![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 13
1 Introduction to IFRS S1
1.1 The objective of IFRS S1
IFRS S1 sets out the general requirements for the content and presentation
of information that an entity needs to provide about sustainability-related
risks and opportunities. [IFRS S1.4]. The objective of providing such
information is to support users of general purpose financial reports in their
decision-making process that relates to providing resources to the entity
which prepares the general purpose financial report. [IFRS S1.1]. That is, this
information is intended to enable those users to assess the entity’s exposure
to sustainability-related risks and opportunities over the short, medium
and long term, as well as to assess how the entity manages those risks and
opportunities in order to inform their decisions in providing resources to that
entity.
General purpose financial reports are defined by IFRS S1 as those that
provide financial information about an entity that is useful for the users
of those reports in making decisions related to providing resources to the
entity, and include, but are not restricted to, an entity’s general purpose
financial statements (or financial statements) and sustainability-related
financial disclosures. [IFRS S1 Appendix A]. Information about an entity’s
sustainability-related risks and opportunities is incorporated in disclosures,
referred to as sustainability-related financial disclosures, that constitute
a particular form of general purpose financial report and which supplements
and complements the information provided in the entity’s financial
statements.
To further clarify the objective of IFRS S1, there are certain components
embedded in the standard as further discussed in the next sections:
• Who does IFRS S1 consider to be the users of general purpose financial
statements (see section 1.1.1 below)
• How does IFRS S1 describe the sustainability-related risks and
opportunities addressed by the ISSB standards (see section 1.1.2 below)
1.1.1 Primary users
IFRS S1 defines primary users of general purpose financial reports (primary
users) as the “existing and potential investors, lenders and other creditors”.3
[IFRS S1 Appendix A]. This definition was built on what is stated in paragraph 1.7
of the Conceptual Framework: “General purpose financial reports are not
designed to show the value of a reporting entity; but instead, they provide
information to help existing and potential investors, lenders and other
creditors estimate the value of the reporting entity”.
According to this definition, the ISSB standards focus on the information
needs of primary users in making their decisions about providing resources to
an entity, rather than of a broader group of stakeholders. The BC to IFRS S1
states that “Disclosures made in accordance with IFRS Sustainability
Disclosure Standards are conceptually and practically complementary to —
but not a replacement for — reporting on an entity’s significant impacts
on people, the environment and the economy”. This clearly distinguishes
sustainability-related financial information provided in accordance with
the ISSB standards from the broader, multi-stakeholder perspective adopted
by other sustainability-related frameworks that focus on how an entity
contributes to sustainable development. [IFRS S1.BC49]. For further discussion
3
The terms users of general purpose financial reports, or primary users, or users are used
within the IFRS sustainability disclosure standards to describe the same population.
[IFRS S1 Appendix A].
The ISSB standards focus
on the information needs
of primary users in
making their decisions
relating to providing
resources to an entity,
rather than on a broader
group of stakeholders.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-14-320.jpg)
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on the perspective adopted by other sustainability frameworks, see section
3.2.6 below.
Although focusing on the information needs of primary users is widely
accepted by the market, identifying and assessing the information that
would be useful to primary users may not always be straightforward. Primary
users need sufficient and relevant information to make their decisions about
where and when to provide resources to the entity that prepares the general
purpose financial reports, as well as what type of resources to provide. Also,
primary users are a diverse group with potentially differing objectives and
types of risk exposure and the range of their interests on sustainability
matters is rather wide and varies across industries, locations as well as
business models and business activities. For further discussion on the
identification of information that is useful to primary users, see section 3.2.2
below.
1.1.2 Description of sustainability-related risks and
opportunities
1.1.2.A Broad term of sustainability
The term sustainability is a broad term and applies widely across
environmental, social and governance matters and encompasses a wide
range of notions. Sustainability is frequently linked to ‘sustainable
development’, defined by the United Nations in 1987 as: “development
that meets the needs of the present without compromising the ability of
future generations to meet their own needs”.4
IFRS S1 focuses on requiring
disclosures about sustainability-related financial information related to
an entity’s governance, strategy, risk management and metrics, and targets
in relation to those risks and opportunities. Therefore, the relationship of
sustainability-related risks and opportunities with the established notions
of sustainability and sustainable development, is fundamental to an
understanding of the scope of IFRS S1 and the ISSB standards in general.
[IFRS S1.BC42, IFRS S1.BC43].
1.1.2.B The concept of value
In line with its commitment to leverage from the existing material available
from other frameworks and standard-setters, the ISSB based the description
of sustainability-related risks and opportunities on the concepts of the
Integrated Reporting Framework.5
One of the fundamental concepts in the
Integrated Reporting Framework is that an entity’s ability to create, preserve
and erode value for itself over time (and thus to generate returns for the
entity’s investors, lenders and other creditors) is inextricably linked to value
that the entity creates, preserves or erodes for others. [IFRS S1.BC46]. In
particular, the Integrated Reporting Framework contains the following key
points:
Extract from the Integrated Reporting Framework
2.2 An integrated report explains how an organization creates,
preserves or erodes value over time. Value is not created,
preserved or eroded by or within an organization alone. It is:
• Influenced by the external environment
• Created through relationships with stakeholders
• Dependent on various resources.
4
Sustainability | United Nations
5
Integrated Reporting Framework | Integrated Reporting](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-15-320.jpg)
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…
2.6 The ability of an organization to create value for itself is linked to
the value it creates for others.
This concept is also broadly consistent with the IASB’s Exposure Draft on
Management Commentary6
. [IFRS S1.BC47].
The broader concept of value reflects that primary users are interested not
just in the value the entity creates for itself, but also in the value that the
entity creates for others since that value may ultimately affect, for example,
the cash flows generated by the entity, its cost of capital, or the availability
of funding. The value concept also clarifies how important longer time
horizons are. This is because, although the sources of value may not affect
the entity’s financial performance in the near term, they may impact its
performance, and ultimately its value, as assessed by primary users over
time.
1.1.2.C The concept of value in the description of sustainability
in IFRS S1
IFRS S1 explains how an entity’s ability to create, preserve or erode value
is influenced by its interactions within the interdependent system in which
it operates. In particular, an entity interacts, directly or indirectly, with its
stakeholders, society, the economy and the natural environment throughout
its value chain. Such interactions result from an entity’s own actions in
operating its business model to achieve its strategic purposes, as well as
from the influences it receives from the external environment in which it
operates. In the context of IFRS S1, these interactions take place within
an interdependent system and have a dual meaning. That is, an entity both:
a) depends on resources and relationships throughout its value chain to
generate cash flows; and b) affects those resources and relationships
through its activities and outputs by contributing to the preservation,
regeneration and development of those resources and relationships or to
their degradation and depletion. [IFRS S1.2, IFRS S1.B2].
IFRS S1 provides the following example of the close relationship between the
value the entity creates, preserves or erodes for others and the entity’s own
ability to succeed and achieve its goals: [IFRS S1.B3].
Extract from IFRS S1
B3 For example, if an entity’s business model depends on a natural
resource—such as water—the entity could both affect and be
affected by the quality, availability and affordability of that
resource. Specifically, degradation or depletion of that resource—
including resulting from the entity’s own activities and from other
factors—could create a risk of disruption to the entity’s operations
and affect the entity’s business model or strategy and could
ultimately negatively affect the entity’s financial performance
and financial position. In contrast, regeneration and preservation
of that resource—including resulting from the entity’s own
activities and from other factors—could positively affect the
entity. Similarly, if an entity operates in a highly competitive
market and requires a highly specialised workforce to achieve its
strategic purposes, the entity’s future success will likely depend
on the entity’s ability to attract and retain that resource. At
the same time, that ability will depend, in part, on the entity’s
employment practices—such as whether the entity invests in
employee training and wellbeing—and the levels of employee
6
Exposure Draft: Management Commentary (ifrs.org)](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-16-320.jpg)
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satisfaction, engagement and retention. These examples
illustrate the close relationship between the value the entity
creates, preserves or erodes for others and the entity’s own
ability to succeed and achieve its goals.
1.1.2.D Requirement to identify sustainability-related risks and
opportunities based on the description of sustainability
in IFRS S1
IFRS S1 requires an entity to provide information about its sustainability-
related risks and opportunities arising from the interactions described in
section 1.1.2.C above. That is, the impacts and dependencies on resources
and relationships that an entity both relies on and affects by its activities
and outputs may give rise to sustainability-related risks and opportunities.
However, the sustainability-related risks and opportunities about which an
entity is expected to provide information are limited to those that “could
reasonably be expected to affect the entity’s cash flows, its access to finance
or cost of capital over the short, medium or long term”. For the purposes
of IFRS S1, these sustainability-related risks and opportunities are referred
to as “sustainability-related risks and opportunities that could reasonably
be expected to affect the entity’s prospects”. [IFRS S1.3]. The enhanced
description of concepts that underlie sustainability-related risks and
opportunities in IFRS S1 is intended to assist entities in identifying them.
How we see it
IFRS S1 provides a description of the concepts underlying sustainability-
related risks and opportunities, rather than a definition for sustainability.
This broad description does not set exact boundaries for the universe
of topics covered by sustainability-related financial disclosures so as to
reflect the evolving nature of these topics. It follows that the identification
of sustainability-related risks and opportunities by an entity may change
over time and reassessment of that identification may become necessary
(see relevant discussion on reassessing the scope of sustainability-related
risks and opportunities in section 1.2.3 below).
1.2 Identifying sustainability-related risks and
opportunities
1.2.1 The identification process
To meet the objective of IFRS S1, an entity is required to identify the
sustainability-related risks and opportunities that could reasonably be
expected to affect its prospects and make a materiality assessment to
identify and disclose the material information about the identified risks and
opportunities. For the purposes of identifying sustainability-related risks and
opportunities, materiality is not an attribute of a risk or opportunity, rather
it is an attribute of information about that risk and/or opportunity. This
distinction is similar to the IASB’s Conceptual Framework.7
Also, the IASB’s
Exposure Draft on Management on Commentary has proposed requirements
7
Paragraph 2.21 of the IASB’s Conceptual Framework states: “The most efficient and
effective process for applying the fundamental qualitative characteristics would usually
be…First, identify an economic phenomenon, information about which is capable of being
useful to users of the reporting entity’s financial information. Second, identify the type of
information about that phenomenon that would be most relevant. Third, determine whether
that information is available and whether it can provide a faithful representation of the
economic phenomenon.”
Sustainability-related
risks and opportunities
about which an entity is
expected to provide
information are limited
to those that could
reasonably be expected
to affect the entity’s
prospects.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-17-320.jpg)
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for an entity to focus on key matters and to provide material information
about those key matters.
IFRS S1 does not explicitly require the two steps of: a) identifying the
sustainability-related risks and opportunities that could reasonably be
expected to affect an entity’s prospects; and b) identifying material
information about those risks and opportunities, to be performed
sequentially. In practice, the assessment performed under these two steps
is likely to be iterative.
An entity needs to disclose information about the judgements it has made to
prepare its sustainability-related financial disclosures that most significantly
affect those disclosures. An example where judgement is expected to occur
that can significantly affect the information reported by an entity is when
identifying sustainability-related risks and opportunities that could be
reasonably expected to affect the entity’s prospects (see further discussion
on judgements in section 6.1 below). [IFRS S1.74].
Moreover, IFRS S1 provides additional guidance in the section on ‘sources
of guidance’ to help entities identify sustainability-related risks and
opportunities, including those across a range of sustainability-related issues
and those that are specific to industries. For further information please see
section 5.1.1 below.
1.2.2 Use of reasonable and supportable information
1.2.2.A The concept of reasonable and supportable information
Many stakeholders, during the consultation process for the Exposure Draft of
IFRS S1, shared their concerns with the ISSB about the range of capabilities
and preparedness of entities around the world to apply the requirements
of the ISSB standards. The cost of investing in and operating the systems
and processes necessary to prepare the disclosures required by the ISSB
standards can be relatively high for some entities. Also, the availability of
high-quality external data can be limited in some markets, industries and
parts of the value chain, and some entities can struggle to access the skills
or expertise needed to prepare the disclosures. [IFRS S1.BC8]. For example,
despite the guidance provided in IFRS S1 to assist in the identification of
sustainability-related risks and opportunities that could reasonably be
expected to affect an entity’s prospects (discussed in section 1.2.1 above),
entities may still find it challenging to make such an assessment and
understand how far they should go within their value chain.
These concerns led the ISSB to make decisions about proportionality in the
application of the ISSB standards to ease the burden of disclosure and assist
entities in this application process. One of these decisions was to introduce
in IFRS S1 the concept of “all reasonable and supportable information that
is available to the entity at the reporting date without undue cost or effort”.
This concept is not unique to sustainability-related financial disclosures.
There are amounts recognised and measured according to the IFRS
accounting standards by also referring to this concept, but its use is limited
to specific circumstances to guide an entity in applying requirements that
involve a high level of measurement uncertainty, rather than being used as
a broad principle. [IFRS S1.BC9, IFRS S1.BC10, IFRS S1.BC11].
Similarly, this concept only applies to specific requirements of IFRS S1 where
judgement is involved. The ISSB believes that the use of this concept is
beneficial where entities apply requirements that involve a high level of
judgement or uncertainty because it establishes parameters for the type
of information to consider, and for the effort required to obtain such
information. [IFRS S1.BC15].
In identifying
sustainability-related
risks and opportunities
that could reasonably
be expected to affect
an entity’s prospects,
only supportable and
reasonable information
that is available to the
entity at the reporting
date needs to be used.
An entity should not
carry out an exhaustive
search for this
information that would
represent ‘undue cost
or effort’.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-18-320.jpg)
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1.2.2.B Application of the concept of reasonable and
supportable information in IFRS S1
IFRS S1 requires this concept to be applied in the identification process of
sustainability-related risks and opportunities that could reasonably be
expected to affect an entity’s prospects, as well as in the determination of
the scope of an entity’s value chain (including its breadth and composition)
in relation to each of those sustainability-related risks and opportunities.
[IFRS S1.B6, IFRS S1.B7]. For further discussion about the determination of the
scope of the value chain, see section 3.3.3 below. The ISSB’s intention is
to avoid situations where entities overstate or understate their reported
sustainability-related risks and/or opportunities. [IFRS S1.BC51]. IFRS S1
also requires this concept to be used with respect to the preparation of
disclosures about the anticipated financial effects of a sustainability-related
risk or opportunity (see discussion in section 4.3.4 below).
IFRS S1 goes on to determine what qualifies as reasonable and supportable
information as follows: [IFRS S1.B8, IFRS S1.B9, IFRS S1.B10].
Extract from IFRS S1
Reasonable and supportable information
B8 Reasonable and supportable information used by an entity in
preparing its sustainability-related financial disclosures shall
cover factors that are specific to the entity as well as general
conditions in the external environment. In some cases—such as
in identifying sustainability-related risks and opportunities that
could reasonably be expected to affect an entity’s prospects —
reasonable and supportable information includes information
about past events, current conditions and forecasts of future
conditions. Other IFRS Sustainability Disclosure Standards may
specify what is reasonable and supportable information in specific
cases.
B9 An entity may use various sources of data that may be both
internal and external. Possible data sources include the entity’s
risk management processes; industry and peer group experience;
and external ratings, reports and statistics. Information that is
used by the entity in preparing its financial statements, operating
its business model, setting its strategy and managing its risks and
opportunities is considered to be available to the entity without
undue cost or effort.
B10 An entity need not undertake an exhaustive search for
information to identify sustainability-related risks and
opportunities that could reasonably be expected to affect the
entity’s prospects. The assessment of what constitutes undue
cost or effort depends on the entity’s specific circumstances and
requires a balanced consideration of the costs and efforts for the
entity and the benefits of the resulting information for primary
users. That assessment can change over time as circumstances
change.
