What are IFRS Sustainability Disclosure Standards?
The International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards is a framework aimed at guiding organizations’ sustainability information reporting. Established by the ISSB, these standards address the matters of improving the quality and global comparability of sustainability reports. It is designed to harmonize with other internationally recognized frameworks, including the Global Reporting Initiative (GRI) and Task Force on Climate-related Financial Disclosures (TCFD), all of which provide a comprehensive tool for organizations struggling to understand how to address sustainability reporting properly.
For instance, firms in the financial industry encounter difficulties in identifying and reporting climate risks. To fill this gap, the IFRS standards present substantive rules for reporting such risks in line with the investors’ expectations.
Importance of IFRS Sustainability Disclosure Standards
These standards remain important in the sense that they aim at creating parity in the sustainability disclosures by making them easier and more comprehensible to investors. As climate change and other environmental issues become increasingly important to businesses, investors require specific and standardized data to assess these threats and opportunities.
Businesses should apply the IFRS standards as they create credibility, tap into the environmental investor market, and remain relevant to new regulations. The World Economic Forum’s 2023 global investors’ report revealed that 92% of investors insist on sustainability disclosures to evaluate long-term Corporate Earnings.
Understanding IFRS Sustainability Disclosure Standards S1 and S2
What is IFRS S1?
IFRS S1 covers more extensive sustainability disclosure, and it mandates organizations to disclose a general picture of the sustainability activities undertaken by them. It covers key elements like:
- Governance: Board and executive management of sustainable-related decisions.
- Strategy: Where and how sustainability perspectives are incorporated across the company’s strategic plan.
- Risk Management: Risk management approaches to sustainability issues.
- Metrics and Targets: Measurable parameters to assess sustainability outcomes.
For instance, a firm might reveal how it aligns its water management policies within the management schedules or how it checks its emissions of greenhouse gases.
What is IFRS S2?
FRS S2 is specifically regarding climate-related risks and opportunities and how an organization recognizes, measures, and controls climate-related risks and opportunities. Key requirements include:
- Determining which physical risks, for example, climate change or natural disasters and which transition risks, for example, changes in legislation or customer behavior.
- Explain risks and consequential impacts with clear examples of how climate risks may manifest in the organization based on different levels of global warming.
- Output measures like carbon emissions and actualization of the projected decentralization of net-zero targets.
For instance, companies operating in the energy sector such as BP and Shell employ climate-specific disclosures to show their focus on renewable sources of energy and adherence to climate-related accords.
Key Differences Between IFRS S1 and S2
Although, as already mentioned, IFRS S1 covers various general sustainability concerns, IFRS S2 concerns are more specifically climatic. IFRS S1 offers a general guide that can be used across different sectors of the economy, while IFRS S2 focuses on the climate field and presents additional specificity for the sectors involved where needed. In combination, the mentioned standards give a full-range strategy that allows companies to consider sustainability in a multifaceted manner.
For example, for reporting on supply chain sustainability, IFRS S1 is adopted by a consumer goods company, while for reporting the climate impact of logistics network and manufacturing, IFRS S2 will be used. These two standards are harmonized to allow the organizations to present sustainability information on various issues.
How Companies Can Adopt IFRS Sustainability Disclosure Standards
Steps to Implement IFRS S1 and S2
- Understand the Standards: Starting with the IFRS S1 and IFRS S2 disclosure requirements first.
- IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information): Requires entities to disclose sustainability-related risks and opportunities that may affect financial position, performance, and cash flows.
- IFRS S2 (Climate-related Disclosures): Focuses specifically on climate-related risks and requires disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD).
- Assess Current Practices: The firm should conduct a gap analysis to determine which areas should be improved.
- Integrate Sustainability Data: Integrate sustainability measurements into financial and operating reporting frameworks.
- Build Capacity: Educate teams so that they can appreciate and uphold the intended standards accordingly.
For example, Walmart has incorporated sustainability reporting features in its practices by adopting the technique of giving both financial and non-financial information at the same time. Some initiatives on training and capacity building have helped its teams to address international reporting needs.
Key Requirements of IFRS S1 and S2
IFRS S1: General Sustainability Disclosures
- Governance: Companies must disclose governance structures overseeing sustainability risks and opportunities.
- Strategy: Provide details on how sustainability risks impact financial planning and operations.
- Risk Management: Explain processes used to identify, assess, and manage sustainability-related risks.
- Metrics and Targets: Disclose key sustainability metrics, goals, and performance-tracking methods.
IFRS S2: Climate-related Disclosures
- Climate-related Risks & Opportunities: Companies must assess and disclose physical and transition risks related to climate change.
- GHG Emissions Reporting:
- Scope 1 (Direct emissions)
- Scope 2 (Indirect emissions from purchased energy)
- Scope 3 (Supply chain and value chain emissions, where material)
- Scenario Analysis: Organizations should model potential climate scenarios and disclose the impact on financial performance.
