UK reporters should note that IFRS S1 'General Requirements for Disclosure of Sustainability-related Financial Information' will not be available to UK companies until it is endorsed for use in the UK as a UK Sustainability Disclosure Standard (UK SDS). Following endorsement, but before decisions are made on the scope and implementation of any mandatory reporting requirements, UK companies will be permitted to apply UK SDSs voluntarily.
To be compliant with IFRS Sustainability Disclosure Standards, entities must apply IFRS S1 and IFRS S2 'Climate-related Disclosures'. Companies can apply IFRS S1 and IFRS S2 whether their financial statements are prepared in accordance with IFRS Accounting Standards or other generally accepted accounting principles or practices (GAAP).
Conceptual Foundations
IFRS S1 requires an entity to disclose information about all sustainability-related risks and opportunities that is useful to investors and lenders when making decisions on providing resources to the entity. This means disclosing material information about sustainability-related risks and opportunities that could reasonably be expected to affect the entity's prospects – its cash flows, its access to finance or cost of capital over the short, medium or long term.
Information about sustainability-related risks and opportunities that could reasonably be expected to affect the entity's prospects is interchangeably referred to in the standard as sustainability-related financial information and sustainability-related financial disclosures.
Fair presentation
To achieve fair presentation, entities must present sustainability-related information that is relevant to the users' decision-making and that faithfully represents what it purports to represent. Faithful representation requires that disclosures provide a complete, neutral and accurate depiction of the entity's sustainability-related risks and opportunities. Relevance and faithful representation are the fundamental qualitative characteristics of useful sustainability-related financial information.
The usefulness of sustainability-related financial information is enhanced if the information is comparable, verifiable, timely and understandable; these are the enhancing qualitative characteristics.
Materiality
ISSB Standards have a financial materiality focus whereby sustainability-related financial information is material if omitting, misstating or obscuring that information could reasonably be expected to influence investors' decisions.
This is not the same as the GRI standards (Global Reporting Initiative), which focus on impact materiality, or the European Sustainability Reporting Standards (ESRS) which adopt double materiality, combining both financial materiality and impact materiality. Impact materiality considers the entity's positive or negative impacts on people or the environment.
Reporting entity
An entity's sustainability-related financial disclosures must be for the same reporting entity as the related financial statements. For example, a parent company that presents consolidated financial statements would provide sustainability‑related financial disclosures for itself and its subsidiaries.
Connected information
Entities are required to provide information that enables investors to understand connections, including:
- connections between various sustainability-related risks and opportunities;
- connections within sustainability-related financial disclosures, such as connections between disclosures on governance, strategy, risk management and metrics and targets; and
- connections across the sustainability-related financial disclosures and the financial statements.
As far as possible, data and assumptions used in preparing the sustainability-related financial disclosures must be consistent with the corresponding data and assumptions used in preparing the related financial statements. Such consistency improves investors' understanding of connections between information in the 'front-half' and 'back-half' of annual reports.
Core Content
IFRS S1 requires entities to provide disclosures about:
- Governance – the governance processes, controls and procedures the entity uses to monitor and manage sustainability-related risks and opportunities;
- Strategy – the approach the entity uses to manage sustainability-related risks and opportunities;
- Risk management – the processes the entity uses to identify, assess, prioritise and monitor sustainability-related risks and opportunities; and
- Metrics and targets – the entity's performance in relation to sustainability-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation.
The core content requirements integrate the Task Force on Climate Related Financial Disclosures (TCFD) recommendations. When applying IFRS S1, however, entities may be required to disclose information beyond the TCFD's core recommendations.
Undue cost or effort
Entities are required to make qualitative and quantitative disclosures about how sustainability-related risks and opportunities both have affected and are expected to affect financial position, financial performance and cash flows.
In preparing disclosures about the anticipated financial effects of a sustainability-related risk or opportunity, an entity should use reasonable and supportable information that is available to it without undue cost or effort. The assessment of what constitutes undue cost or effort depends on the entity's specific circumstances and requires consideration of the benefits of the resulting information for investors and lenders.
Time horizons
An entity's assessment of the anticipated effect of sustainability-related risks and opportunities on its financial position, financial performance and cash flows should consider the short, medium and long term.
The standard does not specify time horizons for short, medium and long term as time horizons can vary between entities and depend on many factors. Factors to consider include industry-specific characteristics such as the business cycle, and the time horizons over which investors and lenders conduct their assessments of entities in that industry. Entities are required to explain how they define 'short term', 'medium term' and 'long term'.
General Requirements
Identification of sustainability-related risks and opportunities
When identifying relevant sustainability-related risks and opportunities, entities must:
- apply IFRS Sustainability Disclosure Standards; and
- consider the applicability of disclosure topics in the Sustainability Accounting Standards Board (SASB) Standards.
Additionally, entities may also consider the applicability of:
- the Climate Disclosure Standards Board (CDSB) Framework Application Guidance (both for water-related and biodiversity-related disclosures);
- industry or geographical practice; and
- recent pronouncements of other investor-focused standard setting bodies.
What to disclose
When determining what to disclose for sustainability-related risks and opportunities other than those which are climate-related, entities may consider the GRI standards and ESRSs in addition to the above sources.
When determining what to disclose for climate-related risks and opportunities, entities must follow IFRS S2.
Location of disclosures
Entities are required to include sustainability-related financial disclosures as part of their general purpose financial reports. IFRS S1 does not mandate a location of sustainability-related financial disclosures within the general purpose financial report, allowing entities to meet regulatory or other requirements that may apply in their jurisdiction.
The standard however, suggests suitable locations for the information, such as within a management commentary or similar report. Alternatively, information required by an IFRS Sustainability Disclosure Standard may be included in sustainability-related financial disclosures by cross-reference to another report published by the entity.
Timing of reporting
An entity's sustainability-related financial disclosures must be reported at the same time, and must cover the same reporting period, as the related financial statements.
In the first annual reporting period in which an entity applies IFRS S1, it is permitted to report its sustainability-related financial information after its related financial statements are published. The standard however, specifies time limits by when the information must be disclosed when applying this transitional relief.
Comparative information
Entities must disclose comparative information for all amounts disclosed in the reporting period. Entities must also disclose comparative information for narrative and descriptive sustainability-related financial information if such information would be useful for an understanding of the sustainability-related financial disclosures for the reporting period.
However, entities do not need to disclose comparative information in the first annual reporting period in which the entity applies the ISSB Standards.
Judgements, uncertainties and errors
Entities must:
- disclose information to enable investors to understand the judgements that have been made in preparing sustainability-related financial disclosures;
- disclose information to allow investors to understand significant uncertainties affecting the amounts reported in the sustainability-related financial disclosures; and
- correct material prior period errors by restating the comparative amounts unless it is impracticable to do so.
Concepts and defined terms
IFRS S1 contains a glossary of defined terms.
Due to connectivity between the work of the International Accounting Standards Board (IASB) and the ISSB, the language in IFRS Accounting Standards and IFRS Sustainability Disclosure Standards is consistent; where the standards use the same concepts and terms, they are intended to mean the same thing. Examples include:
- fundamental and enhancing qualitative characteristics of useful information
- general purpose financial reports
- materiality, and
- primary users.
Further information
The connections between the IASB and the ISSB, including the common use of language, are discussed is an IFRS Foundation webcast on connections between accounting and sustainability disclosures.
