What are the IFRS Sustainability Disclosure Standards IFRS S1 and IFRS S2?
Simply put, these sustainability-related financial reporting standards are intended to provide a comprehensive approach to sustainability reporting.
Why is another sustainability framework/standard needed?
The sustainability reporting landscape has many general reporting standards/frameworks/questionnaires such as GRI Standards, CDP environmental questionnaires, TCFD Recommended Disclosures, SASB Industry Standards, and other, sector-specific benchmarks such as the GRESB Real Estate Assessment.
Yet with the existing range of sustainability reporting standards/frameworks, the reporting landscape can sometimes seem fragmented. This has led to an increase in calls for standardization and specific connections to financial statements. The result has been the creation of, ironically perhaps, even more standards and frameworks.
Because most of these reporting standards are voluntary, companies can select to report using as many or few as they want. What they choose to use is influenced by what is needed to assess their sustainability impacts and risks, what peer companies do, and what investors ask for.
What are investors asking for?
According to the Chartered Financial Analyst (CFA) Institute,
“…investors are demanding high-quality, comparable sustainability information for investment and voting decision making, which issuers are providing under their own or third-party reporting frameworks.”
CFA Institute
The CFA Institute, as an advocate for investment industry and investment management professionals, has promoted the development of high-quality sustainability reporting standards over the last decade. CFA plays an important role in the investment industry, promoting the need for high-quality investment financial reports and independent audits. It has advocated for the creation of the International Sustainability Standards Board (ISSB).
What is in the IFRS Sustainability Disclosure Standards? In July 2021, the International Financial Reporting Standards (IFRS) Foundation created the International Sustainability Standards Board (ISSB) to develop and issue comprehensive sustainability reporting standards for consistent, comparable and high-quality sustainability reporting with investors’ needs in mind. The two standards, IFRS S1 and IFRS S2, are based on the Taskforce on Climate-related Financial Disclosures Framework, which I discussed in my last post. The four core elements of governance, strategy, risk management, and metrics and targets set the stage for the IFRS Sustainability Disclosure Standards.
IFRS S1 lays out the general requirements for how a company is to disclose sustainability-related information, and specific requirements involving a complete set of sustainability-related financial disclosures. This information is intended for users of general-purpose financial reports in making decisions relating to providing resources to the entity. As you can see below, the required disclosures are based on the four core elements from TCFD.
- governance processes, controls and procedures the entity uses to monitor, manage and oversee sustainability-related risks and opportunities;
- the entity’s strategy for managing sustainability-related risks and opportunities;
- processes the entity uses to identify, assess, prioritize and monitor sustainability-related risks and opportunities; and
- 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.
IFRS S2 involves requirements that cover climate-related risks and opportunities and are most directly related to TCFD Recommended disclosures.
There are, however, some differences between the core content requirements in IFRS S2 and TCFD’s core recommendations. These differences are explained in detail in Comparison IFRS S2 Climate-Related Disclosures with the TCFD Recommendations, a document prepared by IFRS Foundation staff.
These differences take three forms. Specifically, IFRS S2:
- Uses different wording but requires the same information and is considered “broadly consistent with” the TCFD Recommended Disclosures.
- Requires more detailed information that is in line with the TCFD recommendations.
- Is different from TCFD guidance by providing some additional requirements and guidance than TCFD.
Here is an example of the differences from the comparison document.
Formatted text is used in the right-hand column of the table to indicate the differences between IFRS S2 and the TCFD recommendations:
black bold text: Additional specificity in IFRS S2 that is in line with TCFD recommendations;
This comparison document is useful for companies that are using TCFD and want to advance their reporting with IFRS Sustainability Disclosures. The IFRS Foundation provides helpful information about making the Transition from TCFD to ISSB.
There are some important things to keep in mind about using the IFRS Standards. They are voluntary unless your company is in a jurisdiction (i.e., country) that requires it. If this is the case, you should recognize that the country can modify the reporting requirements to fit the needs of the country. The IFRS Foundation posts the global adoption progress on its website. The other important thing to note is what it means to comply with the IFRS Sustainability Standards. Unlike the GRI Standards that provide for “in accordance” and “referenced” reporting options, you must apply both IFRS S1 and IFRS S2 to state that you comply with IFRS standards. This may change in time in order that more companies can work their way up to full compliance in stages.