This concept, in itself, does not introduce additional disclosure requirements,
nor does it intend to exempt an entity from providing a disclosure. Rather,
it is intended to emphasise that relevant and appropriate information is
required. Also, it is intended to assist those entities that find it challenging to
apply the requirements in the ISSB standards and would otherwise be unable
to comply fully with them. Entities need to provide only information that is
supportable and reasonable and use all information that is available to them
at the reporting date, without carrying out an exhaustive search that would
represent ‘undue cost or effort’. This is determined based on an entity’s](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-19-320.jpg)
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circumstances (e.g., a less exhaustive search for information is permitted if
the cost of obtaining particular information is proportionately higher for the
entity than for other entities with more resources). This does not mean that
no effort is necessary, especially given the fact that such information relates
to a risk or opportunity that could reasonably be expected to affect the
entity’s prospects. [IFRS S1.BC16, IFRS S1.BC17].
How we see it
In identifying sustainability-related risks and opportunities, an entity needs
to consider its specific circumstances when searching for reasonable and
supportable information without undue cost or effort. However, we expect
that searching for such information will only infrequently involve undue
cost or effort. Although an entity is not required to carry out exhaustive
search for information, the effort an entity takes in this identification
process needs to be commensurate with the processes set up for
identifying its sustainability-related risks and opportunities, as discussed
in section 1.2.1 above.
1.2.3 Reassessing the scope of sustainability-related risks
and opportunities
An entity’s sustainability-related risks and opportunities, along with their
effects and expectations of those effects on an entity, change over time
and in relation to the interdependent system in which an entity operates.
The ISSB initially considered requiring entities to reassess the scope of each
sustainability-related risk and opportunity throughout their value chain at
each reporting date. However, the ISSB decided that primary users would
typically benefit from a reassessment only if a significant event or a
significant change in circumstances occurs and that doing so at each
reporting date was not necessary. However, an entity may choose to
reassess the scope of any sustainability-related risk or opportunity
throughout its value chain more frequently (e.g., annually). [IFRS S1.B12,
IFRS S1.BC45, IFRS S1.BC59, IFRS S1.BC60, IFRS S1.BC61, IFRS S1.B62].
According to IFRS S1 “a significant event or significant change in
circumstances can occur without the entity being involved in that event
or change in circumstances, or as a result of a change in what the entity
assesses to be important to users of general purpose financial reports”.
[IFRS S1.B11]. Generally, assessing whether an event or change in
circumstances is significant and, therefore, reassessment of the scope of all
affected sustainability-related risks and opportunities is required throughout
the entity’s value chain, is a matter of judgement. [IFRS S1.75(d)]. For further
discussion on judgements, see section 6.1 below.
IFRS S1 provides examples of the types of events or changes in
circumstances that would be considered significant. They also illustrate that
a significant event or significant change in circumstances can occur without
the entity being involved in that event or change in circumstances, or as
a result of a change in what the entity assesses to be important to primary
users. [IFRS S1.B11].
Extract from IFRS S1
B11 On the occurrence of a significant event or significant change in
circumstances, an entity shall reassess the scope of all affected
sustainability-related risks and opportunities throughout its value
chain. A significant event or significant change in circumstances
can occur without the entity being involved in that event or
change in circumstances or as a result of a change in what the
entity assesses to be important to users of general purpose](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-20-320.jpg)
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financial reports. For example, such significant events or
significant changes in circumstances might include:
(a) a significant change in the entity’s value chain (for
example, a supplier in the entity’s value chain makes a
change that significantly alters the supplier’s greenhouse
gas emissions);
(b) a significant change in the entity’s business model,
activities or corporate structure (for example, a merger or
acquisition that expands the entity’s value chain); and
(c) a significant change in an entity’s exposure to
sustainability-related risks and opportunities (for example,
a supplier in the entity’s value chain is affected by the
introduction of a new regulation that the entity had not
anticipated).
While an entity is required to reassess the scope of all affected sustainability-
related risks and opportunities arising throughout its value chain when such
a significant event or significant change in circumstances occurs, not all
sustainability-related risks and opportunities will necessarily be affected. This
is further explained by the example provided in the BC to IFRS S1.
[IFRS S1.BC61].
Illustration 1–1: Reassessing the scope of sustainability-related
risks and opportunities
A regulation is introduced for greenhouse gas emissions associated with
employee travel that an entity had not anticipated. Because of this regulation,
the entity may be required to reassess which categories to include in the
measurement of its Scope 3 greenhouse gas emissions. However, this
regulation does not affect the entity’s other sustainability-related risks and
opportunities in its value chain (e.g., the entity’s identified risk of water
scarcity). Therefore, the entity is not required to reassess the scope of those
other sustainability-related risks and opportunities.
It is not necessary to have a change in the entity’s value chain to conclude
that a significant event or significant change in circumstances has occurred.
That is, the scope of a sustainability-related risk or opportunity may change
even though the entity’s value chain has not changed. [IFRS S1.BC61].
2 Scope
2.1 The scope of IFRS S1
Entities apply IFRS S1 when preparing and reporting sustainability-related
financial disclosures in accordance with the ISSB standards. The scope of
IFRS S1 covers sustainability-related risks and opportunities that could
reasonably be expected to affect an entity’s prospects (as discussed in
section 1.1.2 above). Therefore, any sustainability-related risks and
opportunities that could not reasonably be expected to affect an entity’s
prospects are outside the scope of IFRS S1. [IFRS S1.5, IFRS S1.6].
IFRS S1 sets out the general requirements for providing primary users with
a complete set of sustainability-related financial disclosures (as discussed
in section 1.1 above). This means that IFRS S1 focuses on the overall
sustainability-related financial disclosures, while other ISSB standards specify
information an entity is required to disclose about specific sustainability-
related risks and opportunities (e.g., IFRS S2). [IFRS S1.7]. In order to comply
with the specific requirements set out by other ISSB standards for
sustainability-related risks and opportunities related to specific topics that
The sustainability-related
financial disclosures in
accordance with the ISSB
standards are provided
regardless of which
generally accepted
accounting principles or
practices (GAAP) the
entity uses in preparing
the related financial
statements.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-21-320.jpg)
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could reasonably be expected to affect an entity’s prospects, it is also
necessary to take into account the relevant requirements of IFRS S1.
The sustainability-related financial disclosures provided in accordance
with the requirements of the ISSB standards are part of an entity’s general
purpose financial reports (as discussed in section 1.1 above). Such
disclosures can be applied regardless of which generally accepted accounting
principles or practices (GAAP) the entity uses in preparing the related
financial statements. [IFRS S1.8]. IFRS S1 uses definitions and requirements
that are consistent, if applicable, with the IASB’s Conceptual Framework,
IAS 1 and IAS 8. However, its rationale is to introduce a base for decision-
useful and comparable reporting of sustainability-related financial
information by requiring the application of some established practices from
financial reporting, rather than mandating the use of the IFRS accounting
standards used for the preparation of financial statements. [IFRS S1.BC5].
2.2 Application by public sector or entities other
than profit-oriented entities
The terminology used in the ISSB standards is suitable for profit-oriented
entities, including public-sector business entities. However, the ISSB
identified interest in the ISSB standards from, among others, the public
sector, entities other than profit-oriented entities, as well as regulators
and other organisations that oversee financial market stability. Considering
this interest, the ISSB decided not to preclude not-for-profit activities in the
private sector or public sector from applying the ISSB standards, but if they
do so, IFRS S1 specifies that they may need to amend the descriptions used
for particular items of information. [IFRS S1.9, IFRS S1.BC4].
3 Conceptual foundations
3.1 Fair presentation of sustainability-related risks
and opportunities
The concept of fair presentation is well-understood in the IFRS accounting
standards (as described in the IASB’s Conceptual Framework and IAS 1) and
in other GAAP. IFRS S1 adapted this concept in the context of sustainability-
related financial disclosures.
IFRS S1 requires an entity to provide a complete set of sustainability-related
financial disclosures that presents fairly all sustainability-related risks and
opportunities that could reasonably be expected to affect an entity’s
prospects. [IFRS S1.11]. Moreover, to meet the objective of IFRS S1,
sustainability-related financial disclosures need to include information that is
useful to primary users to enable their decision-making relating to providing
resources to the entity (see section 1.1 above).
To achieve fair presentation of sustainability-related risks and opportunities
and ensure that the information about them is useful, sustainability-related
financial information needs to meet the fundamental qualitative
characteristics of being relevant and faithfully representing what it purports
to represent in accordance with the principles set out in IFRS S1. Along
with the fundamental qualitative characteristics, IFRS S1 includes a list
of additional qualitative characteristics that enhance the usefulness of
sustainability-related financial information. These enhancing qualitative
characteristics are: comparability; verifiability; timeliness; and
understandability of the sustainability-related financial information.
[IFRS S1.10, IFRS S1.13]. The qualitive characteristics are further discussed in
section 3.1.1 below.
Fair presentation of
sustainability-related
risks and opportunities
is achieved when the
information provided to
primary users meets the
fundamental qualitative
characteristics set out in
IFRS S1. The usefulness
of sustainability-related
financial information
is enhanced by the
additional qualitative
characteristics also set
out in IFRS S1.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-22-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 22
In addition to meeting the qualitative characteristics mentioned above,
to achieve fair presentation, IFRS S1 also requires an entity to disclose
additional information if compliance with the specifically applicable
requirements in the ISSB standards is insufficient to enable primary users
to understand the effects of sustainability-related risks and opportunities
on the entity’s cash flows, its access to finance and cost of capital over the
short, medium and long term. [IFRS S1.15, IFRS S1.BC63]. For further discussion
on the additional information, see section 3.2.3.A below.
Figure 3–1: Fair presentation
3.1.1 Qualitative characteristics of sustainability-related
financial information
While the nature of some of the information required to meet the objective of
IFRS S1 differs in some respects from the information provided in financial
statements (see further discussion in section 3.2.1 below), the qualitative
characteristics have been adapted from the IASB’s Conceptual Framework.
The IASB’s Conceptual Framework describes the objective of, and the
concepts that apply to, general purpose financial reports and one of its
purposes is to assist the IASB to develop the IFRS accounting standards
for preparing financial statements based on consistent concepts. Since the
sustainability-related financial information is part of the general purpose
financial reports, the qualitative characteristics of the IASB’s Conceptual
Framework also apply to sustainability-related financial disclosures.
[IFRS S1.D1, IFRS S1.D2].
Given that there is no separate conceptual framework directly applicable
to the ISSB standards, IFRS S1 includes guidance on the qualitative
characteristics (both the fundamental and the enhancing ones) of
sustainability-related financial information. These qualitative characteristics
are intended to assist entities in preparing their sustainability-related
financial disclosures by explaining their applicability to sustainability-related
financial information (e.g., the fact that information in the form of
explanations or forward-looking statements is still verifiable). It is also
intended to ensure that information in general purpose financial reports
(both in sustainability-related financial disclosures and in financial
statements) is useful to users of those reports. [IFRS S1.BC64, IFRS S1.BC65].
A description for each qualitative characteristic of sustainability-related
financial information is included in Figure 3-2 below which is based on
Appendix D of IFRS S1. [IFRS S1 Appendix D].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-23-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 24
[IFRS S1.D4, IFRS S1.D5, IFRS S1.D6,
IFRS S1.D7, IFRS S1.D8].
attainable precision, and the
factors that make information
accurate, depend on the nature
of the information and the
nature of the matters to which it
relates. For example, accuracy
requires that:
• Factual information is free
from material error
• Descriptions are precise
• Estimates, approximations
and forecasts are clearly
identified as such
• No material errors are made
in selecting and applying
an appropriate process for
developing an estimate,
approximation or forecast
• Assertions and inputs used
in developing estimates are
reasonable and based on
information of sufficient
quality and quantity
• Information on judgements
about the future faithfully
reflects both those
judgements and the
information on which
they are based.
[IFRS S1.D9, IFRS S1.D10, IFRS S1.11,
IFRS S1.D12, IFRS S1.D13, IFRS S1.D14,
IFRS S1.15].
The ISSB noted that, according to
the IASB’s Conceptual Framework, to
be a perfectly faithful representation,
a depiction would have three
characteristics: it would be complete,
neutral and free from error. However,
considering that entities may not
be familiar with the term ‘free from
error’ in the context of sustainability-
related financial disclosures, the ISSB
decided to use the term ‘accurate’,
instead of ‘free from error’, to
describe a ‘complete depiction’ of
an entity’s sustainability-related
financial information.
[IFRS S1.BC66].
Enhancing qualitative characteristics
Comparability Verifiability Timeliness Understandability
The decisions
made by the
primary users
involve choosing
between
alternatives (e.g.,
selling or holding
an investment, or
investing in one
reporting entity or
another).
Verifiability helps to
give primary users
confidence that
information is
complete, neutral
and accurate (see
also description for
faithful
representation
above). Information
is verifiable if it is
Timeliness
means
having
information
available to
decision-
makers in
time to be
capable of
influencing
their
Information is
understandable
when it is clear
and concise. In
particular:
• The level of
clarity in
disclosures
depends on the
nature of the
information. In](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-25-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 25
Comparability is
the characteristic
that enables
primary users to
identify and
understand
similarities in, and
differences among,
items. Unlike the
other qualitative
characteristics,
comparability does
not relate to a
single item as it
requires at least
two items.
Information is
more useful if it
can also be
compared with
information
provided by the
entity in previous
periods, as well as
by other entities,
in particular, those
with similar
activities or
operating within
the same industry.
Comparability is
not uniformity. For
information to be
comparable, like
things need to look
alike and different
things need to look
different.
Comparability is
not enhanced by
making unlike
things look alike
any more than it is
enhanced by
making like things
look different.
Appendix D of IFRS
S1 differentiates
consistency from
comparability by
stating that,
although they are
related, the former
refers to the use of
the same
approaches or
methods for
providing
disclosures about
the same
sustainability-
related risks and
opportunities,
from period to
period, both by a
possible to
corroborate either
the information itself
or the inputs used to
derive it.
Verifiability means
that various
knowledgeable and
independent
observers could
reach consensus,
although not
necessarily complete
agreement, that a
particular depiction
is a faithful
representation.
Quantified
information need not
be a single point
estimate to be
verifiable, rather
a range of possible
amounts and the
related probabilities
could also be verified.
Verifiable
information is more
useful to primary
users than
information that is
not verifiable and can
be enhanced by, for
example:
• Including
information that
can be
corroborated by
comparing it
with other
information
available to
primary users
about an entity’s
business, about
other businesses
or about the
external
environment in
which the entity
operates;
• Providing
information
about inputs and
methods of
calculation used
to produce
estimates or
approximations;
and
• Providing
information
reviewed and
agreed by the
decisions.
Although
older
information
may be less
useful, some
may continue
to be timely
long after the
end of a
reporting
period (e.g.,
when
primary
users need to
identify and
assess
trends).
[IFRS S1.D25].
some cases, in
addition to
narrative text,
an entity may
need to add
tables, graphs
or diagrams (or
even additional
text or tables
for those
additions to
avoid obscuring
material detail).
Clarity can be
enhanced by
distinguishing
information
about
developments
in the reporting
period from
‘standing’
information
that remains
unchanged, or
changes little,
from one
period to the
next (e.g., by
separately
describing
features of
an entity’s
sustainability-
related
governance
and risk
management
processes that
have changed
since the
previous
reporting
period). In
some cases,
information
about
sustainability-
related risks
and
opportunities
may be
inherently
complex and
difficult to
present in a
manner that
is easy to
understand.
Such
information
needs to be
presented as
clearly as
possible, rather
than excluding](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-26-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 26
reporting entity
and other entities.
That is,
consistency helps
in achieving
comparability,
which is the goal.
[IFRS S1.D17,
IFRS S1.D18,
IFRS S1.D19,
IFRS S1.D20].
entity’s board,
board
committees or
equivalent
bodies.
