, risk management, and metrics and targets. Here's a closer look at the specific information required to be reported within each pillar:
Governance:
The objective of governance disclosures is to facilitate stakeholders' understanding of the governance processes utilised to monitor and manage climate-related risks and opportunities. Entities are required to disclose essential information, including the identity of the governing body responsible for overseeing climate-related risks and opportunities, ensuring the availability of requisite skills and competencies for overseeing climate-related strategies, and details about the application of dedicated controls and procedures in managing climate-related risks and opportunities, along with their integration with other internal functions.
Strategy:
Disclosures related to strategy aim to provide stakeholders with insights into the entity's approach to addressing climate-related risks and opportunities. Entities must disclose information such as expected climate-related impacts on their flows, access to finance, and cost of capital over varying time horizons, as well as the effects of these risks and opportunities on their business model, value chain, strategy, decision-making processes, financial position, performance, and cash flows. Additionally, entities are expected to assess the climate resilience of their strategy and business model to significant physical and transition risks through scenario analysis.
Risk Management:
The objective of disclosures on risk management is to enable stakeholders to understand how climate-related risks and opportunities are identified, assessed, and managed within the entity. Entities are required to disclose the processes employed to identify, assess, and manage climate-related risks, integrating these processes into their overall risk management framework. This includes assessing the likelihood and effects associated with such risks, prioritising climate-related risks relative to other types of risks, identifying and prioritising climate-related opportunities, and monitoring and managing climate-related risks and opportunities, along with related policies.
Metrics and Targets:
Disclosures on metrics and targets aim to provide stakeholders with an understanding of how the entity measures, monitors, and manages significant climate-related risks and opportunities. Entities must disclose metrics, including Scope 1, 2, and 3 emissions, along with targets used to assess and manage climate-related risks and opportunities. Additionally, they are required to provide information relevant to cross-industry metric categories, industry-based metrics, and other metrics used by the board or management to measure progress towards targets. The disclosure should cover targets set to mitigate or adapt to climate-related risks or maximise opportunities, their alignment with international agreements on climate change, validation by third parties, and the entity's intention to use carbon offsets to achieve these targets.
7.3 What does this Mean for Australia?
Effective from January 1, 2024, the ISSB Standards, although not immediately mandatory, beckon businesses to align financial reporting with sustainability reporting. This alignment anticipates additional disclosures in financial statements, requiring companies to be prepared to share a more comprehensive range of information with investors, lenders, and other financial stakeholders.
For Australian businesses, the journey toward transparency includes the development of mandatory climate-related financial disclosures. The Australian Government's commitment is reflected in the proactive steps led by the Treasury and the Australian Accounting Standards Board (AASB).
In October 2023, the AASB took a significant step by unveiling an exposure draft (ED) focused on disclosing climate-related financial information. Within this ED, the AASB introduced three prospective Australian Sustainability Reporting Standards (ASRS Standards), featuring adjustments to the ISSB Standards with a primary emphasis on climate considerations. The proposal extends the applicability of these standards to both profit and not-for-profit entities.
The AASB envisions the ASRS Standards becoming effective for annual reporting periods commencing on or after 1 July 2024. However, the specific financial period when an entity must initially adhere to these standards remains contingent upon decisions made by the Australian Government.
What should companies do now?
As the ISSB Standards become a global reality, businesses worldwide, including those in Australia, are urged to take proactive steps. Getting familiar with proposed ASRS Standards, engaging with exposure drafts, and aligning reporting processes are essential. The shift towards sustainability reporting is not just a regulatory necessity; it's a strategic move towards a future where transparency and accountability are paramount.
Stay Informed and Engage:
- Familiarise yourself with ASRS Standards proposals.
- Understand Treasury exposure draft legislation.
Educate and Establish Governance:
- Educate your organisation on sustainability-related risks and opportunities.
- Establish a board-led governance structure integrating finance and sustainability considerations for effective decision-making.
Enhance Reporting Processes:
- Engage with process owners to understand information definitions, capture mechanisms, and identify control gaps.
- Enhance systems, processes, and controls for efficient data collection and reporting, aligning with ISSB Standards.
