IFRS Sustainability Disclosure Standards Explained

By Shraddha Sawant, Senior Sustainability Analyst, TOS (Two Oceans Strategy)

In recent years, the global non-financial reporting landscape has witnessed a growing need for consistent and verifiable sustainability disclosures, leading to the introduction of the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards. Developed by the International Sustainability Standards Board (ISSB), these standards intend to establish a high-quality global baseline for companies to report on their environmental, social, and governance (ESG) risks and opportunities.

The IFRS standards aim to enhance the comparability and consistency of sustainability information, enabling investors and stakeholders to make more informed decisions. This article looks at the disclosure requirements of the standards, and unpacks who can benefit, as well as how the IFRS disclosures compare against existing standards.

IFRS Sustainability Standards Requirements

The IFRS Sustainability standards are set to be adopted in two phases, with the first set of general disclosures expected[TM1]?[TM2]?[ND3]?[SS4]?[NDC5]? to be adopted starting from 2024 by the public companies that report using IFRS Accounting Standards in over 140 jurisdictions as the concepts of IFRS S1 are developed using the accounting standards.

IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information provides information to investors about the company’s sustainability-related risks and opportunities faced over the short, medium and long term. Key content includes objectives, scope, conceptual foundations, core content, general requirements, and judgements, uncertainties and errors.?

IFRS S2 Climate-related Disclosures guides a company to disclose information about its climate-related risks and opportunities and builds on the requirements set out in IFRS S1. Key disclosures include information on strategy and decision-making, current and anticipated financial effects, climate resilience, scope 1, 2 and 3 GHG emissions, industry-specific disclosures, and climate-related targets. Both the disclosures S1 and S2 are based on and fully integrate TCFD recommendations[TM6]?[ND7]?[SS8]?[NDC9]? enabling companies to skip double reporting on TCFD; they supersede TCFD reporting requirements.

Who can benefit from reporting using IFRS Sustainability Standards?

IFRS Sustainability Standards will be useful for new entrants in the field of sustainability reporting as they can use these standards as a “roadmap” to begin their journey for eventual ESG compliance.? It will also be valuable for businesses and investors operating in jurisdictions like the US, where regulations are anticipated but not yet adopted as these standards are designed to apply for both, voluntary and mandatory[TM10]?[ND11]?[SS12]? (regulatory) disclosures such as the US SEC climate rules. IFRS Accounting Standard is mandatory but IFRS Sustainability Standard is not mandatory yet.

IFRS in comparison to existing sustainability standards

IFRS Disclosures are consistent with many existing sustainability standards which eliminates the need for reporting on multiple frameworks. For example, since IFRS is in line with TCFD, a company does not need to report on TCFD recommendations in addition to IFRS. The industry-specific disclosures for IFRS S1 and S2 are developed based on SASB material topics and metrics. While the climate-related disclosures for IFRS S2 are based on GHG Protocol (2004) and are also in line with the GRI 305 Emissions disclosures.

?Another key aspect of IFRS reporting is its high degree of interoperability with EU’s European Sustainability Reporting Standards (ESRS). Both frameworks have similarities in terms of reporting sustainability risks and opportunities within the value chain, and its impact over short, medium, and long-term. Achieving alignment and interoperability among global sustainability standards is essential to mitigate reporting challenges arising from variations in jurisdictional disclosure requirements.

?The following representation summarises the ways the IFRS Sustainability Disclosure Standards is well-integrated with some of the existing standards in the sustainability reporting landscape.

Positive impacts of IFRS Sustainability Standards

Because IFRS is built on existing reporting standards, it streamlines the disclosure process and simplifies it for new companies while also giving an edge to the established, long-time reporters. Data from IFRS reports can assist companies to present decision-useful information to their investors, aid in conducting performance benchmarking and save the overall time and cost required for sustainability reporting. For investors, IFRS standards can provide guidance on sound investment decisions by considering critical sustainability data and climate-related risks and opportunities, help in due diligence process and analyse their investment portfolio. Another positive aspect of IFRS is the integration of financial and non-financial data which makes it a comprehensive standard.?

IFRS S1 and S2 have the potential to enhance alignment and comparability of data within the sustainability reporting landscape and encourage more businesses of all sizes, sectors, and jurisdictions to disclose their climate-related data. This adds flexibility allowing companies (especially of small-medium scale) to reuse data for multiple standards, save on associated costs and time, and reduce the overall complexity otherwise disrupting the adoption of voluntary sustainability disclosures. To further simplify the process for companies with limited resources, IFRS allows companies to submit qualitative data in place of quantitative disclosures.

In the coming years, harmonising reporting standards across jurisdictions will become essential to address the impacts of global challenges like climate change. These challenges encompass global and country-level targets for mitigation and adaptation, which directly influence the metrics and targets to be set at the company level. Some jurisdictional requirements, such as the climate disclosure rules by the US SEC, are already closely aligned with the fundamental structure of the IFRS standards facilitating the process of setting consistent metrics and targets.

Potential downsides of IFRS Sustainability Standards

While the IFRS Sustainability Standards are making positive steps forward for sustainability reporting on the whole, some elements also carry a potential downside.

?As mentioned earlier, IFRS Sustainability Standards provides a basic roadmap for guiding companies on required reporting content. However, it does not delve into the specific metrics or KPIs needed for assessing performance in a detailed manner. This can lead to possibility of false or inaccurate claims eventually misguiding the investors on company’s performance.

?Giving leeway to companies with resource constraints to disclose qualitative data instead of quantitative data, holds the potential to reduce data reliability, as subjective assessments are not as accurate as numerical assessment. It can also degrade the overall quality of reporting.

?Even though the overall objectives of ESRS and IFRS S1 and S2 are similar, there is one key difference between the two standards. IFRS defines materiality in a traditional way i.e. from the investor’s point of view to identify the potential environmental and climate risks to businesses. While ESRS takes the new approach of defining material issues using principles of double materiality i.e. to understand the impact of environmental and climate risks on the business as well as the impact of business activities on the environment. Lack of considering company’s impact on the environment could lead to a bias in the data presented to investors and disregard some major potential long-term risks to the business. To make the IFRS Sustainability Standards holistic, it will be crucial to redefine the materiality aspect.

?In conclusion, the addition of IFRS Sustainability Standards to the reporting landscape certainly enables streamlining of the disclosure process. As with all frameworks in a nascent stage, there are still factors to be considered and improved on and we hope to see the standards develop to stay at the forefront of sustainability reporting as a guiding light for all as intended.

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