Some sustainability-
related financial
information will be
presented as
explanations or
forward-looking
information. That
information can be
supportable, for
example by faithfully
representing fact-
based strategies,
plans and risk
analyses. To help
primary users decide
whether to use such
information, a
description of the
underlying
assumptions and
methods of
producing the
information, as well
as other factors that
provide evidence that
the information
reflects the actual
plans or decisions
made by the entity
would be necessary.
[IFRS S1.D21,
IFRS S1.D22,
IFRS S1.D23,
IFRS S1.D24].
it. Excluding
such
information
would render
those reports
incomplete and
potentially
misleading.
• Disclosures are
concise if they
include only
material
information.
Any immaterial
information
included needs
to be provided
in a way that
avoids
obscuring
material
information
(see also
section 3.2.3.B
below).
Having clear and
concise information
can be achieved
when an entity:
• Avoids generic
(i.e.,
‘boilerplate’)
information,
that is not
specific to the
entity;
• Avoids
duplication of
information in
its general
purpose
financial
reports,
including
unnecessary
duplication of
information
also provided
in the related
financial
statements;
and
• Uses clear
language
and clearly
structured
sentences and
paragraphs
The completeness,
clarity and
comparability of
sustainability-
related financial
information all rely](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-27-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 27
on information
being presented
as a coherent whole.
Coherence is also
important in
meeting the
requirements of
IFRS S1 about
connected
information (see
relevant discussion
in section 3.4
below). For the
information to be
coherent, an entity
needs to:
• Present it in
a way that
explains the
context and
the connections
between the
related items
of information.
That is, if
sustainability-
related risks
and
opportunities
located in one
part of an
entity’s general
purpose
financial
reports have
implications for
information
disclosed in
other parts, the
entity needs to
include the
information
necessary for
primary users
to assess those
implications.
• Provide it in a
way that allows
primary users
to relate
information
about its
sustainability-
related risks
and
opportunities
to information
in the entity’s
financial
statements.
[IFRS S1.D26-33].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-28-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 28
3.2 Materiality
3.2.1 Definition of materiality
In meeting the objective of IFRS S1, an entity is required to disclose
information about its sustainability-related risks and opportunities that could
reasonably be expected to affect the entity’s prospects (see section 1.2
above). [IFRS S1.17, IFRS S1.B13]. IFRS S1 also states that this information needs
to be useful to primary users so that they make their decisions relating to
providing resources to the entity (see section 1.1 above), and this occurs
when the information disclosed is material.
IFRS S1 defines materiality as follows: [IFRS S1.18].
Extract from IFRS S1
18 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.
The definition of materiality was developed based on the definitions of
‘material information’ and ‘material’ in the IASB’s Conceptual Framework and
IAS 1, respectively. This definition is used in IAS 1 with a specific reference
to the financial statements. The materiality assessment in the IASB’s
Conceptual Framework is not constrained to what is financially material in the
financial statements but focuses on the identification of information that is
useful to primary users. These primary users are consistent with those of the
sustainability-related financial disclosures prepared in accordance with the
ISSB standards (see section 1.1.1 above). Such a consistency emphasises
that the purpose of the materiality assessment is to ensure that the primary
users have the information that is relevant to their decision-making and that
users do not make their decisions on the basis of just one form of general
purpose financial reports published by the entity. [IFRS S1.BC68].
The alignment in the concept and definition of materiality, applicable to both
sustainability-related financial information and information in the financial
statements, facilitates the connectivity between them (for further discussion
on connected information, see section 3.4 below) and it supports the
application of the ISSB standards, given the broad use of the IFRS accounting
standards. However, the materiality judgements for sustainability-related
financial disclosures will inevitably differ from those for financial statements
since they serve their specific objectives and provide different types of
information about an entity. In fact, information about sustainability-related
risks and opportunities is intended to capture a broader set of information
that is not constrained by the definitions of assets, liabilities, equity, income
and expenses under the IFRS accounting standards, nor the criteria for
recognising them. Compared with information included in financial
statements, sustainability-related financial information may have different
measurement bases and considers financial implications over longer time
periods, including interactions throughout an entity’s value chain. It follows
that the material information about sustainability-related risks and
opportunities that could reasonably be expected to affect the entity’s
prospects, aim to complement the information provided in the financial
statements about the entity’s assets, liabilities, equity, income and expenses.
[IFRS S1.BC1, IFRS S1.BC69].
Including a specific definition of materiality in IFRS S1 (applicable to all ISSB
standards) was a deliberate decision by the ISSB given that the ISSB](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-29-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 29
standards are not designed to be applied only with the IFRS accounting
standards, but any GAAP (see section 2.1 above) that may not share the
same definition of materiality. Also, given the variation in how the concept
of materiality is interpreted, applied and enforced in various jurisdictions in
the context of sustainability-related financial information, a definition of
materiality in IFRS S1 was a key decision to make it clear to entities how
the materiality concept needs to be applied and assessed under the ISSB
standards. [IFRS S1.BC71, IFRS S1.BC72].
How we see it
Applying the materiality concept in the context of sustainability-related
financial disclosures is relatively new and this is expected to evolve over
time. Although this application can be informed by the assessment of
materiality in financial statements, more judgement may be needed by an
entity given the more qualitative nature of sustainability-related financial
disclosures. Therefore, an entity needs to establish the appropriate
processes to make materiality judgements based on its specific
circumstances.
3.2.2 Identifying material information
As mentioned in section 3.2.1 above, an entity needs to disclose material
information about its sustainability-related risks and opportunities such that
the information is useful to primary users in making their decisions about
providing resources to the entity. However, the identification of such material
information requires judgement. IFRS S1 requires an entity to disclose
information about the judgements it has made to prepare its sustainability-
related financial disclosures that have the most significant effect on those
disclosures. An example of making such a judgement is when an entity
identifies material information to be included in the sustainability-related
financial disclosures. For further discussion on judgements, see section 6.1
below. [IFRS S1.74].
Therefore, similar to the process of identifying the sustainability-related risks
and opportunities that could reasonably be expected to affect an entity’s
prospects (discussed in section 1.2 above), the ISSB indicated in IFRS S1,
various ways to assist in the identification of material information about
those risks and opportunities. In particular, apart from the definition of
materiality discussed in section 3.2.1 above, the following sections include:
• Guidance relating to identifying and meeting primary users’ information
needs (see section 3.2.2.A below)
• Requirements to be applied while identifying material information by
considering:
• The sources of guidance an entity uses in this identification process
(see section 3.2.2.B below)
• Possible future events with uncertain outcomes (see section 3.2.2.C
below)
• Other characteristics of material information (i.e., additional
information disclosed by an entity, aggregation and disaggregation
of information, interaction with law or regulation, commercially
sensitive information) (see section 3.2.3 and 3.2.4 below)
3.2.2.A Information needs of primary users
In identifying the material information to be disclosed, apart from
understanding the definition of materiality underpinned in the application of
standards (see section 3.2.1 above), an entity needs to understand the types
of decisions made by primary users and what it can do to meet those](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-30-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 30
information needs. IFRS S1 gives an overview of what is involved in the
primary users’ decisions that relate to providing resources to the entity being
decisions about: [IFRS S1.B14].
• Buying, selling or holding equity and debt instruments
• Providing or selling loans and other forms of credit
• Exercising rights to vote on, or otherwise influence, the actions of
the entity’s management that affect the use of the entity’s economic
resources
These types of decisions depend on primary users’ expectations of their
returns (e.g., dividends, principal and interest payments or market price
increases). Such expectations depend on primary users’ assessment of the
amount, timing and uncertainty of future net cash inflows to the entity.
Also, those expectations depend on the primary users’ assessment of the
stewardship that the entity’s management and its governing body(s) or
individual(s) exercises on the entity’s economic resources. [IFRS S1.B15].
Having considered the types of decisions that primary users make and the
expectations on which their decisions depend, an entity needs to consider the
characteristics of primary users and its own circumstances to determine what
could reasonably be expected to influence their decisions made for a specific
entity. IFRS S1 describes primary users as those “who have reasonable
knowledge of business and economic activities and who review and analyse
information diligently. At times, even well-informed and diligent users may
need to seek the aid of an adviser to understand sustainability-related
financial information”. [IFRS S1.B16, IFRS S1.B17].
The information needs and desires of the primary users may differ among
them, may be conflicting and could evolve over time. However, it is
acknowledged that sustainability-related financial disclosures do not,
and cannot, provide all the information that primary users need, such as
specialised information needs that are unique to particular users. Instead,
sustainability-related financial disclosures aim to meet the common
information needs of an entity’s primary users. [IFRS S1.B18].
The Implementation Guidance to IFRS S1 goes on to explain the approach an
entity follows to meet the common information needs of its primary users. In
particular, an entity identifies the information needs of one of the three types
of primary users e.g., investors (existing and potential), and then those of the
two remaining types i.e., lenders and other creditors (existing and potential).
The combination of those information needs forms the set of common
information needs that the entity aims to meet. There may be information
needs shared by all types of primary users or specific to only one or two
types. However, using this approach, an entity identifies the common
information needs of primary users, without having to identify the
information needs that are shared by all types of primary users (i.e., the
information needs that the primary users have in common), as this would
exclude potential information that meets the needs of only one type of
primary users. [IFRS S1.IG5, IFRS S1.IG6].
Apart from the general purpose financial reports, primary users also consider
other sources to meet their information needs (e.g., the industry in which an
entity operates, the entity’s competitors and the state of the economy, the
entity’s press releases as well as other documents the entity has published).
However, the fact that information needed by primary users is publicly
available does not relieve an entity from disclosing material information
about the sustainability-related risks and opportunities that could reasonably
be expected to affect the entity’s prospects to comply with the ISSB
standards. [IFRS S1.IG7].
Understanding the
information needs of
primary users, based on
the types of decisions
they make and the
expectations on which
their decisions depend,
contributes to the
identification of material
sustainability-related
financial information.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-31-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 31
How we see it
In some cases, significant judgement may be required in determining what
meets the primary users’ information needs, especially because such needs
may evolve over time.
3.2.2.B Sources applied in assessing materiality
Materiality judgements are specific to an entity, therefore, IFRS S1 does
not specify any thresholds for materiality or predetermine what would be
material in a particular situation. The starting point for an entity in identifying
material information about a sustainability-related risk or opportunity is to
apply the requirements of the ISSB standard that specifically applies to that
sustainability-related risk or opportunity (e.g., the requirements in IFRS S2
for climate-related disclosures as discussed in Part B – Introduction to
IFRS S2 below). However, in the absence of such an ISSB standard, the
entity applies the requirements specified in the section of IFRS S1 related
to the sources of guidance, which is further discussed in section 5.1.2 below.
In identifying such information (either by applying the requirements of
a specific ISSB standard or other sources of guidance), an entity needs to
assess whether this information, individually or in combination with other
information, is material in the context of the entity’s sustainability-related
financial disclosures taken as a whole. This assessment requires the
consideration of both quantitative and qualitative factors (e.g., the
magnitude and the nature of the effect of a sustainability-related risk
or opportunity on the entity). [IFRS S1.B19, IFRS S1.B20, IFRS S1.B21].
3.2.2.C Possible future events with uncertain outcomes
A materiality assessment is also required for information about possible
future events with uncertain outcomes and IFRS S1 includes specific
considerations for this assessment. In particular, IFRS S1 states: [IFRS S1.B22].
Extract from IFRS S1
B22 In some cases, IFRS Sustainability Disclosure Standards require
the disclosure of information about possible future events with
uncertain outcomes. In judging whether information about such
possible future events is material, an entity shall consider:
(a) the potential effects of the events on the amount, timing
and uncertainty of the entity’s future cash flows over the
short, medium and long term (referred to as ‘the possible
outcome’); and
(b) the range of possible outcomes and the likelihood of the
possible outcomes within that range.
If the potential effects of a possible future event are significant and the
event is likely to occur, the information about that event is more likely to](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-32-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 32
be material. However, information about low-probability and high-impact
outcomes still needs to be considered as these may be material either
individually or in combination with information about other low-probability
and high-impact outcomes. For example, an entity is exposed to several
sustainability-related risks that could individually cause the same type of
disruption to the entity (e.g., disruption to its supply chain). Information
about an individual source of risk is not material because disruption caused
from that source is highly unlikely to occur. However, information about the
aggregate risk (i.e., the risk of supply chain disruption from all sources) may
be material. [IFRS S1.B23].
Moreover, if a possible future event is expected to affect an entity’s cash
flows, but only many years in the future, information about that event is
usually less likely to be considered material than information about a possible
future event with similar effects that are expected to occur sooner. However,
in some circumstances, primary users’ decisions could reasonably be
expected to be influenced by information, regardless of the magnitude of
the potential effects of the future event or the timing of that event (e.g., if
information about a particular sustainability-related risk or opportunity is
highly scrutinised by primary users of an entity’s general purpose financial
reports). [IFRS S1.B24].
3.2.3 Additional information disclosed by an entity
3.2.3.A Additional information provided when the requirements
of the ISSB standards are not sufficient
Under certain circumstances, an entity may need to provide information
that is additional to the information provided to comply with the specifically
applicable requirements in an ISSB standard. In particular, when compliance
with the requirements of an ISSB standard that specifically applies to an
entity’s circumstances is not sufficient for primary users to understand the
effects of sustainability-related risks and opportunities on the entity’s cash
flows, its access to finance and cost of capital over the short, medium and
long term, the entity needs to disclose additional information. [IFRS S1.B26].
How we see it
Sometimes compliance with the specific requirements of the ISSB
standards is not sufficient and, therefore, additional information would be
needed to support primary users in making their decisions about providing
resources to an entity. Such additional information would constitute
material information and be required by IFRS S1 (see discussion about the
definition of materiality in section 3.2.1 above).
3.2.3.B Requirements for not obscuring material information
Generally, if information is not material, there is no need to disclose such
information that is otherwise required by an ISSB standard, even if the
specific ISSB standard contains a list of specific requirements or describes
them as minimum requirements. [IFRS S1.B25]. Moreover, sustainability-related
financial information required by the ISSB standards needs to be clearly
identified and distinguished from other information provided by the entity
that is additional to what is required by the ISSB standards (see also relevant
discussion about location of information in section 5.2 below). However,
when such information is included, an entity needs to ensure that material
information is not obscured.
Because IFRS S1 uses a definition of material information that is consistent
with IAS 1, the ISSB also decided to include guidance in IFRS S1 with
respect to the concept of obscuring material information building on similar](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-33-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 33
requirements in IAS 1. That is, information may be obscured when it is
communicated in a way that would have a similar effect for primary users
to omitting or misstating that information. [IFRS S1.B27, IFRS S1.BC73].
IFRS S1 provides examples of circumstances that may result in material
information being obscured: [IFRS S1.B27].
Extract from IFRS S1
B27 An entity shall identify its sustainability-related financial
disclosures clearly and distinguish them from other information
provided by the entity (see paragraph 62). An entity shall not
obscure material information. Information is obscured if it is
communicated in a way that would have a similar effect for
primary users to omitting or misstating that information.
Examples of circumstances that might result in material
information being obscured include:
(a) material information is not clearly distinguished from
additional information that is not material;
(b) material information is disclosed in the sustainability-
related financial disclosures, but the language used is
vague or unclear;
(c) material information about a sustainability-related risk or
opportunity is scattered throughout the sustainability-
related financial disclosures;
(d) items of information that are dissimilar are inappropriately
aggregated;
(e) items of information that are similar are inappropriately
disaggregated; and
(f) the understandability of the sustainability-related financial
disclosures is reduced as a result of material information
being hidden by immaterial information to the extent that
a primary user is unable to determine what information is
material.
Material information required by the ISSB standards must be presented
prominently and be distinguishable from immaterial information (e.g.,
provided to comply with law, regulation or other requirements), to avoid
being obscuring. Potential ways for achieving this distinction could be,](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-34-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 34
for example, when the information required by the ISSB standards is:
[IFRS S1.BC74].
