Intro to IFRS S1 and S2, P1

The International Sustainability Standards Board (ISSB) has recently issued it’s first set of sustainability standards (issued June 26, 2023) - IFRS S1 and S2. These standards become effective 1 January 2024. A lot of financial reporting practitioners, researchers and students would wonder why Sustainability Reporting standards are issued, questions are possibly running through their minds on how these standards are to be applied. This has spurred my muse to pen this article, I would be explaining in very simple and domestic terms what these standards set to achieve and discuss the major highlights of the standards. Hopefully, this introduces you to basics of the standards. Happy Reading!!!

Why IFRS S1 and S2?

When in doubt, please remember that Sustainability Reporting (SR) aims at communicating its three (3) elements to users of financial statements- Environmental (E), Social (S), and Governance (G). ?SR also assesses the impact of qualitative activities of an entity, right from its promotional and sales activities to the issues of climate change and how value is created from all these activities. Sustainability reporting (SR) has made enough waves in my opinion, only that for most reporting entities, it still seems like a mere ambition than an outright action. The drive to channel a uniform and globally acceptable path towards Sustainability reporting gave birth to creation of the ISSB at COP 26 in 2021 under the umbrella of the IFRS Foundation and saddled with the responsibilities of issuing sustainability related standards.

Imagine how haphazard and insufficient a lot of Sustainability reports have been nowadays, also imagine allowing some “creative accountants” the leeway to dictate the tone of SR whichever way they prefer? That can lead to disastrous accounting, Lol. ?

It is worthy to note that there have been voluntary (mandatory at times) disclosure requirements in some jurisdictions by regulators. However, these disclosures have been considered insufficient and inconsistent for users of financial statement. There was also a need to harmonise with existing sustainability rules of The Taskforce on Climate-related Financial Disclosures (TCFD) and the Carbon Disclosure Project amongst others. It then means that like IFRSs, IFRS S1 and S2 ensure there is a standardised sustainability disclosures for capital markets and other users of financial statement across the world. The beauty of this project is that an entity’s sustainability disclosures would be “speaking one language” through alignment with IFRSs S1 and S2.

IFRS S1 – General Requirements for Disclosure of Sustainability related Financial Information

The objective of IFRS S1 - General Requirements for Disclosure of Sustainability related Financial Information is to require an entity to disclose information about its sustainability-related risks and opportunities that is useful to primary users of general-purpose financial reports in making decisions relating to providing resources to the entity.

English, yeah? The key message here is ensuring that sustainability-related risks and opportunities are properly disclosed on the financial statement. Across an entity’s value chain, there are certain interactions with the society, economy and natural environment that often have significant impact, this can thus constitute risks or create opportunities; the standard then says entities should please disclose. Lol, “please” wasn’t added; pun intended.

Let’s take for example, an entity’s business model requires water as one of the major production inputs, how available this water is could pose a threat or opportunity, how affordable it is can also be worth assessing. All these opportunities and threats are what the standard requires reporting entities to disclose whilst preparing their general-purpose financial statement. Nowadays, we have started seeing entities issue Green-compliant financial instruments, these instruments have associated sustainability related risks and opportunities. IFRS S1 says, disclose all!

The standard was also very explicit on the fact that only applicable sustainability-related risks and opportunities to the entity needs to be disclosed, others that would not potentially affect the entity’s prospects are excluded. This standard can be applied by all entities irrespective of the reporting framework being adopted.

To be very honest, the ISSB leveraged the milestone of the IASB (its sister entity) as IFRS S1 amazingly has a conceptual framework, like the IASB Conceptual Framework, however called Conceptual foundations in this instance. It states that for sustainability-related financial information to be useful, it must be relevant and faithfully represented. These are tagged the fundamental qualitative characteristics whilst other enhancing qualitative characteristics are also applicable, like the comparability, verifiability, timeliness, and understandability.

Please see my articles on the IASB Conceptual Framework The Revised Conceptual Framework (linkedin.com), The Revised Conceptual Framework- Part II (linkedin.com) for better understanding.

Materiality is obviously implied in faithful representation as in the case of the IASB Conceptual framework, this is also emphasised in the ISSB Conceptual foundations. Paragraph 18 of the standard espouses “In the context of sustainability-related financial disclosures, information is material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general-purpose financial reports make on the basis of those reports, which include financial statements and sustainability-related financial disclosures and which provide information about a specific reporting entity”. ?You and I know this doesn’t require thinking, it's closely related to the materiality concept in Financial Reporting where exclusion/inclusion of a part can affect decision users of FS would make on such exclusion/inclusion on the financials.

An interesting addition to the Conceptual foundations is the need to disclose connectedness of the sustainability-related financial disclosures, i.e., what is the relationship between the elements of the sustainability-related information such as the governance, strategy, risk management and metrics and targets.

The standard also explains what the core content of sustainability disclosure should be. Paragraph 23 of the standard espouses:

Unless another IFRS Sustainability Disclosure Standard permits or requires otherwise in specified circumstances, an entity shall provide disclosures about:

(a) governance—the governance processes, controls, and procedures the entity uses to monitor and manage sustainability-related risks and opportunities.

(b) strategy—the approach the entity uses to manage sustainability-related risks and opportunities

(c) risk management—the processes the entity uses to identify, assess, prioritise, and monitor sustainability-related risks and opportunities, and

(d) 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.

I like to fall the curtain here as the story is getting so long already. Lol! The next article shall be a deep dive into the core contents listed above as well as a thorough insight into IFRS S2.

I hope you enjoyed this article as usual.

Your IFRS Pal,

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