By CPA Ahuli Silas Afanda
IFRS S1 “GENERAL REQUIREMENTS FOR DISCLOSURE OF SUSTAINABILITY-RELATED FINANCIAL INFORMATION”
IFRS S1 “General Requirements for Disclosure of Sustainability-related Financial Information“ sets out the overall requirements for disclosing sustainability-related financial information. It is effective for annual reporting periods beginning on or after January 1, 2024, but entities can choose to adopt it earlier, provided they also adopt IFRS S2 “Climate-related Disclosures” at the same time. This approach is designed to ensure that climate-related disclosures are made alongside more general sustainability disclosures, reflecting the importance of climate issues in the context of financial and sustainability reporting.
The objective of IFRS S1 is to ensure that entities provide disclosures about sustainability-related risks and opportunities that are useful to primary users of general-purpose financial reporting. These disclosures are intended to help users assess the entity’s prospects for future net cash inflows and the quality and sustainability of those cash inflows. The standard aims to give users information that could affect their assessments of the value, timing, and uncertainty of those future cash flows, which are critical for making informed decisions about providing resources to the entity
The standard mandates that entities disclose information about sustainability-related risks and opportunities that could reasonably be expected to influence their cash flows, access to finance, or cost of capital in the short, medium, or long term. These are collectively referred to as ‘sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects.’
IFRS S1 outlines the manner in which an entity should prepare and present its sustainability-related financial disclosures. It provides general requirements for the content and presentation of such disclosures to ensure that the information is useful to users when making decisions about providing resources to the entity. The disclosures are meant to give a clear picture of how sustainability issues may impact the financial performance and position of the entity, thereby enabling users to make more informed assessments and decisions.
IFRS S1 sets out the requirements for disclosing information about an entity’s sustainability-related risks and opportunities. The disclosures that an entity is required to provide under IFRS S1 typically include:
1. Governance: Information about the governance processes, controls, and procedures that the entity has in place to monitor and manage sustainability-related risks and opportunities.
2. Strategy: How sustainability-related risks and opportunities are identified and how they are integrated into the entity’s strategy and business model.
3. Risk Management: Information about how the entity identifies, assesses, and manages sustainability-related risks.
4. Metrics and Targets: Quantitative metrics and targets used to assess and manage relevant sustainability-related risks and opportunities.
The objective of these disclosures is to provide users of financial reports with a comprehensive understanding of how sustainability issues could affect the entity’s value creation over time. This includes understanding the resilience of the entity’s strategy and business model to risks related to sustainability, as well as the entity’s prospects and financial effects stemming from sustainability-related risks and opportunities.
The specific requirements and guidance on how to make these disclosures are detailed in the IFRS S1 standard, and entities are expected to apply judgment in determining the relevant information to disclose, based on the nature of their operations and the sustainability-related risks and opportunities they face.
Standard history
The process that led to the issuance of IFRS S1 “General Requirements for Disclosure of Sustainability-related Financial Information” by the International Sustainability Standards Board (ISSB) is as outlined below:
1. March 2022: The ISSB published the Exposure Draft of IFRS S1, which proposed general requirements for entities to disclose sustainability-related financial information. This included information about sustainability-related risks and opportunities and proposed that entities provide a complete set of sustainability-related financial disclosures.
2. Feedback Period: After the Exposure Draft was published, stakeholders had the opportunity to review and provide feedback on the proposals. This feedback is critical for the ISSB to understand the views of various stakeholders, including preparers, users, auditors, and regulators.
3. Redeliberations: The ISSB considered the feedback received on the Exposure Draft. Redeliberations are an essential part of the standard-setting process, allowing the ISSB to refine and adjust the proposals to address concerns and suggestions from stakeholders.
4. June 2023: Following the redeliberation process, the ISSB issued the final version of IFRS S1. This standard sets out the requirements for disclosing sustainability-related financial information, reflecting the ISSB’s consideration of the feedback received and aiming to improve the relevance and comparability of sustainability-related disclosures across entities.
The issuance of IFRS S1 represents a significant step in the global effort to standardize sustainability reporting, providing a framework for entities to report on sustainability issues that could affect their financial performance and position. The standard is designed to be used alongside IFRS S2 “Climate-related Disclosures,” which focuses specifically on climate-related information.
IFRS S2 “Climate-related Disclosures”
IFRS S2 “Climate-related Disclosures” is set to be effective for annual reporting periods beginning on or after January 1, 2024. Entities are allowed to adopt IFRS S2 earlier, but if they choose to do so, they must also apply IFRS S1 “General Requirements for Disclosure of Sustainability-related Financial Information” at the same time.