• Extracted by primary users by using digital tagging
• Presented together with immaterial information in a single report but is
distinguished from it by using appropriate formatting (e.g., using boxes
or shading to emphasise or make the distinction clear)
• Presented separately so that it is clearly distinguished from immaterial
information (e.g., splitting the report into parts)
• Provided in two sets of information (one that includes the entire package
of information without distinction, i.e., both the information required by
the ISSB standards and immaterial information, and an accompanying
report that only provides the information required by the ISSB
standards).
3.2.3.C Interaction with law or regulation
Frequently, entities may need to comply with law or regulation enforced
in the jurisdictions they operate that specifies disclosure requirements
on sustainability-related information. In such circumstances, the entity
is permitted to include in its sustainability-related financial disclosures,
information to meet legal or regulatory requirements, even if that
information is not considered material under the ISSB standards. However,
the entity needs to ensure that such information does not obscure material
information, as discussed in section 3.2.3.B above. [IFRS S1.B31].
Material sustainability-related financial information is disclosed, even if law or
regulation permits the entity not to disclose such information. However, an
entity need not disclose information otherwise required by an ISSB standard
if law or regulation prohibits the entity from disclosing that information.
However, if such material information is omitted for that reason, an entity
needs to identify the type of information not disclosed and explain the source
of the restriction. [IFRS S1.B32, IFRS S1.B33].
3.2.4 Other characteristics of material information
3.2.4.A Aggregation and disaggregation
Building on the principles of aggregation and disaggregation in IAS 1, IFRS S1
requires an entity to consider all facts and circumstances to determine how
to aggregate and disaggregate information in its sustainability-related
financial disclosures. [IFRS S1.B29]. The ISSB considered that the concepts
of aggregation and disaggregation embedded in IAS 1 in relation to the
information provided in the financial statements are equally important for
sustainability-related financial disclosures. This is to ensure that primary
users are provided with information at appropriately aggregated and
disaggregated levels.
To avoid reducing the understandability of sustainability-related financial
disclosures, an entity needs to ensure that material information is not
obscured by immaterial information or material items of information that
are dissimilar to each other are not aggregated. [IFRS S1.B29]. In general,
information cannot be aggregated if doing so would obscure information
that is material. Items of information that are eligible for being aggregated
have shared characteristics, rather than those that do not have shared
characteristics. For example, disaggregating information by geographical
location or in consideration of the geopolitical environment may be necessary
to ensure that material information is not obscured when reporting about
the use of water drawn from abundant sources and water drawn from water-
stressed areas. [IFRS S1.B30].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-35-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 35
3.2.4.B Commercially sensitive information
While IFRS S1 was being developed, stakeholders were concerned about
disclosing information that could be considered commercially sensitive.
The concerns related to the potential impact on an entity’s competitive
advantage by revealing details about its strategy and planned actions
through the disclosures required by the ISSB standards. The concerns
were mainly focused on disclosing commercially sensitive information
about opportunities, rather than risks, as these could affect an entity’s
competitiveness in the market or otherwise be commercially harmful.
[IFRS S1.BC76, IFRS S1.BC77].
Considering these concerns, the ISSB introduced in IFRS S1 a targeted
exemption by permitting an entity, in limited circumstances, to omit from its
sustainability-related financial disclosures information about a sustainability-
related opportunity. Such an omission is permitted even if information is
otherwise required by an ISSB standard, and the information is material.
[IFRS S1.B34].
The exemption is intentionally narrow and applies only to the disclosure of
information about opportunities, and it is not permitted to be applied for non-
disclosure of information about risks. Also, the exemption is not intended to
permit broad non-disclosure of information about opportunities. [IFRS S1.BC79,
IFRS S1.B37]. Rather, an entity qualifies for the exemption if, and only if:
[IFRS S1.B35, IFRS S1.BC80, IFRS S1.BC81, IFRS S1.BC83].
a) Information about the sustainability-related opportunity is not already
publicly available. That is, the exemption does not apply to information
that is already publicly available (e.g., continuous disclosure notices,
investor presentations, briefings to analysts, or other publicly available
documents) as it is unlikely that such disclosure will harm an entity’s
advantage in pursuing the opportunity.
b) Disclosure of the information could reasonably be expected to prejudice
seriously the economic benefits the entity would otherwise be able to
realise in pursuing the opportunity.
c) The entity has determined that it is impossible to disclose that
information in a manner that would enable the entity to meet the
objectives of the disclosure requirements without seriously prejudicing
the economic benefits the entity would otherwise be able to realise
in pursuing the opportunity. For example, an entity needs to first
consider whether it is possible to disclose the information about the
opportunity at a sufficiently aggregated level to resolve its concerns
about commercial sensitivity, before applying the exemption. However,
if it does so, an entity needs to ensure that aggregation does not obscure
material information (as discussed in section 3.2.4.A above).
IFRS S1 requires additional disclosures when this exemption is applied. In
particular, if an entity elects to use the exemption for each item of
information omitted, the entity needs to: [IFRS S1.B36].
a) Disclose the fact that it has used the exemption to make users aware that
information has been excluded for reasons of commercial sensitivity; and
b) Reassess, at each reporting date, whether the information qualifies for
the exemption and, if the entity is no longer eligible for the exemption,
disclose that information at that reporting date.
3.2.5 Reassessment of material information
The individual circumstances of an entity and/or the external environment
may change and, therefore, the sustainability-related risks and opportunities
that users reflect to make their decisions can also change over time.
Accordingly, the material sustainability-related financial information
disclosed by an entity may change from one reporting period to another
The exemption of
omitting commercially
sensitive information
from sustainability-
related financial
disclosures is
intentionally narrow and
is not intended to permit
broad non-disclosure of
information.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-36-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 36
due to changes in circumstances and assumptions to reflect the evolving
information needs of primary users (see section 3.2.2.A above). This means
that some types of information included in an entity’s sustainability-related
financial disclosures for prior periods may no longer be material. Conversely,
some types of information not previously disclosed may become material.
[IFRS S1.B28]. This dynamic nature of materiality led the ISSB to the decision of
requiring entities to reassess their materiality judgements at each reporting
date to take account of changes in circumstances and assumptions.
3.2.6 Interoperability considerations
Overall, the ISSB’s intention is to establish a comprehensive global baseline
of sustainability-related financial disclosures that meet the information needs
of primary users in relation to sustainability-related risks and opportunities.
This global baseline is intended to serve as a comprehensive foundation
of disclosure requirements, for which jurisdictions will be able to add any
necessary incremental disclosure requirements to this common baseline. To
achieve this, interoperability with jurisdictional requirements is imperative.
The more compatible the ISSB standards are with the law or regulation in
the jurisdictions in which entities operate (including law or regulation that
specifies the documents, formats and structures for disclosing information),
the more likely it is to achieve comparable, cost-effective and decision-useful
sustainability-related financial disclosures that are designed to meet the
needs of primary users. [IFRS S1.BC27, IFRS S1.BC28].
However, not all sustainability-related frameworks share the same definition
of materiality that is used in the ISSB standards (discussed in section 3.2.1
above). There are similarities in the language used when referring to
assessing material information in the context of the short, medium and long-
term effects of sustainability issues. However, in practice, determining
what is ‘material’ depends on the issue, the context, the time frame and the
stakeholder. For example, the key difference between the GRI standards, the
European Sustainability Reporting Standards (ESRS) and the ISSB standards
is the audience (i.e., ISSB standards focus on primary users, whereas GRI and
ESRS have a broader set of ‘users’ of the information).
Lack of interoperability could be costly for entities and risks undermining the
provision of clear and consistent information to primary users. Also, primary
users need to be able to clearly identify both information relevant to them
and information relevant to a broader set of stakeholders, so that material
information for primary users is not obscured. [IFRS S1.BC31]. In supporting
the interoperability among the ISSB standards and the other frameworks, the
ISSB included in IFRS S1 clarifications on concepts and terminologies (e.g.,
an extensive description of sustainability and its connection with the value of
an entity as discussed in section 1.1.2 above), as well as specific definitions
(e.g., materiality as discussed in section 3.2.1 above), to explain their use
by the ISSB standards compared with other jurisdictional initiatives and
sustainability reporting frameworks. Also, including a list of sources of
guidance as part of the identification process of sustainability-related risks
and opportunities that could reasonably be expected to affect an entity’s
prospects and the identification of material information about those risks
and opportunities (as discussed in section 3.2.2 above) contributes to
the interoperability with other sustainability-related frameworks and the
reduction of the burden for entities already using or are mandated to comply
with those other frameworks. The ISSB also permits entities to include
information disclosed to meet other requirements (e.g., specific jurisdictional
requirements) as long as it does not obscure the material information
provided in complying with the ISSB standards (as discussed in section
3.2.3.B above).](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-37-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 37
3.3 Reporting entity
3.3.1 Definition of a reporting entity
IFRS S1 defines reporting entity as an entity that is required, or chooses, to
prepare general purpose financial statements. [IFRS S1 Appendix A]. The entity
that is required to disclose sustainability-related financial information is the
same as the one that prepares the related financial statements. [IFRS S1.20].
For example, when the entity applies the IFRS accounting standards, the
consolidated financial statements provide information about the parent
and its subsidiaries as a single reporting entity. The reporting entity’s
sustainability-related financial disclosures focus on the sustainability-related
risks and opportunities that enable primary users to assess the effects of
those risks and opportunities on the entity’s prospects (i.e., the effects on
the prospects of the parent and its subsidiaries, in the case of information
presented in consolidated financial statements). [IFRS S1.B38].
Requiring the same reporting entity for both financial statements and
sustainability-related financial disclosures is one of the decisions the ISSB
made for the purposes of enabling information disclosed in the financial
statements to be connected with sustainability-related financial information
(as discussed in section 3.4 below). [IFRS S1.BC85].
3.3.2 Breadth of reporting
The reporting entity is required to disclose information about sustainability-
related risks and opportunities throughout its value chain (see section 1.2
above). This means that the reporting entity is required to identify the
sustainability-related risks and opportunities that could reasonably be
expected to affect its prospects and determine the scope of its value
chain, including its breadth and composition, in relation to each of those
sustainability-related risks and opportunities.
The value chain is also mentioned in the section of IFRS S1 on the ‘core
content’ of information under the strategy pillar; an entity is required to
disclose the current and anticipated effects of sustainability-related risks
and opportunities that could reasonably be expected to affect its prospects
throughout its business model and value chain and describe where these risks
and opportunities are concentrated (see section 4.3.4 below).
IFRS S1 defines the value chain as follows: [IFRS S1 Appendix A].
Extract from IFRS S1
Appendix A
Defined terms
value chain The full range of interactions, resources and relationships
related to a reporting entity’s business model and the external
environment in which it operates.
A value chain encompasses the interactions, resources
and relationships an entity uses and depends on to create
its products or services from conception to delivery,
consumption and end-of-life, including interactions, resources
and relationships in the entity’s operations, such as human
resources; those along its supply, marketing and distribution
channels, such as materials and service sourcing, and product
and service sale and delivery; and the financing, geographical,
geopolitical and regulatory environments in which the entity
operates.
Although the reporting
entity that prepares
sustainability-related
financial disclosures
and the related financial
statements is the same,
the sustainability-related
financial disclosures are
not constrained to what
is recognised in the
financial statements.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-38-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 38
Resources and relationships can vary for a number of reasons. For example,
they may take various forms (e.g., natural, manufactured, intellectual,
human, social, financial), they can be internal (e.g., workforce, know-how,
organisational processes) or external (e.g., accessing materials and services
or relationships with suppliers, distributors and customers), they can be
recognised as assets in the entity’s financial statements or not.
Moreover, resources and relationships can be direct or extend throughout the
entity’s value chain (e.g., the entity’s supply and distribution channels, the
effects of the consumption and disposal of the entity’s products, the entity’s
sources of finance and its investments, including investments in associates
and joint ventures). That is, if the entity’s business partners throughout its
value chain face sustainability-related risks and opportunities, the entity
could be exposed to related consequences of its own. [IFRS S1.B4, IFRS S1.B5].
Therefore, even though the reporting entity that prepares sustainability-
related financial disclosures is the same as the one that prepares the related
financial statements, the breadth of reporting is not the same. That is, the
sustainability-related financial disclosures are not constrained to what is
recognised in the financial statements, but goes beyond that to capture
information about the value chain.
3.3.3 Determining the scope of value chain
Determining the scope of an entity’s value chain could be challenging due to
the possible scope of the value chain, as well as potential complexities in
obtaining information to prepare the required disclosures. This is because
obtaining information about the value chain may require a reporting entity
to collect information from parties that the entity does not control or in
which it has no ownership interest. For example, the ultimate consumers of
an entity’s products may be the most important contributors to the entity’s
Scope 3 greenhouse gas emissions. Also, the employment practices of a
supplier in an entity’s supply chain could have a reputational effect on the
entity, even if the supplier has no direct relationship with the reporting
entity. [IFRS S1.BC56, IFRS S1.BC57]. Joint ventures, associates and investments
are not considered to be part of the reporting entity that is presenting
consolidated financial statements. However, the reporting entity recognises
these items in its financial statements and reports aspects of their
performance. Likewise, sustainability-related financial information related
to those investments is relevant to primary users in assessing the effects
of sustainability-related risks and opportunities on the entity’s prospects.
[IFRS S1.BC54].
Although assessing the scope of the value chain may be challenging, it is
not new or unique to the field of sustainability reporting. As part of their
general purpose financial reports, entities frequently produce management
commentary that provides insights into factors that have affected the entity’s
financial performance and financial position and factors that could affect its
ability to create value and generate cash flows in the future. These factors
also capture aspects of the value chain including the activities of diverse
investments and dependencies. Therefore, since entities also assess activities
within their value chain for general planning and risk management purposes,
the requirements in IFRS S1 are effectively following this approach in the
analysis of risk management or strategic business model.
The ISSB noted that determining the value chain and clarifying the breadth
of reporting is a process that is unique for each entity and is difficult to
specifically prescribe through principles or standards, as it is unlikely to apply
in the same way to all types of entities. The ISSB also referred to the existing
market guidance and practice around reporting on a broad range of activities
in the value chain and across subsidiaries (e.g., the SASB standards contain
disclosure topics and metrics that demonstrate how an entity could report](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-39-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 39
on value chain activities, and which of those activities may be relevant for
a given industry).
In determining the scope of its value chain, an entity is required to use
“all reasonable and supportable information that is available to the entity
at the reporting date without undue cost or effort”, in relation to each
sustainability-related risk and opportunity identified that could reasonably
be expected to affect the entity’s prospects. This concept assists entities
by establishing parameters for the type of information they consider when
preparing disclosures regarding the value chain, and the effort required to
obtain such information. For further information about this concept, see
section 1.2.2 above.
3.4 Connected information
Entities are required to provide information in a manner that enables primary
users to understand connections between various disclosures in an entity’s
general purpose financial reports, as well as insight into the connections
between the items to which the information relates. [IFRS S1.B39].
The following Figure 3-3 illustrates the types of connections for which
information needs to be provided according to IFRS S1: [IFRS S1.21].
Figure 3–3: Types of connections for which information is
required
3.4.1 Connections between items to which the information
relates
IFRS S1 provides examples relating to information about connections
between items to which the information relates: [IFRS S1.B40].
• An entity pursued a particular sustainability-related opportunity that
resulted in revenue increase. The connected information will depict the
relationship between the entity’s strategy and its financial performance.
• An entity identified a trade-off between two sustainability-related risks
it is exposed to and took action on the basis of its assessment of that
trade-off. The connected information will depict the relationship between
those risks and the entity’s strategy.
• An entity committed to a particular sustainability-related target, but
that commitment has not yet affected the entity’s financial position or
financial performance because the applicable recognition criteria have
not been met. The connected information will depict that relationship.
