Sustainability Matters Ep 2.1 - From voluntary to mandatory: understanding IFRS S1 and S2

Summary

This video introduces the ISSB (International Sustainability Standards Board) and the IFRS sustainability disclosure standards, focusing on S1 and S2. S1 requires companies to disclose sustainability-related risks that affect their enterprise value, while S2 centers on climate-related risks, including physical and transition risks, and aligns with frameworks like TCFD and SASB. Both standards emphasize transparency, governance, and consistency with financial statements. With the ISSB planning to finalize these standards by June 2023, organizations need to prepare for a more structured and comprehensive approach to sustainability reporting, especially around climate resilience and emissions.

Takeaways

• 😀 The ISSB is responsible for developing and improving the IFRS Sustainability Disclosure Standards.
• 😀 In March 2022, the ISSB published two draft exposure standards for consultation: S1 and S2.
• 😀 S1 requires companies to disclose sustainability-related risks and opportunities impacting their enterprise value.
• 😀 S1 emphasizes consistency between financial statements and sustainability disclosures, which should be published together.
• 😀 S2 focuses on climate-related risks, including physical and transition risks, and requires disclosure on how these affect a company's financial position.
• 😀 S2 incorporates industry-based metrics from frameworks like TCFD and SASB for climate resilience and emissions disclosures.
• 😀 Physical climate risks covered in S2 include acute and chronic risks, such as extreme weather events and long-term climate shifts.
• 😀 Transition risks in S2 are linked to moving towards a lower carbon economy, including regulatory and policy changes.
• 😀 The ISSB aims to finalize the S1 and S2 standards by June 2023 after completing a balloting process.
• 😀 The video will cover further steps to help companies prepare for the upcoming sustainability disclosure standards in the next episode.

Q & A

What is the ISSB and what role does it play in sustainability reporting?

The ISSB (International Sustainability Standards Board) is an independent body responsible for developing and improving the IFRS Sustainability Disclosure Standards. It aims to create a comprehensive Global Baseline of sustainability disclosures to meet the information needs of investors.

What are the IFRS Sustainability Disclosure Standards S1 and S2?

S1 and S2 are the draft exposure standards developed by the ISSB. S1 covers a broad range of sustainability-related disclosures, focusing on financial risks, opportunities, and governance. S2 specifically addresses climate-related risks, including physical and transition risks, and outlines the required disclosures.

What is the primary goal of the S1 standard?

The primary goal of S1 is to provide a complete set of sustainability-related financial disclosures that allow investors to assess the impact of sustainability risks and opportunities on a company's value. It includes disclosures related to governance, strategy, risk management, and sustainability metrics.

How does S1 ensure consistency with financial statements?

S1 emphasizes the need for consistency between financial statements and sustainability disclosures. It requires that both sets of reports be published simultaneously, ensuring that sustainability information aligns with financial data.

What is the significance of the full value chain in the S1 standard?

S1 requires companies to disclose information across the full value chain, which includes all activities, resources, relationships, and the external environment in which the business operates. This ensures a comprehensive understanding of sustainability impacts.

What are the key features of the S2 standard?

S2 focuses on climate-related risks, requiring companies to disclose both physical and transition risks. It also includes metrics for climate-related disclosures, industry-specific standards, and expectations for reporting on scope 1, 2, and 3 emissions.

What is the difference between physical and transition climate-related risks in S2?

Physical risks refer to the acute and chronic impacts of climate change, such as extreme weather events or long-term shifts in climate patterns. Transition risks are related to the shift towards a lower-carbon economy, including risks arising from regulatory changes or policy shifts.

What disclosures are required under S2 regarding climate-related risks?

S2 requires disclosures on how climate-related risks impact a company's financial position, transition planning, climate resilience, and scope 1, 2, and 3 emissions. It also incorporates industry-based metrics from frameworks like the TCFD and SASB.

What progress has been made on the ISSB standards as of March 2023?

As of March 2023, the ISSB announced that the exposure drafts for the standards were close to finalization. The final content for the standards was agreed upon during a public meeting, and a balloting process was underway with an expected finalization date of June 2023.

What can companies do to prepare for the upcoming sustainability reporting standards?

Companies can prepare by familiarizing themselves with the ISSB's exposure drafts, understanding the required disclosures under S1 and S2, and aligning their sustainability strategies and metrics with the forthcoming standards. A follow-up video will provide additional tips on preparation.