- Financial Impact Assessment: Describe how climate-related risks affect revenues, costs, and investments.
- Targets and Performance: Report progress toward climate targets, such as net-zero goals.
Leveraging Technology for Sustainability Reporting
Sustainability reporting cannot be executed by organizations without technology. Some of the technologies that companies can use to gather sustainability data and report them are as follows: ESG software platforms, AI, and blockchain.
For instance, Microsoft organizes sustainability data on its operations and suppliers through its ESG cloud-based tool. Such tools assist in automating reports, enhancing the credibility of data, and making disclosures compatible with IFRS. AI can also help with predictive analysis for planning development about sustainability issues and gains.
Collaborating with Stakeholders
There is a significant need to engage with stakeholders including suppliers, investors, and auditors to produce effective and relevant disclosures. Communicating with suppliers makes the supply chain more transparent while communicating with investors assists in the integration of sustainability with business plans.
Other players involved in sustainability reports include external auditors as well. For example, KPMG and other auditing firms help corporations guarantee the compliance of their disclosures with the IFRS standards, thus strengthening the recognition of a business among its stakeholders. Integration enhances commitment to sustainability, and in turn, encourages organizations to improve their reports.
Challenges in Implementing IFRS Sustainability Disclosure Standards
Data Collection and Quality Issues
Collecting meaningful sustainability information when managing long and multifaceted supply chains is not an easy task for businesses. Gaps in data collecting activities, poor record keeping, as well as poor data collection formulas impact reporting negatively.
These issues can be resolved with the help of various solutions like blockchain, IoT sensors, third-party verification, etc. For example, when tracking raw materials, H&M relies on a blockchain system that guarantees the authenticity of field data. It also increases transparency and traceability when working with suppliers on standardizing data collection.
Cost of Compliance
Adopting compliance with IFRS standards may also be costly, particularly for SMEs. These are expenses in technology, training, and auditing to ensure that the right disclosures have been made.
But quality and affordable solutions are possible. ESG reporting tools can also be modular, so companies can build their programs according to budget, or they can hire sustainability consultants to do the reporting for them. For instance, platforms like Carbon Trail present SMEs with affordable reporting services through which such enterprises can automate compliance reporting.
Lack of Awareness and Expertise
There is little awareness regarding knowledge on the IFRS standards and how they can be implemented. Some of these organizations do not have the internal capacity to put in place these standards hence making the implementation a big issue.
Some of these gaps can only be filled through capacity-building programs and associations with consultants. Indeed, EY and KPMG provide professional training and advisory services that can assist organizations in comprehending the IFRS standards that exist.
The Future of IFRS Sustainability Disclosure Standards
Global Adoption and Harmonization
The adoption of IFRS Sustainability Disclosure Standards is expected to grow globally, driven by increasing pressure from regulators and investors. Countries may integrate these standards with local frameworks, creating a more harmonized global reporting landscape.
For example, the ISSB is working to align IFRS standards with existing frameworks like the Global Reporting Initiative (GRI) and CDP. Such harmonization will streamline reporting processes and reduce compliance burdens for companies operating across borders.
Evolving Requirements for Sustainability Reporting
The future of IFRS standards will likely include sector-specific reporting guidelines to address unique industry challenges. Technology will play a critical role in enhancing data collection, analysis, and reporting, making disclosures more accurate and timely.
For instance, AI and big data can help companies predict sustainability risks, optimize resource use, and enhance decision-making. In sectors like agriculture and manufacturing, predictive analytics can identify climate-related disruptions, enabling businesses to act proactively.
Role in Achieving Global Sustainability Goals
The IFRS Sustainability Disclosure Standards are consistent with the United Nations Sustainable Development Goals (UNSDGs). These standards, which demand companies to report climate risks, resource consumption, and social effects, ensure that businesses advance sustainability.
For instance, informative disclosures under the IFRS standards can enhance SDG 13 (Climate Action) by fueling organizational climate initiatives. Organizations like Adidas have extended supply chain management to address goals such as sustainable consumption and production patterns of goods. Companies can foster worldwide sustainable development goals through the adoption of IFRS standards.
Conclusion
The International Financial Reporting Standards for Sustainability Disclosure Standards have been instrumental in improving transparency, accountability, and sustainability information disclosure. By relying on IFRS S1 and S2, firms can offer stable and accurate information on sustainability management, thus helping investors and stakeholders to identify potential threats and potentials.
Adopting these standards not only meets stakeholder expectations but also positions businesses as leaders in sustainability, driving long-term resilience and growth. As global challenges like climate change intensify, IFRS standards provide a framework to align corporate goals with sustainability objectives, fostering a more sustainable and robust global economy.