3.4.2 Connections between disclosures provided in general
purpose financial reports
With respect to the connections between various disclosures in an entity’s
general purpose financial reports, IFRS S1 distinguishes two categories:
a) connections between disclosures provided by an entity within its
Information needs to be provided
in a manner that enables primary users to understand the following types of connections:
Between items to which the
information relates
(see section 3.4.1 below)
Within its
sustainability-related
financial disclosures
(see section 3.4.2.A)
Across its sustainability-related
financial disclosures and other
general purpose financial reports
published by the entity
(see section 3.4.2.B)
Between disclosures provided by the entity in its general
purpose financial reports (see section 3.4.2)](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-40-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 40
sustainability-related financial disclosures; and b) connections between
disclosures provided across an entity’s sustainability-related financial
disclosures and other general purpose financial reports published by the
entity.
3.4.2.A Connections between disclosures provided within an
entity’s sustainability-related financial disclosures
IFRS S1 explains the nature of information about connections between
disclosures provided by an entity within its sustainability-related financial
disclosures, as follows: [IFRS S1.B41].
• Information about a particular sustainability-related risk or opportunity
explaining the connections between disclosures on governance, strategy
and risk management (i.e., relating to the four content pillars as further
discussed in section 4 below).
• Information between disclosures about various sustainability-related
risks and opportunities provided within an entity’s sustainability-related
financial disclosures. For example, when an entity integrates its
oversight of sustainability-related risks and opportunities and, therefore,
needs to integrate the disclosures on governance instead of providing
separate disclosures on governance for each sustainability-related risk
and opportunity.
3.4.2.B Connections between disclosures provided across
sustainability-related financial disclosures and other
general purpose financial reports published by the entity
Connected information also needs to be provided to explain the connections
between disclosures provided across an entity’s sustainability-related
financial disclosures and other general purpose financial reports published by
the entity. For example, an entity needs to explain how information provided
in its sustainability-related financial disclosures is connected with the
information provided in its related financial statements. However, this type
of connections is not restricted to connections with the related financial
statements, but it also relates to all other reports that constitute the general
purpose financial report (e.g., the management commentary).
IFRS S1 requires information about the current and anticipated effects of
sustainability-related risks and opportunities on an entity’s financial position,
financial performance and cash flows (see relevant discussion on the core
content information about the strategy pilar in section 4.3.4 below). This
requirement represents a specific application of connected information
between sustainability-related financial disclosures and the related financial
statements of an entity.
To promote this connectivity, IFRS S1 requires an entity to: [IFRS S1.22,
IFRS S1.23, IFRS S1.24].
• Identify the financial statements to which the sustainability-related
financial disclosures relate
• Use consistent data and assumptions in preparing the sustainability-
related financial disclosures with the related financial statements (to
the extent possible considering the requirements of the IFRS accounting
standards or other applicable GAAP)
• Use the presentation currency of its related financial statements, when
currency is specified as the unit of measure in the sustainability-related
financial disclosures
An entity is required to align data and assumptions to the extent possible by
taking into consideration the requirements in the IFRS accounting standards
(or other GAAP) instead of mandating full alignment. This is because there
could be legitimate reasons for data and assumptions to vary between](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-41-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 41
an entity’s sustainability-related financial disclosures and its financial
statements (e.g., financial statements may reflect specific recognition criteria
included in the IFRS accounting standards or other GAAP, which are not
possible to reflect in the sustainability-related financial disclosures).
The following examples are based on the BC to IFRS S1: [IFRS S1.BC88].
Illustration 3–1: Examples of the types of connections
Entity W, a pharmaceutical company, has been exposed to claims of unethical
testing. Therefore, it may need to explain how its strategic response has, or
has not, led to the recognition of provisions and associated operating costs in
its financial statements.
Entity X, an electronics manufacturer, has publicly announced a target of net
zero for its corporate greenhouse gas emissions, which are primarily created
during its manufacturing process. Entity X adopts a new strategy that involves
shifting its procurement of energy to renewable sources and investing in more
energy-efficient machinery. Therefore, Entity X may need to explain how this
strategy to achieve the target led to an increase in capital expenditure and
possibly an impairment review of non-energy-efficient machinery, as well as
lower (and less volatile) energy prices, increased revenue due to a related
increased demand from its customers, and an increase in margins on sales.
Entity Y, a supplier, finds that demand for its goods has risen due to its
treatment of workers and its record on respecting workers’ rights, especially
because its approach in this area was better than many of its peers. Entity Y
may need to explain how its strategy and performance in relation to the
treatment of its workers has positioned it favourably and has led to increases
in revenue.
Entity Z has a net zero greenhouse gas emissions plan that relies on replacing
its fleet of diesel-powered vehicles with electric vehicles. Shifting to electric
vehicles will require much more capital investment than was necessary for
diesel vehicles. The transition plan is that each vehicle will be replaced when it
reaches the end of its useful economic life. Entity Z concludes that the vehicles
are not impaired and no changes to depreciation rates or useful life estimates
are required to be reflected in the financial statements. Entity Z may need to
explain that the transition plan will have consequences for its future cash flows
and that its accounting, as reflected in the financial statements, is consistent
with its transition plan.
3.4.3 Characteristics of connections
Drawing connections between disclosures involves, but is not limited to,
disclosing necessary explanations and cross-references and using consistent
data, assumptions, and units of measure. In doing so, IFRS S1 requires:
[IFRS S1.B42].
• Explanation of the connections between disclosures in a clear and
concise manner
• Avoiding unnecessary duplication if an ISSB standard requires the
disclosure of common items of information (see also discussion on the
enhancing qualitative characteristic of understandability of information
in section 3.1.1 above)
• Disclosing information about significant differences between the data
and assumptions used in preparing the entity’s sustainability-related
financial disclosures and the data and assumptions used in preparing
the related financial statements, as explained in section 3.4.2.B above.
When disclosing sustainability-related financial information, there is a
possibility that this information could result in duplication of information
within the general purpose financial report. This is because other frameworks
(such as the IFRS accounting standards or other GAAP) may require similar
information. Therefore, in identifying and explaining the connections both
In identifying and
explaining the
connections both
between the items to
which the information
relates and between
disclosures provided
by the entity in its
general purpose
financial reports, an
entity needs to avoid
unnecessary duplication.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-42-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 42
between the items to which the information relates and between disclosures
provided by the entity in its general purpose financial reports (discussed
in sections 3.4.1 and 3.4.2 above), an entity needs to avoid unnecessary
duplication. To achieve this, one approach an entity may consider is to use
cross references from sustainability-related financial disclosures to the other
general purpose financial reports published by the entity, subject to the
specified requirements being met. The requirements about information
included in sustainability-related financial disclosures by cross-reference
are further discussed in section 5.2.2 below.
The following examples are included in IFRS S1 to describe the nature of
disclosures that could explain the various types of connections. For example,
in providing connected information, an entity may: [IFRS S1.B43, IFRS S1.B44].
• Explain the effect or likely effect of its strategy on its financial
statements and financial planning, or explain how that strategy relates
to the metrics the entity uses to measure progress against targets
• Explain how its use of natural resources or changes within its supply
chain could amplify or, alternatively, reduce its sustainability-related
risks and opportunities. The information about the use of natural
resources or changes within its supply chain may need to be linked to
information about current or anticipated financial effects on the entity’s
production costs, its strategic response to mitigate those risks and its
related investment in new assets. Also, the narrative information about
the related metrics and targets may need to be linked to information in
the related financial statements.
• Explain the combined effects of its sustainability-related risks and
opportunities and its strategy on its financial position, financial
performance and cash flows over the short, medium and long term.
For example, when the entity faces decreasing demand for its products
because of consumer preferences for lower-carbon alternatives, it may
need to explain how its strategic response (e.g., closing a major factory)
could affect its workforce and local communities, and the effect of that
response on the related financial statements (e.g., the effect of closing
a major factory on the useful lives of its assets and on impairment
assessments).
• Describe the alternatives it considered in setting its strategy in
response to its sustainability-related risks and opportunities, including
a description of the trade-offs between those risks and opportunities.
For example, an entity may need to explain the potential effects of its
decision to restructure its operations (e.g., developing new products)
in response to a sustainability-related risk (e.g., how environmental
risks affect its reputation or ability to operate) on the future size and
composition of the entity’s workforce, or financial performance reported
in the entity’s financial statements.
4 Core content
4.1 Overview of TCFD
IFRS S1 requires an entity to disclose information about its governance,
strategy, risk management and metrics and targets in relation to its
sustainability-related risks and opportunities. These disclosure requirements
represent the ‘core content’ that provides information about the way the
entity manages those risks and opportunities. Information disclosed in
relation to this ‘core content’ is necessary for primary users to assess the
effects of sustainability-related risks and opportunities on an entity’s cash
flows, its access to finance and cost of capital over the short, medium and
long term.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-43-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 44
Figure 4-1: Core content builds on the four TCFD pillars
An entity may have overarching processes, controls and procedures that
are used to monitor and manage various sustainability-related risks and
opportunities in an integrated manner. IFRS S1 does not require an entity to
repeat disclosures relating to the core content for each type of sustainability-
related risk and opportunity. Instead, an entity discloses that its approach
to monitoring and managing a specific sustainability-related risk and
opportunity is integrated into its overall process, controls and procedures
and, if material, explain any adaptations made to those processes to address
any unique characteristics of that specific risk and opportunity. [IFRS S1.B41(b),
IFRS S1.B42(b), IFRS S1.BC94].
How we see it
The purpose of the core content disclosure requirements in IFRS S1 is
to require an entity to explain its actual sustainability-related activities,
instead of prescribing how it should govern, manage risks and
opportunities, and set strategy in managing its business. If, for example,
an entity has limited governance arrangements or strategies in place to
monitor and manage its sustainability-related risks and opportunities, the
entity is required to disclose that fact if that would be material information
to primary users. Entities need to consider whether to introduce process
improvements to strengthen their arrangements and processes for
managing and monitoring sustainability-related risks and opportunities.
4.2 Governance
In defining ‘governance’, the TCFD includes a reference to the G20/OECD
Principles of Corporate Governance, which states “Governance involves
a set of relationships between an organization’s management, its board, its
shareholders, and other stakeholders. Governance provides the structure
and processes through which the objectives of the organization are set,
progress against performance is monitored, and results are evaluated.”8
The objective of the governance disclosures in IFRS S1 is to enable primary
users to understand the governance processes, controls and procedures an
entity uses to monitor, manage and oversee sustainability-related risks and
opportunities. [IFRS S1.26].
To help primary users evaluate whether and how much attention is given to
sustainability-related risks and opportunities, IFRS S1 requires disclosure of:
[IFRS S1.27].
8
TCFD, Appendix 5: Glossary and Abbreviations, page 62
The objective of the
governance disclosures
in IFRS S1 is to enable
primary users to
understand the
governance processes,
controls and procedures
an entity uses to monitor,
manage and oversee
sustainability-related risks
and opportunities.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-45-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 45
• The governance body(s) or individual(s) with oversight of an entity’s
sustainability-related risks and opportunities (see section 4.2.1 below);
and
• Management’s role in the governance processes, controls and
procedures used to monitor, manage and oversee sustainability-related
risks and opportunities (see section 4.2.2 below).
4.2.1 Information about the oversight role
‘Governance body(s)’ that may have oversight of sustainability-related
risks and opportunities include boards, committees or equivalent bodies
charged with governance. IFRS S1 acknowledges that, for some entities,
the responsibility for the oversight of sustainability-related risks and
opportunities may be held by an individual(s) rather than a governance
body(s). An individual may be charged with the overall oversight of
sustainability-related risks and opportunities because of their specific
expertise and experience. [IFRS S1.BC96].
IFRS S1 requires an entity to disclose information about oversight
arrangements, as set out in Figure 4-2 below: [IFRS S1.27(a)].
Figure 4-2: Disclosures about oversight role
Theme Disclosure required
Responsibility Identify the governance body(s) or individual(s)
responsible for oversight of sustainability-related
risks and opportunities. This requirement includes
information about how responsibilities for
sustainability-related risks and opportunities is
reflected in the terms of reference, mandates, role
descriptions and other related policies applicable to
that body(s) or individual(s). [IFRS S1.27(a)(i)].
Competency Describe how the governance body(s) or individual(s)
determines whether they have, or will need to develop,
the appropriate skills and competencies to oversee
strategies that respond to sustainability-related risks
and opportunities. [IFRS S1.27(a)(ii)].
Inform Explain how, and how often, they are informed about
sustainability-related risks and opportunities.
[IFRS S1.27(a)(iii)].
Address Explain how they take sustainability-related risks and
opportunities into account when overseeing strategy
and risk management and assessing transactions. As
part of this disclosure, explain whether the governance
body(s) or individual(s) has considered trade-offs
associated with those risks and opportunities.
[IFRS S1.27(a)(iv)].
Monitor Describe their oversight of the setting of targets and
tracking progress against those targets. As part of
this disclosure, explain whether and how related
performance metrics are included in remuneration
policies. [IFRS S1.27(a)(v)].
4.2.2 Information about management’s role
The governance disclosure requirements distinguish between oversight by
a governance body or individual and the responsibilities of management-
level positions or committees to enable primary users to understand how
responsibilities are delegated within the entity in relation to sustainability-](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-46-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 46
related matters. To illustrate this, the board of directors of an entity may
provide oversight on broader sustainability-related matters, whereas
executives within management may make operational decisions about
how specific sustainability-related risks and opportunities are assessed and
managed.
IFRS S1 requires an entity to make disclosures about management’s role in
the governance processes, controls and procedures used to monitor, manage
and oversee sustainability-related risks and opportunities. These disclosures
are summarised in Figure 4-3 below: [IFRS S1.27(b)].
Figure 4-3: Disclosures about management’s role
Theme Disclosure required
Delegation Information about whether the role is delegated to
a specific management-level position or committee
and how oversight over that position or committee is
exercised. [IFRS S1.27(b)(i)].
Processes Information about whether management uses controls
and procedures to support the oversight of
sustainability-related risks and opportunities and, if
so, how these controls and procedures are integrated
with other internal functions. [IFRS S1.27(b)(ii)].
Given the nature of the disclosure requirements about the role of the
governance body and the role of management, it is likely that entities will
use narrative disclosures to meet those requirements. IFRS S1 notes that
the usefulness of sustainability-related financial information is enhanced if,
among other things, that information is understandable (see section 3.1.1
above).
Depending on the nature of the information, clarity of the disclosure may
be enhanced through the use of tables, graphs or diagrams in addition
to narrative text. The Practical example 4-1 below shows how Flutter
Entertainment plc, in applying the TCFD Recommendations, has identified
and described the role and mandate of the governance bodies that
have oversight of its sustainability-related risks and opportunities and
management’s delegated roles in the governance. This Practical example
provides a visual representation of the role of each body which is explained
further in the accompanying narrative disclosure included in Flutter
Entertainment plc’s annual report for 2022, which also details the processes,
controls and procedures used to monitor, manage and oversee its
sustainability-related risks and opportunities.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-47-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 47
Practical example 4–1: Flutter Entertainment plc
(2022)
Ireland
Annual Report & Accounts 2022 [extract]
Strategic report [extract]
Sustainability [extract]
Environment [extract]
Governance of environment and climate strategy [extract]
page 71
4.3 Strategy
The TCFD defines ‘strategy’ as referring to “an organization’s desired future
state. An organization’s strategy establishes a foundation against which it
can monitor and measure its progress in reaching that desired state. Strategy
formulation generally involves establishing the purpose and scope of the
organization’s activities and the nature of its businesses, taking into account
the risks and opportunities it faces and the environment in which it
operates”.9
The objective of the strategy disclosures in IFRS S1 is to enable primary users
to understand an entity’s strategy for managing sustainability-related risks
and opportunities. [IFRS S1.28]. These disclosures can be used to inform
primary users’ expectations about the future performance of an entity.
The foundation of the strategy disclosures is information about the
sustainability-related risks and opportunities that could reasonably be
expected to affect the entity’s prospects (see section 4.3.1 below). The other
strategy disclosures build on that initial disclosure by providing information
about: [IFRS S1.29].