The rationale behind this requirement is to ensure that climate-related disclosures are made within the broader context of sustainability-related financial disclosures, providing a comprehensive view of an entity’s sustainability risks and opportunities. This alignment is intended to enhance the comparability and consistency of sustainability-related information provided to users of financial statements.
The objective of IFRS S2 is to ensure that entities provide relevant information about the risks and opportunities arising from climate change that could reasonably be expected to affect their financial performance, financial position, and cash flows. This information is intended to be useful to users of general-purpose financial reports, such as investors, creditors, and other stakeholders, in making decisions related to providing resources to the entity.
IFRS S2 requires entities to disclose:
1. Governance: Information about the governance around climate-related risks and opportunities.
2. Strategy: The actual and potential impacts of climate-related risks and opportunities on the entity’s businesses, strategy, and financial planning.
3. Risk Management: How the entity identifies, assesses, and manages climate-related risks.
4. Metrics and Targets: Metrics and targets used to assess and manage relevant climate-related risks and opportunities.
These disclosures are designed to provide a clear understanding of how climate-related issues may impact the entity’s prospects and to enable users to make more informed assessments and decisions. The standard recognizes that climate change can affect entities in various ways and that these effects may be felt over different time horizons—short, medium, or long term.
The standard requires entities to disclose information about their climate-related risks and opportunities, which include:
a. Climate-related risks:
i. Physical risks associated with climate change, such as extreme weather events and long-term shifts in climate patterns such as the rising sea levels as well as the increasing temperatures
ii. Transition risks related to the transition to a lower-carbon economy, which may entail policy, legal, technology, market, and reputation risks. These might occasion a reduced demand for certain products or services.
b. Climate-related opportunities: Opportunities that may arise from the transition to a lower-carbon economy, such as the development of new products or services, access to new markets, or enhanced resilience through diversification.
IFRS S2 outlines specific areas where entities must provide disclosures to enable users of general-purpose financial reports to understand:
a. Governance: How the entity’s governance structure oversees climate-related issues, including the board’s oversight role and management’s role in assessing and managing climate-related risks and opportunities.
b. Strategy: The impact of climate-related risks and opportunities on the entity’s business model, strategy, and financial planning over the short, medium, and long term.
c. Risk Management: The processes for identifying, assessing, prioritizing, and managing climate-related risks, and how these processes are integrated into the entity’s overall risk management.
d. Metrics and Targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities, including performance against targets and any regulatory requirements.
The disclosures aim to provide a comprehensive view of how climate-related issues affect the entity and how the entity is addressing these challenges and opportunities. This information is crucial for stakeholders to evaluate the entity’s resilience to climate-related risks and its ability to capitalize on climate-related opportunities.
Standard history
When the International Sustainability Standards Board (ISSB) published the Exposure Draft of IFRS S2 “Climate-related Disclosures” in March 2022, it aimed to integrate and build upon the existing framework provided by the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD recommendations have been widely recognized and adopted by organizations around the world for reporting climate-related financial information.
Additionally, the ISSB sought to incorporate industry-specific disclosure requirements that were derived from the Sustainability Accounting Standards Board (SASB) Standards. The SASB Standards are known for providing industry-specific metrics that help businesses identify and report on sustainability issues that could affect financial performance.
By combining the principles-based approach of the TCFD with the industry-specific metrics of the SASB, the ISSB aimed to create a comprehensive global baseline for climate-related disclosures that would provide useful and comparable information for investors and other stakeholders, facilitating informed decision-making.
The Exposure Draft marked a significant step toward the establishment of a global standard for sustainability disclosures, with a particular focus on climate-related information. Following the feedback period and subsequent redeliberations, the ISSB issued the final version of IFRS S2, which entities will be required to apply for annual reporting periods beginning on or after January 1, 2024, with earlier application permitted under certain conditions.
The development of IFRS S1 “General Requirements for Disclosure of Sustainability-related Financial Information” and IFRS S2 “Climate-related Disclosures” by the ISSB represents a significant move towards the integration of sustainability reporting with financial reporting.
The author holds a bachelor’s degree in Industrial Chemistry from the University of Nairobi, CPA (K), a member of ICPAK, ICPAR and CPS Finalist KASNEB. He works with EY, Rwanda as an Audit Senior, based in Kigali Rwanda.
