July 12, 2023
Three Steps Boards Can Take to Prepare for the New IFRS Sustainability Disclosure Standards
Sarah Keyes, FCPA, FCA – CEO of ESG Global Advisors
After years of calls for a global set of sustainability standards to address the ‘alphabet soup’ of reporting frameworks, we finally have a starting point.
On June 26, 2023, the International Sustainability Standards Board (ISSB) issued its inaugural disclosure standards—IFRS S1 and IFRS S2—marking a new era for material sustainability information in capital markets. As these standards become adopted worldwide in the months and years ahead, capital allocators will gain access to comparable, decision-useful information to help inform their investment decisions.
For context, the ISSB was established in 2021 in response to calls for a global baseline of sustainability-related disclosures. The need for consistent and comparable disclosure on sustainability-related risks and opportunities was driven by the G20, the Financial Stability Board, the International Organization of Securities Commissions (IOSCO), and leaders from the business and investor communities.
Importantly, the ISSB’s standards are grounded in financial materiality, and its definition of materiality is consistent with that of financial reporting standards given the primary intended users of the information are providers of capital.
What are the new IFRS Sustainability Disclosure Standards?
IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information outlines the general requirements for a company to disclose information about its exposure to a broad range of sustainability-related risks and opportunities. IFRS S1 sets out the core content for a complete set of sustainability-related financial disclosures, establishing a comprehensive baseline of sustainability-related financial information to meet the needs of global capital markets. IFRS S1 is akin to the Conceptual Framework for Financial Reporting – it establishes the foundation upon which the other standards are applied.
IFRS S2 Climate-related Disclosures builds on the requirements described in IFRS S1 but focuses specifically on climate-related risks and opportunities. IFRS S2 integrates the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and requires disclosure of systemic and industry-specific climate-related risks and opportunities. Given the systemic risks posed by climate change – and there is no shortage of examples than the Canadian wildfires – the ISSB and the capital markets have focused on adoption of IFRS S2 as the priority.
Key Takeaways on IFRS S2 Climate-related Disclosures
This standard is effective for annual reporting periods beginning on or after 1 January 2024. IFRS S2 requires the company to disclose information about climate-related risks and opportunities that could reasonably be expected to affect its cash flows, access to finance, or cost of capital over the short, medium, or long term.
There are 2 primary areas of complexity for Directors to be aware of when it comes to IFRS S2:
- Scope 3 Emissions – Organizations are required to report on the GHG emissions in their value chains (i.e., Scope 3 emissions) within 1 year of adoption of the standard.
- Scenario Analysis – Organizations are required to conduct climate change scenario analysis to inform potential impacts on the company’s strategy and business model.
3 Ways to Start Preparing for IFRS S2
The Canadian Sustainability Standards Board (CSSB) is now operational with their first meeting scheduled for September 2023. The mandate of the CSSB is twofold: (1) partner with the ISSB by supporting the uptake of ISSB standards in Canada, highlighting key issues for the Canadian context; and (2) facilitating interoperability between ISSB standards and any forthcoming CSSB standards.
With the establishment of the CSSB and the recent finalization of IFRS S2, all eyes are on Canadian securities regulators and prudential regulators to determine the implications for Canadian public companies, pensions, banks, and insurers.
As we wait to see how this unfolds, here are three ways that Canadian boards can prepare for the implementation of IFRS S2 at their organizations:
#1: Ensure effective governance and oversight of climate change
Governance is a foundational component of IFRS S1 and S2 – and the capital markets are increasingly focusing on Board oversight of climate-related risks and opportunities.
As a starting point, corporate directors should be asking the following key questions:
- Do we understand Management’s process for assessing, and managing climate-related risks and opportunities?
- How are we as a Board in overseeing climate-related risks and opportunities?
#2: Conduct a materiality assessment using the TCFD’s risks and opportunities
Many organizations are conducting materiality assessments on their climate-related risks and opportunities to prepare for adoption of the IFRS Sustainability Standards given they apply a financial materiality lens. Thankfully, the TCFD framework provides a useful set of definitions for climate-related risks and opportunities that can be used by companies to conduct these assessments. It is best practice for climate-related risks and opportunities to be evaluated using the same impact and likelihood criteria as defined in the organization’s enterprise risk management (ERM) policy and processes.
#3: Establish internal controls and processes over climate-related data
Organizations should begin evaluating their internal systems and processes for collecting, aggregating, and validating sustainability-related information across the company and its value chain. The priority should initially be on climate-related data and information, in particular the calculation and reporting of greenhouse gas (GHG) emissions. Given the IFRS Sustainability Standards are intended to be auditable, it is important that organizations invest time and resources into establishing robust systems and controls to gather and report their climate-related metrics and targets.