• The current and anticipated effects of those sustainability-related risks
and opportunities on the entity’s business model and value chain (see
section 4.3.2 below)
• The effects of those risks and opportunities on the entity’s strategy and
decision-making (see section 4.3.3 below)
• The current and anticipated effects of those risks and opportunities on
the entity’s financial position, financial performance and cash flows (see
section 4.3.4 below)
9
TCFD, Appendix 5: Glossary and Abbreviations, pages 63-64
The objective of the
strategy disclosures in
IFRS S1 is to enable
users of general purpose
financial reports to
understand an entity’s
strategy for managing
sustainability-related
risks and opportunities.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-48-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 48
• The resilience of the entity’s strategy and its business model to those
sustainability-related risks. (see section 4.3.5 below)
These strategy disclosure sub-topics are summarised in Figure 4-4 below.
Figure 4-4: Strategy disclosure sub-topics
4.3.1 Disclosures about sustainability-related risks and
opportunities that could reasonably be expected to
affect the entity’s prospects
As discussed in section 1.2 above, an entity is required to identify the
sustainability-related risks and opportunities that could reasonably be
expected to affect its prospects. IFRS S1 requires an entity to disclose
a description of each of those sustainability-related risks and opportunities.
[IFRS S1.30].
To provide primary users with further context in relation to each of those
sustainability-related risks and opportunities, IFRS S1 requires an entity
to specify the time horizons over which the effects of each of those
sustainability-related risks and opportunities could reasonably be expected
to occur. IFRS S1 identifies the time horizons as being the short, medium or
long term. [IFRS S1.30(b)].
The ISSB decided to not prescribe specific time frames that represent ‘short
term’, ‘medium term’ and ‘long term’ because the ISSB considered that
relevant information about an entity’s sustainability-related risks and
opportunities is best understood in the context of entity-specific assessments
of short, medium and long term. For that reason, IFRS S1 requires an entity
to also disclose an explanation of how the entity defines the ‘short term’,
‘medium term’ and ‘long term’ time horizons and how those definitions are
linked to the planning horizons used by the entity for strategic decision-
making. [IFRS S1.23(c), IFRS S1.BC102].
In defining these time horizons, an entity needs to take into account a
number of factors that can vary between entities and the industries in which
they operate. Also, time horizons often become management processes,
e.g., rolling forecast horizons, budget periods and strategic planning cycles.
IFRS S1 includes the following examples as entity-specific or industry-specific
factors: [IFRS S1.31, IFRS S1.BC102].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-49-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 49
• Cash flow, investment and business cycles
• Planning horizons typically used in an entity’s industry for strategic
decision-making and capital allocation plans
• The time horizons over which primary users conduct their assessments
of entities in that industry.
4.3.2 Disclosures about the effects of sustainability-related
risks and opportunities on the entity’s business
model and value chain
IFRS S1 requires an entity to describe the current and anticipated effects of
sustainability-related risks and opportunities on the entity’s business model
and value chain and where in that business model and value chain those
sustainability-related risks and opportunities are concentrated. For example,
the sustainability-related risks and opportunities may be concentrated across
geographical areas, facilities or types of assets. [IFRS S1.32].
The examples below are based on the BC to IFRS S1 and illustrate the type of
information an entity may provide to disclose where in its business model and
value chain sustainability-related risks and opportunities are concentrated:
[IFRS S1.BC52].
Illustration 4-1: Examples showing where in the entity’s business
model and value chain sustainability-related risks
and opportunities are concentrated
Entity A operates in the beverage industry and has identified that it needs to
disclose risks associated with water use, especially in areas where water is
scarce. Entity A may describe how its use of water affects the supply available
to meet its operational needs. It may explain how its water consumption
affects communities close to the entity’s operations that rely on the same
source of water. It may also explain how over-consumption of water in those
locations could lead to risks of reputational damage and loss of customers, or
to the imposition of taxes or limits on the use of the resource. It may also
describe how these risks have been assessed throughout its supply chain.
Entity B is a clothing brand and has identified that it needs to describe the
opportunity associated with changing to use less resource-intensive materials
in its products and packaging. The potential effects may be driven by Entity B’s
commitments to sustainable business practices, or consumer preferences for
more sustainable or recycled alternatives. Entity B may also disclose the areas
of its value chain and operations that are potentially most affected by this
opportunity, and the processes in place to assess and monitor the opportunity.
Entity C is an electronics manufacturer and has identified that it needs to
describe the risks of human rights issues in its supply chain, including
reputational damage and supply chain disruptions. In doing so, Entity C may
describe the effects on its policies, actions it has taken to assess and monitor
the risks, and how it manages any identified abuses.
4.3.3 Disclosures about the effects of sustainability-related
risks and opportunities on the entity’s strategy and
decision-making
To enable primary users to understand the effects of sustainability-related
risks and opportunities on an entity’s strategy and decision-making, IFRS S1
requires an entity to disclose information about: [IFRS S1.33].
• How the entity has responded to, and plans to respond to, sustainability-
related risks and opportunities in its strategy and decision-making
• The entity’s progress in respect of plans it has disclosed in previous
reporting periods, including quantitative and qualitative information](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-50-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 50
• Trade-offs between sustainability-related risks and opportunities that
the entity considered.
The example below illustrates disclosures about trade-off between
sustainability-related risks and opportunities:
Illustration 4-2: Example on trade-offs between sustainability-
related risks and opportunities
During the reporting period, Entity A decided where to locate its new
manufacturing facility that would replace the existing facility that was
approaching the end of its useful life. Entity A had considered two alternative
sites for its new manufacturing facility:
Site X is located in the same region as the existing facility. However, the site is
prone to flash flooding during heavy rains due to the poor drainage systems at
the site and its surrounding area.
Site Y is located in a different region, which is not prone to flood risk. A
consequence of relocating to Site Y is that Entity A is currently the main
employer in the community that surrounds Site X. A decision by Entity A to
relocate to Site Y is that it would have an adverse effect on its local workforce
and indirectly on the economic prospects for the entire community.
Entity A performed impact assessments to investigate the extent of flood
risk of Site X and the social risk of moving to Site Y and identified options for
mitigating those risks. Entity A decided, on cost/benefit grounds, to build its
new manufacturing facility at Site X and as part of the development works,
install new drainage systems that can divert flood waters away from the site
and the community. In reaching this decision, Entity A also considered the
benefit of continued access to the locally trained and engaged workforce to
operate the facility.
4.3.4 Disclosures about current and anticipated financial
effects of sustainability-related risks and
opportunities
IFRS S1 requires an entity to disclose quantitative and qualitative information
about: [IFRS S1.34].
• The effects of the entity’s sustainability-related risks and opportunities
on its financial position, financial performance and cash flows for the
reporting period, which is referred to as ‘current financial effects’; and
• The anticipated effects of those sustainability-related risks and
opportunities on its financial position, financial performance and cash
flows over the short, medium and long term, taking into consideration
how the entity includes those sustainability-related risks and
opportunities in its financial planning. These are referred to as
‘anticipated financial effects’.
The timescales contemplated by the meaning of ‘current financial effects’ and
‘anticipated financial effects’ are illustrated in Figure 4-5 below.
Figure 4-5: Timeline for current and anticipated financial effects
Disclosures of current and anticipated financial effects are intended to
supplement or expand upon information provided in the related financial
Disclosures about
current and anticipated
financial effects are
intended to supplement
or expand upon
information provided in
the related financial
statements.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-51-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 51
statements. This includes identifying and explaining the connections between
sustainability-related risks and opportunities and the information reported in
the financial statements (see discussion on connected information in section
3.4.2.B above). Connections between items of information may be able to
be explained without duplicating information by using cross-references.
For example, a cross reference to information disclosed in the notes to the
financial statements may satisfy the requirement in IFRS S1 to disclose how
sustainability-related risks and opportunities have affected an entity’s current
and anticipated financial position, financial performance and cash flows. The
use of cross references is subject to the requirements in IFRS S1 (see further
discussion in section 5.2.2 below).
4.3.4.A Disclosures about current financial effects
IFRS S1 requires an entity to disclose quantitative and qualitative information
about how sustainability-related risks and opportunities have affected its
financial position, financial performance and cash flows for the reporting
period. [IFRS S1.35(a)].
An entity may also be required to disclose these current financial effects
in the notes to its financial statements when applying the IFRS accounting
standards or other GAAP. As discussed in section 4.3.4 above, an entity
should consider whether it can include a cross reference to this information
to avoid unnecessary duplication of disclosures.
4.3.4.B Disclosures about anticipated financial effects – next
annual reporting period
Anticipated financial effects refer to those financial effects anticipated in the
next annual reporting period and to those financial effects anticipated over
the short, medium and long term.
IFRS S1 requires disclosure of information that connects the current financial
effects with the anticipated financial effects in the next annual reporting
period. In accordance with this disclosure requirement in IFRS S1, an entity
is required to disclose quantitative and qualitative information about those
sustainability-related risks and opportunities that have both of the following
characteristics: [IFRS S1.35(b)].
• The sustainability-related risks or opportunities were identified as having
current financial effects (see also section 4.3.4.A above)
• Within the next annual reporting period, there is a significant risk of
a material adjustment to the carrying amounts of assets and liabilities
reported in the related financial statements.
Similar to the disclosure of current financial effects, the information required
by this disclosure may also be disclosed in the notes to the entity’s financial
statements due to requirements in IAS 1 for the disclosure of sources of
estimation uncertainty. Therefore, an entity may need to consider whether to
include a cross reference to this information to avoid unnecessary duplication
of disclosures.
4.3.4.C Disclosures about anticipated financial effects – Short,
medium and long term
IFRS S1 requires an entity to disclose quantitative and qualitative information
about how the entity expects its financial position to change over the short,
medium and long term, given its strategy to manage sustainability-related
risks and opportunities, taking into consideration the entity’s: [IFRS S1.35(c)].
• Investment and disposal plans, including plans for which the entity is not
contractually committed
• Planned sources of funding to implement its strategy](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-52-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 52
An entity’s investment and disposal plans may include plans for capital
expenditure, major acquisitions and divestments, joint ventures, business
transformation, innovation, new business areas, and asset retirements.
Similarly, IFRS S1 also requires an entity to disclose quantitative and
qualitative information about how the entity expects its financial
performance and cash flows to change over the short, medium and long
term, given its strategy to manage sustainability-related risks and
opportunities. [IFRS S1.35(d)].
4.3.4.D Measurement of current and anticipated financial effects
IFRS S1 does not provide guidance on how to measure current and
anticipated financial effects other than to indicate that quantitative
information may be disclosed as a single amount or a range. The ISSB
acknowledged that, in some cases, ranges of possible outcomes could be
more useful than single estimates. [IFRS S1.36, IFRS S1.BC89].
How we see it
Given the variety of factors that may need to be considered in quantifying
the anticipated financial effects of a sustainability-related risk or
opportunity, an entity may need to use judgement to determine how to
measure those effects. Such judgement relates to selecting the method
that an entity expects that it will best reflect the effect on its financial
position, financial performance and cash flows. In exercising judgement to
select a relevant measurement method to quantify the anticipated financial
effects, an entity may consider the suitability of measurement methods
used in the IFRS accounting standards or other GAAP.
4.3.4.E Preparing disclosures about anticipated financial effects
Stakeholders raised concerns about the difficulties that some entities may
face in disclosing information about anticipated financial effects. To address
these concerns, specifically for the preparation of disclosures about the
anticipated financial effects of a sustainability-related risk or opportunity,
IFRS S1 allows an entity to: [IFRS S1.37, IFRS S1.BC106, IFRS S1.BC107].
• Use all reasonable and supportable information that is available to the
entity at the reporting date without undue cost or effort (for further
information see discussion in section 1.2.2 above). The ISSB further
clarified this requirement in the context of anticipated effects as
summarised in Figure 4-7 below.
• Use an approach that is commensurate with the skills, capabilities and
resources that are available to the entity for preparing those disclosures.
However, the ISSB clarified that an entity cannot avoid providing
quantitative information for anticipated financial effects because it does
not have the skills or capabilities to do so if it has the resources available
to obtain or develop those skills or capabilities.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-53-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 53
Figure 4-7: The concept of reasonable and supportable information
in the context of disclosures for anticipated effects
Phrase Meaning
“use all reasonable
and supportable
information”
An entity is prohibited from overstating or
understating the anticipated financial effects of
opportunities or risks premised on information
that is unsupportable or unreasonable.
“use… information
that is available to the
entity at the reporting
date”
An entity is:
• permitted to use only the information that is
available to the entity at the reporting date
(including information about past events,
current conditions and forecasts of future
conditions)
• not required to use information that only
becomes available after that date
“use… information
that is available to the
entity… without undue
cost or effort”
An entity is not required to carry out an
exhaustive search for information to determine or
measure the anticipated financial effects of risks
and opportunities.
Instead, an entity is permitted to carry out an
information search that is proportional to the cost
and effort involved in obtaining that information
4.3.4.F Criteria and disclosures when quantitative information
about current and anticipated financial effects is not
required
The ISSB has established criteria for when an entity is not required to
disclose quantitative information about the financial effects of a
sustainability-related risk or opportunity. In particular: [IFRS S1.38, IFRS S1.39,
IFRS S1.BC109].
• For either current or anticipated financial effects of a sustainability-
related risk or opportunity, IFRS S1 states that an entity is not required
to provide quantitative information if:
• Those current or anticipated financial effects are not separately
identifiable. That is, the financial effects may arise from many risks
or opportunities and affect many items in the financial statements.
As such, it may be difficult to attribute financial effects to an
individual sustainability-related risk or opportunity.
Or
• The level of measurement uncertainty involved in estimating those
effects is so high that the resulting quantitative information would
not be useful. See section 6.2 below for a further discussion on
measurement uncertainty.
• Specifically for anticipated financial effects of a sustainability-related
risk or opportunity, IFRS S1 does not require an entity to provide
quantitative information on those anticipated financial effects if
the entity lacks the skills, capabilities or resources to do so.
For current or anticipated financial effects of a particular sustainability-
related risk or opportunity, the ISSB clarified that, even if an entity is not in
a position to disclose quantitative information, it is still required to provide
other quantitative and qualitative information that would be useful to primary
users. For that reason, if an entity concludes that it is unable to provide
quantitative information, IFRS S1 requires the entity to: [IFRS S1.40].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-54-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 54
• Explain why it has not provided quantitative information
• Provide qualitative information about those financial effects—this is to
include identifying line items, totals and subtotals within the related
financial statements that are likely to be affected, or have been affected,
by that sustainability-related risk or opportunity
• Provide quantitative information about the combined financial effects of
that sustainability-related risk or opportunity with other sustainability-
related risks or opportunities and other factors. However, disclosing
quantitative information about the combined financial effects is not
required if the entity determines that this information would not be
useful.
4.3.5 Disclosures about the resilience of the entity’s
strategy and business model to sustainability-related
risks
IFRS S1 requires a resilience assessment of an entity’s strategy and business
model. The purpose of the resilience assessment is to inform primary
users about the entity’s ability to cope with and withstand the effects of
sustainability-related risks and related uncertainties in different scenarios.
In particular, IFRS S1 requires an entity to disclose an assessment of the
resilience of the entity’s strategy and business model in relation to its
sustainability-related risks, including information about how the assessment
was carried out and its time horizon. The assessment is to be a qualitative
and, if applicable, quantitative assessment. When providing quantitative
information, IFRS S1 permits an entity to disclose a single amount or a range.
[IFRS S1.41].
IFRS S1 acknowledges that other ISSB standards may specify the type of
information an entity is required to disclose about its resilience to specific
sustainability-related risks and how to prepare those disclosures, including
whether a scenario analysis is required. [IFRS S1.42]. For example, IFRS S2
includes specific requirements for resilience assessments for an entity’s
climate-related risks (see further discussion in section 4.3 of Part B –
Introduction to IFRS S2).
The requirements to disclose information about the resilience of an entity’s
strategy and business models and to disclose information about the current
and anticipated financial effects of an entity’s sustainability-related risks
and opportunities are designed to meet different information needs. The
requirements for a resilience assessment relate to an entity’s capacity
to adjust to the uncertainties arising from sustainability-related risks,
whereas the requirements on the current and anticipated financial effects
of sustainability-related risks and opportunities relate to the effects of risks
and opportunities on an entity’s financial performance, financial position
and cash flows. Therefore, these requirements can be applied independently.
However, while an entity is not required to carry out a resilience assessment
to determine the anticipated financial effects of sustainability-related risks
and opportunities, the ISSB also acknowledged that an entity may find the
resilience assessment useful and relevant in determining the anticipated
financial effects of sustainability-related risks and opportunities.
[IFRS S1.BC113].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-55-320.jpg)
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4.4 Risk management
The TCFD defines ‘risk management’ as referring to “a set of processes that
are carried out by an organization’s board and management to support the
achievement of the organization’s objectives by addressing its risks and
managing the combined potential impact of those risks”.10
The objective of risk management disclosures in IFRS S1 is to enable primary
users to: [IFRS S1.43].
• Understand an entity’s processes to identify, assess, prioritise and
monitor sustainability-related risks and opportunities
• Understand whether and how those processes are integrated into
and inform the entity’s overall risk management process
• Assess the entity’s overall risk profile
• Assess the entity’s overall risk management process
This objective is summarised in Figure 4-8 below:
Figure 4-8: Risk management processes
The TCFD noted that in assessing an entity’s financial and operating results,
many investors want insight into the governance and risk management
context in which such results are achieved.11
This focus helps to draw a
distinction between the purpose of the risk management disclosures and
the strategy disclosures. The ISSB explained that disclosures about risk
management processes relate to the risk management framework that the
entity has put in place. In contrast, disclosures about strategy are focused on
providing information about an entity’s strategy for managing sustainability-
related risks and opportunities. [IFRS S1.BC116].
4.4.1 Processes for sustainability-related risks
Consistent with this disclosure objective, IFRS S1 requires an entity to
disclose information about the processes and related policies that it uses
to identify, assess, prioritise and monitor sustainability-related risks. The
information to be disclosed includes information about: [IFRS S1.44(a)].
10
TCFD, Appendix 5: Glossary and Abbreviations, page 63
11
Final Report Recommendations of the Task Force on Climate-related Financial Disclosures,
June 2017, page 17
Risk management
processes refer to
processes an entity uses
to identify, assess,
prioritise and monitor
sustainability-related
risks and opportunities.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-56-320.jpg)
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• The inputs and parameters used by the entity in the processes and
policies that identify, assess, prioritise and monitor sustainability-related
risks (e.g., information about data sources and the scope of operations
covered in those processes)
• Whether and how scenario analysis is used to inform the entity’s
identification of sustainability-related risks
• How the nature, likelihood and magnitude of the effects of those risks
is assessed by the entity (e.g., whether qualitative factors, quantitative
thresholds or other criteria are considered)
• Whether and how sustainability-related risks are prioritised by the entity
relative to other types of risk
• How sustainability-related risks are monitored by the entity
• Whether and how the entity has changed the processes it uses compared
with the previous reporting period.
4.4.2 Processes for sustainability-related opportunities
IFRS S1 also requires an entity to disclose information about the processes
that it uses to identify, assess, prioritise and monitor sustainability-related
opportunities. [IFRS S1.44(b)].
Unlike the disclosures for risk management processes for sustainability-
related risks, IFRS S1 does not detail specific information that needs to
be disclosed about the entity’s risk management processes that apply to
its opportunities. The ISSB explained that the disclosure requirements for
sustainability-related risks are more detailed than those for opportunities,
because of the relative maturity of risk management processes and to meet
the primary users’ needs for information about an entity’s processes for
identifying, assessing, prioritising and monitoring risks. [IFRS S1.BC119].
How we see it
Disclosures relating to risk management may also enable primary users to
understand an entity’s processes for managing its sustainability-related
opportunities. Therefore, some of those disclosures could also inform the
disclosures relating to sustainability-related opportunities.
4.4.3 Integrating disclosures
IFRS S1 requires an entity to also disclose the extent to which, and how,
an entity’s processes for identifying, assessing, prioritising and monitoring
sustainability-related risks and opportunities are integrated into and inform
the entity’s overall risk management process. [IFRS S1.44(c)]. This information
assists primary users in evaluating the entity’s overall risk profile and risk
management activities.
When an entity uses the same risk management process to identify, assess,
prioritise or monitor different sustainability-related risks and opportunities,
the entity needs to integrate those disclosures instead of providing separate
risk management disclosures for each sustainability-related risk and
opportunity. To illustrate this, the ISSB provided an example of an entity
disclosing that climate-related risks and opportunities are integrated into the
entity’s overall process for managing risks and opportunities, such as general
strategic or operational risks and opportunities. However, the identification,
assessment, prioritisation and monitoring of other sustainability-related risks
and opportunities occur separately because those specific risk management
processes are not part of the entity’s overall risk management process.
[IFRS S1.BC118].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-57-320.jpg)
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4.5 Metrics and targets
The objective of disclosures on metrics and targets is to enable primary users
to understand an entity’s performance in relation to its sustainability-related
risks and opportunities. [IFRS S1.45].
For each sustainability-related risk and opportunity that could reasonably
be expected to affect the entity’s prospects, IFRS S1 requires an entity to
disclose: [IFRS S1.46].
• The metrics required by the ISSB standards (even if the entity does not
use these metrics); and
• The metrics the entity uses to measure and monitor:
• that sustainability-related risk and opportunity (even if those metrics
are not required by the ISSB standards); and
• the entity’s performance in relation to that risk and opportunity,
including the entity’s progress towards any targets it has set and
any targets it is required to meet by law or regulation.
The metrics disclosed by an entity need to include those associated with
particular business models, activities or other common features that
characterise participation in an industry. [IFRS S1.48].
4.5.1 Metrics required by an ISSB standard
For metrics that apply to climate-related risks and opportunities, IFRS S1
requires an entity to apply the requirements of IFRS S2 (see further
discussion in section 4.5 of Part B – Introduction to IFRS S2). However,
for metrics and targets that apply to sustainability-related risks and
opportunities other than climate, the ISSB is yet to issue other topic-based
ISSB standards that may otherwise specifically apply to that sustainability-
related risk or opportunity. Accordingly, in the absence of an ISSB standard
that specifically applies to a sustainability-related risk or opportunity, IFRS S1
requires an entity to apply the sources of guidance requirements to identify
applicable metrics. An entity is also required to identify the source and the
metric when the metric is taken from a source other than an ISSB standard.
[IFRS S1.47, IFRS S1.49]. For further discussion on sources of guidance, see
section 5.1.2 below.
4.5.2 Metrics developed by the entity
For metrics developed by an entity, IFRS S1 requires an entity to disclose the
following information: [IFRS S1.50].
Figure 4-9: Disclosures for metrics developed by an entity
Theme Disclosure required
Definition How the metric is defined, including:
• Whether the metric is derived by adjusting a metric
taken from a source other than the ISSB standards
• If so, which source and how the metric disclosed by
the entity differs from the metric specified in that
source
Nature Whether the metric is an absolute measure, a measure
expressed in relation to another metric or a qualitative
measure. The ISSB gives an example of a qualitative
measure as indicating status by using the red, amber,
green ‘traffic light’ colours
Validation Whether the metric is validated by a third party and, if
so, which party
Metrics disclosed by
an entity need to include
those associated with
particular business
models, activities or
other common features
that characterise
participation in
an industry.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-58-320.jpg)
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Calculation The method used to calculate the metric and the inputs
to the calculation, including:
• the limitations of the method used
• the significant assumptions made
4.5.3 Targets
An entity’s targets will include any targets it has set to monitor progress
towards achieving its strategic goals as well as any targets it is required to
meet by law or regulation. [IFRS S1.51].
For each target, IFRS S1 requires an entity to disclose: [IFRS S1.51].
• The metric used to set the target and to monitor progress towards
reaching the target
• The specific quantitative or qualitative target the entity has set or is
required to meet
• The period over which the target applies
• The base period from which progress is measured
• Any milestones and interim targets
• Performance against each target and an analysis of trends or changes
in the entity’s performance
• Any revisions to the target and an explanation for those revisions
An entity is required to consistently define and calculate metrics for each
reporting period, including those metrics used to set the entity’s targets and
monitor progress towards reaching them. In the event a metric is redefined
or replaced in a reporting period, an entity is required to: [IFRS S1.52,
IFRS S1.B52].
• Disclose a revised comparative amount, unless it is impracticable to do
so
• Explain the changes to the metric
• Explain the reasons for those changes, including why the metric that
has been redefined or replaced provides more useful information
The metrics and targets disclosed by entity have to be labelled and defined
using names and descriptions that are meaningful, clear and precise.
[IFRS S1.53].
5 General requirements
5.1 Sources of guidance
As discussed in sections 1.2 and 3.2.2 above, IFRS S1 requires an entity to
identify sustainability-related risks and opportunities that could reasonably
be expected to affect the entity’s prospects, as well as material information
that apply to those risks and opportunities. Both identification processes are
informed by the sources of guidance included in IFRS S1.
In these identification processes, an entity is required to first apply the ISSB
standards that specifically apply to that sustainability-related risk or
opportunity. [IFRS S1.54, IFRS S1.56]. IFRS S1 also includes other sources of
guidance which are intended to give direction to entities, especially in
situations where there are no directly applicable requirements in the ISSB
standards. Such guidance effectively provides entities with a roadmap for
the appropriate use of other standards and frameworks to produce decision-
useful disclosures for primary users about sustainability-related risks and
opportunities. The sources of guidance included in IFRS S1 are those that, if
selected, would likely result in the provision of information that would enable
The use of other sources
of guidance is expected
during the period of
development of the
full range of the ISSB
standards, but will
continue to be relevant
in circumstances where
a particular event,
transaction or other
condition is not
specifically addressed
by any ISSB standard.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-59-320.jpg)
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entities to meet the objective of IFRS S1. The ISSB believes that this can
contribute to reducing diversity in practice and improving comparability
between information provided by peer entities. [IFRS S1.BC128].
Up to the date of issuance of this publication, the ISSB has so far issued
specific requirements for disclosing information about sustainability-related
risks and opportunities in relation to climate (i.e., IFRS S2). The use of other
sources of guidance is particularly useful in these early days of the ISSB’s
standard setting activities, until more ISSB standards, beyond climate,
are developed and issued. The ISSB believes that, as additional ISSB
standards will be developed, the reliance of entities on those other sources
of guidance will gradually decrease. This is because the range of the future
ISSB standards will assist in identifying sustainability-related risks and
opportunities, as well as in setting out disclosures designed to meet the
needs of primary users and, therefore, there will be fewer gaps to fill.
[IFRS S1.BC128].
Despite the importance of other sources of guidance during the period of
development of the full range of the ISSB standards as described above, the
ISSB expects that these other sources will continue to be useful to entities
to meet the objective of IFRS S1 even after that period. [IFRS S1.BC128].The
rationale behind the requirements of IFRS S1 in respect of other sources
of guidance is similar to that of IAS 8 applied under the IFRS accounting
standards. That is, there will be circumstances where a particular event,
transaction or other condition is not specifically addressed by any ISSB
standard. Also, the range of sustainability topics and the information needs
of primary users are continuously evolving and it is likely that the ISSB
standards may not provide specific guidance for all possible circumstances.
Moreover, the ISSB considered that this guidance can be particularly useful
for entities that have not previously reported sustainability-related financial
disclosures that focus on meeting the needs of primary users.
The ISSB decided to limit the list the sources of guidance that an entity is
required to, or may refer to and consider the applicability of, instead of
including a long list of sources (both in identifying sustainability-related risks
and opportunities and in identifying material information to provide about
those risks and opportunities) to make the requirements less burdensome
to apply. The ISSB decided to distinguish the sources of guidance between
those that an entity is required to refer to and consider their applicability
and sources that it is permitted, but not required, to refer to and consider
their applicability. The ISSB clarified that the use of “refer to and consider
the applicability of” a source of guidance is intended to require or permit
an entity to refer to that source of guidance and consider whether it is
applicable. If it is, then an entity is required or permitted to apply that source
of guidance. [IFRS S1.BC130, IFRS S1.BC131, IFRS S1.BC132].
5.1.1 Use of sources of guidance when identifying
sustainability-related risks and opportunities
As discussed in section 5.1 above, in identifying the sustainability-related
risks and opportunities that could reasonably be expected to affect an
entity’s prospects, an entity needs to apply the ISSB standards. That is, an
entity needs to consider the sustainability-related topics and the respective
sustainability-related risks and opportunities associated with those topics
included in the ISSB standards. [IFRS S1.54].
In addition to the ISSB standards, IFRS S1 provides a list of other sources
of guidance to assist in the judgement involved in this identification
process. More specifically, an entity is required to refer to and consider
the applicability of the Sustainability Accounting Standards Board standards
(the SASB standards). [IFRS S1.55(a)]. The ISSB considered that using the SASB
standards could reduce application costs for entities and produce useful and](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-60-320.jpg)
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comparable disclosures for primary users. This is because the SASB
standards were developed with a similar objective to IFRS S1 and their
overall design with respect to disclosure topics and associated metrics
generally follows the structure of the requirements in IFRS S1. In fact, the
industry-based guidance provided by the SASB standards is complementary
to the general requirements of IFRS S1, and includes disclosure topics that
are focused on sustainability-related risks and opportunities that arise in
an industry throughout the value chain. [IFRS S1.BC130, IFRS S1.BC134].
5.1.1.A Considerations when referring to the SASB standards to
identify sustainability-related risks and opportunities
Each SASB standard contains: [IFRS S1.IG12].
• Industry descriptions: Intended to support entities in identifying
applicable industry guidance by describing the business models, activities
and other common features that characterise participation in the
industry
• Disclosure topics: Describe specific sustainability-related risks or
opportunities associated with the activities conducted by entities within
a particular industry
• Metrics: Accompany disclosure topics and are designed to provide useful
information regarding an entity’s performance for a specific disclosure
topic (either individually or as part of a set) (see section 5.1.2 below)
• Technical protocols: Provide guidance on definitions, scope,
implementation and presentation of associated metrics (see section
5.1.2 below)
• Activity metrics: Quantify the scale of specific activities or operations
by an entity and are intended for use in conjunction with metrics
accompanying the disclosure topics to normalise data and facilitate
comparison (see section 5.1.2 below)
In considering the applicability of SASB standards, an entity first needs
to understand the activities that a particular SASB standard covers. The
industry descriptions summarise the business that each SASB standard
covers so that an entity understands the activities addressed and determines
if a SASB standard is likely to be applicable to its business model and
associated activities. The industry names and descriptions may not precisely
align with the industry an entity considers itself to be a part of because
industries can be classified and defined according to varying conventions.
In performing that assessment, an entity may determine that: [IFRS S1.IG14,
IFRS S1.IG15, IFRS S1.IG16].
• Its business model and activities closely align with the description of a
single SASB standard, in which case, the entity may need to refer only
to that particular applicable SASB standard
• Its business model and activities closely align with the description of
more than one SASB standard (e.g., when the entity constitutes a
hybrid or complex business model with activities spanning a wider
array of activities than those reflected in any single SASB standard) and,
therefore, needs to refer to and consider the applicability of those SASB
standards
• Its industry does not precisely align with the industry name of the SASB
standard to which it considers itself to be part of, or its activities may not
be specifically addressed by a SASB standard(s) for a particular industry.
However, other SASB standards are likely to address those activities or
similar activities.
The disclosure topics in the SASB standards are useful in helping entities
understand the range of sustainability-related risks and opportunities that
are within the scope of IFRS S1, which is particularly important in the](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-61-320.jpg)
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identification of the sustainability-related risks and opportunities.
Furthermore, the metrics that accompany disclosure topics in the SASB
standards are commonly tailored to the activities of entities within a
particular industry. [IFRS S1.BC134]. Having identified the SASB standard(s)
that closely align(s) with its activities, an entity needs to determine which
disclosure topic(s) within that SASB standard(s) align(s) with its activities
in order to identify the sustainability-related risks and opportunities based
on its business model and activities. [IFRS S1.IG17].
Consider the following Illustration, based on an example provided in the
Implementation Guidance to IFRS S1, about using disclosure topics of the
SASB standards to enable entities to consistently identify sustainability-
related risks and opportunities based on their business model and activities:
[IFRS S1.IG18, IFRS S1.IG19].
Illustration 5–1: Identifying sustainability-related risks and
opportunities by referring to and considering the
applicability of SASB standards
Entity B conducts meat, poultry and dairy operations and, therefore, refers to
and considers the applicability of the Meat, Poultry & Dairy SASB standard.
Entity B concludes that the disclosure topics in that SASB standard that are
applicable in its circumstances include disclosure topics such as the food
safety and the workforce health & safety. Effectively, Entity B’s process of
identification of sustainability-related risks and opportunities is informed by
the using the disclosure topics in this SASB standard.
In applying those disclosure topics, Entity B explains that a failure to maintain
the quality and safety of its product may result in costly recalls, harm the
reputation of its brand, lead to fines, reduce its revenues and increase
regulatory scrutiny, including the imposition of trade restrictions.
Moreover, Entity B uses the disclosure topics to meet the requirements of
IFRS S1 about how it manages the identified risks. In particular, Entity B
provides information about its robust workforce safety practices to avoid
reputational impairment, costly turnover, low worker morale and productivity,
risks associated with potential liability for injuries, associated healthcare and
workers’ compensation costs.
The approach described in Illustration 5-1 can be repeated for each of the
applicable disclosure topics of the entity. However, the disclosure topics of
the SASB standards are meant to inform the identification of sustainability-
related risks and opportunities of a typical entity within a given industry,
rather than every entity within a given industry. That is, SASB standards
may include disclosure topics that would not result in useful information
for primary users for every entity within a given industry. For example, an
entity operating in a particular industry may not engage in activities that
are covered by a disclosure topic of that industry in the SASB standards.
Therefore, information resulting from that disclosure topic would not be
useful to its primary users. Also, the disclosure topics in SASB standards are
not exhaustive and, as such, they are not meant to include every disclosure
topic that would result in useful information and be applicable to all entities
in a given industry. [IFRS S1.IG13, IFRS S1.IG20]. Therefore, when an entity
considers the applicability of the disclosure topics of SASB standards, it may,
for the reasons explained above, conclude that those disclosure topics are
not sufficient to inform the identification of all sustainability-related risks
and opportunities that could reasonably be expected to affect its prospects.
The following examples from the Implementation Guidance to IFRS S1
illustrate the identification of sustainability-related risks and opportunities
by referring to and considering the applicability of the SASB standards:
[IFRS S1.IE Example 1, IFRS S1.IE3, IFRS S1.IE4, IFRS S1.IE Example 2, IFRS S1.IE9, IFRS
S1.IE10, IFRS S1.IE11]](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-62-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 63
and long term. This reputational risk could affect the performance of its
larger businesses, including its ability to attract and retain talent, over a
medium- and long-term time horizon, which could be reasonably expected
to affect its medium- and long-term cash flows, access to finance and
cost of capital. Thus, Entity A considers these topics in identifying
sustainability-related risks and opportunities that could reasonably be
expected to affect its prospects.
5.1.1.B Considerations when referring to other sources of
guidance to identify sustainability-related risks and
opportunities
The entity may also need to consider additional sources of guidance specified
in IFRS S1 to identify its sustainability-related risks or opportunities.
[IFRS S1.IG13, IFRS S1.IG20]. In particular, an entity may refer to and consider the
applicability of the CDSB Framework Application Guidance for Water-related
Disclosures and the CDSB Framework Application Guidance for Biodiversity-
related Disclosures (collectively referred to as ‘CDSB Framework Application
Guidance’). In addition, an entity is permitted to refer to and consider the
applicability of the most recent pronouncements of other standard-setting
bodies whose requirements are designed to meet the needs of primary users,
and to refer to the sustainability-related risks and opportunities identified by
entities that operate in the same industries or geographical regions.
[IFRS S1.55(b)].
For example, the CDSB Framework Application Guidance can support entities
in identifying biodiversity-related risks (e.g., reduction in soil fertility,
reduction in pollination for crop production, reduced availability of fish
stocks) or water-related opportunities (e.g., improved water efficiency,
development of new products and services, conservation and restoration
of ecosystems through engagement and collaboration with stakeholders).
However, that does not preclude an entity from having identified water- or
biodiversity-related risks and opportunities in accordance with the SASB
standards or other sources of guidance. [IFRS S1.IG26, IFRS S1.IG27].
Moreover, the CDSB Framework Application Guidance explains how water-
and biodiversity-related risks may be connected to other sustainability-
related risks and opportunities that could reasonably be expected to affect
an entity’s prospects (e.g., water-related risks such as more frequent flooding
are often inherently linked to climate-related risks). This information is
necessary for an entity in meeting the requirements of IFRS S1 about
connected information, as discussed in section 3.4 above).
The main reasons that the ISSB decided to permit and not require entities to
consider these sources were: a) to prevent entities from having to consider
an extensive list of open-ended sources of guidance that would lead to an
increased burden for entities; and b) to facilitate the transition to the ISSB
standards by enabling entities to use sources that they may already be
familiar with. The application of those sources of guidance is intended to
support the application of the ISSB standards and, therefore, an entity is still
required to comply with all the requirements in the ISSB standards to assert
compliance with them. [IFRS S1.BC135].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-64-320.jpg)
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5.1.2 Sources of guidance when identifying material
sustainability-related financial information
As discussed in section 5.1 above, in determining whether information
about sustainability-related risks and opportunities that could reasonably
be expected to affect an entity’s prospects is material, an entity needs to
apply the requirements of the ISSB standard that specifically applies to that
sustainability-related risk or opportunity. [IFRS S1.56]. For example, if an entity
identifies climate-related risks and opportunities that could reasonably be
expected to affect its prospects, the requirements in IFRS S2 (that are
discussed in Part B – Introduction to IFRS S2) are those that the entity
needs to apply since IFRS S2 is the ISSB standard that specifically applies
to climate-related risk and opportunities.
However, as mentioned in section 5.1 above, the ISSB has, thus far, only
issued specific requirements for disclosing information about sustainability-
related risks and opportunities in relation to climate (i.e., IFRS S2). Moreover,
the information needs of primary users is continuously evolving and
it is likely that the ISSB standards may not provide specific guidance for
all circumstances. Therefore, in the absence of an ISSB standard that
specifically applies to a sustainability-related risk or opportunity, an entity
needs to apply the requirements to sources of guidance specified in IFRS S1.
Those requirements emphasise the judgement that is expected to occur
when identifying information to ensure that the sustainability-related risks
and opportunities are presented fairly in an entity’s disclosures (see also
discussion on fair presentation in section 3.1.1 above). That is, while
developing disclosures in the absence of an ISSB standard, an entity is
required to identify information from sources of guidance that: [IFRS S1.57,
IFRS S1.C1].
• Is relevant to the decision-making needs of primary users
• Faithfully represents the entity’s risks and opportunities in relation
to the specific sustainability-related risk or opportunity
The list of sources of guidance included in IFRS S1 is intended to assist in
making this judgement by including metrics that may be relevant to a
particular sustainability-related risk or opportunity for a particular industry
or in specified circumstances.
5.1.2.A Considerations when referring to the SASB standards to
identify material information about sustainability-related
risks and opportunities
As discussed in section 5.1.2 above, in the absence of an ISSB standard
that specifically applies to a sustainability-related risk or opportunity, an
entity needs to apply judgement to identify information that is relevant and
faithfully represents that sustainability-related risk or opportunity. In making
this judgement, IFRS S1 requires an entity to refer to and consider the
applicability of the metrics associated with the disclosure topics included
in the SASB standards. [IFRS S1.58(a)]. As explained in section 5.1.1 above,
those metrics accompany the disclosure topics and are designed to, either
individually or as part of a set, provide useful information regarding an
entity’s performance for a specific disclosure topic. Each of these metrics is
supported by technical protocols that provide guidance on definitions, scope,
implementation and presentation. The technical protocols may also serve as
criteria against which the disclosed information can be verified (which is one
of the enhancing qualitative characteristics of the provided information as
discussed in section 3.1.1 above). In conjunction to those metrics, there are
activity metrics that quantify the scale of specific activities or operations
by an entity and are used to normalise data and facilitate comparison.
[IFRS S1.IG12, IFRS S1.IG23].
Judgement is expected
to occur in order
to ensure that fair
presentation of
sustainability-related
risks and opportunities
is achieved when
identifying information
by using other sources
of guidance.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-66-320.jpg)
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How we see it
IFRS S1 requires an entity to provide information that fairly presents
the sustainability-related risks and opportunities that could reasonably
be expected to affect an entity’s prospects (see section 3.1 above).
Therefore, when an entity needs to refer to and consider the applicability
of other sources of guidance to identify material information, it needs to
ensure that the disclosures developed are relevant to the decision-making
of primary users, and faithfully represent the entity’s sustainability-related
risks and opportunities. We believe that this is a fundamental threshold
that the selected sources of guidance need to meet in order to ensure the
appropriateness of material information included in sustainability-related
financial disclosures.
Consider the following Illustration, based on an example provided in the
Implementation Guidance to IFRS S1, which is a continuation of the example
provided in Illustration 5-1 in section 5.1.1 above. The example relates
to requirement in IFRS S1 to refer to and consider the applicability of the
metrics associated with the disclosure topics included in SASB standards:
[IFRS S1.IG18, IFRS S1.IG22, IFRS S1.IG23, IFRS S1.IG24].
Illustration 5–2: Identifying material information about
sustainability-related risks and opportunities by
referring to and considering the applicability of
SASB standards
Entity B conducts meat, poultry and dairy operations and therefore, refers
to and considers the applicability of the Meat, Poultry & Dairy SASB standard.
Entity B concludes that the disclosure topics in that SASB standard that are
applicable in its circumstances include disclosure topics such as the food safety
and the workforce health & safety. In identifying material information about
the sustainability-related risks and opportunities it has identified based on
those disclosure topics, Entity B refers to and consider the applicability of
the following metrics included in the Meat, Poultry & Dairy SASB Standard:
(a food safety:
(i) FB-MP-250a.1—Global Food Safety Initiative (GFSI) audit (1) non
conformance rate and (2) associated corrective action rate for (a)
major and (b) minor non-conformances;
(ii) FB-MP-250a.2—Percentage of supplier facilities certified to a Global
Food Safety Initiative (GFSI) food safety certification program;
(iii) FB-MP-250a.3—(1) Number of recalls issued and (2) total weight
of products recalled; and
(iv) FB-MP-250a.4—Discussion of markets that ban imports of the entity’s
products; and
(b) workforce health & safety:
(i) FB-MP-320a.1—(1) Total recordable incident rate (TRIR) and (2)
fatality rate; and
(ii) FB-MP-320a.2—Description of efforts to assess, monitor, and mitigate
acute and chronic respiratory health conditions.
In applying the accompanying technical protocols of the SASB standards,
Entity B discloses information related to workforce health and safety for all
of its workers, regardless of their location and type of employment (e.g., full-
time, part-time, direct, contract, executive, labour, salary, hourly or seasonal).
Entity B applies the accompanying technical protocols as a guide in
supplementing its metrics with appropriate context (e.g., a discussion
of notable recalls, including information related to the cause, amount,
remediation cost, nature (voluntary or involuntary), associated corrective
actions and other significant outcomes related to the recall, such as legal
proceedings or consumer illness).](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-67-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 67
The importance of providing industry-specific disclosures to primary users
is also explicit in the section of IFRS S1 that relates to the core content
of disclosures about metrics (see discussion in section 4.5 above), which
requires an entity to disclose industry-based metrics in relation to its
sustainability-related risks and opportunities (i.e., metrics associated
with particular business models, activities or other common features that
characterise participation in an industry). The associated metrics are likely
to be applicable in assessing the effects of sustainability-related risks and
opportunities on the entity’s cash flows, its access to finance and cost of
capital over the short, medium and long term. Entity-specific judgement is
needed for the metrics chosen in the information about sustainability-related
risks and opportunities to be material. [IFRS S1.BC125, IFRS S1.BC133].
The following examples are a continuation of the Illustrative Example 1 and
Example 2 included in the Implementation Guidance to IFRS S1 provided in
the respective extract in section 5.1.1 above and relate to the identification
of information about sustainability-related risks and opportunities that could
reasonably be expected to affect an entity’s prospects by referring to and
considering the applicability of the SASB standards: [IFRS S1.IE Example 1,
IFRS S1.IE Example 2, IFRS S1.IE5-9, IFRS S1.IE12-15].
Extract from IFRS S1
Example 1—An entity with a single line of business
Entity Y is a regional passenger airline company. In identifying
sustainability-related risks and opportunities that could reasonably be
expected to affect its prospects, Entity Y is required to apply IFRS
Sustainability Disclosure Standards in accordance with paragraph 54 of
IFRS S1. In addition to applying IFRS Sustainability Disclosure Standards,
Entity Y is required to refer to and consider the applicability of the
disclosure topics in the SASB Standards. Entity Y concludes that its
business model and activities most closely align with the Airlines SASB
Standard.
…
In disclosing information about its sustainability-related risks and
opportunities, Entity Y applies IFRS Sustainability Disclosure Standards
that specifically apply to its identified sustainability-related risks
and opportunities. For example, Entity Y applies IFRS S2 to disclose
information about its greenhouse gas emissions. In the absence of
an IFRS Sustainability Disclosure Standard that specifically applies to the
sustainability-related risks and opportunities which Entity Y has identified,
Entity Y refers to and considers the applicability of the metrics associated
with the applicable disclosure topics in the Airlines SASB Standard. Entity Y
concludes that applying these metrics will provide information that is
relevant to the decision-making of users of general purpose financial
reports and faithfully represents the sustainability-related risks and
opportunities that it has identified. For example, the metrics associated
with the ‘Accident & Safety Management’ disclosure topic include:
(a) TR-AL-540a.1—Description of implementation and outcomes of
a Safety Management System;
(b) TR-AL-540a.2—Number of aviation accidents; and
(c) TR-AL-540a.3—Number of governmental enforcement actions of
aviation safety regulations.
In identifying information to provide, Entity Y considers the applicability
of the technical protocols accompanying the metrics. For example, while
disclosing a description of the implementation and outcomes of a Safety
Management System, Entity Y might describe any actions or measures it
has implemented to mitigate any safety risks and hazardous situations that
it has identified. These actions or measures include, for example, particular](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-68-320.jpg)
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significant effect on the information included in those disclosures in
accordance with paragraph 74 of IFRS S1.
The ISSB expects (as in the case of disclosure topics discussed in section
5.1.1 above) the associated metrics in the SASB standards to be typically
applicable for an entity with the given business model and associated
activities. Also, those metrics are not exhaustive. In situations where
an entity concludes that metrics specified in the SASB standards are not
applicable in its circumstances or are not sufficient to identify information
that would fairly present all sustainability-related risks and opportunities that
could reasonably be expected to affect its prospects (as discussed in 5.1.2
above), an entity needs to exercise judgement to refer to and consider other
sources of guidance in accordance with IFRS S1 in this identification process.
[IFRS S1.57, IFRS S1.C1, IFRS S1.IG13, IFRS S1.BC133].
5.1.2.B Considerations when referring to other sources of
guidance to identify material information about
sustainability-related risks and opportunities
To the extent that there is no conflict with the ISSB standards, an entity
is permitted to refer to and consider the applicability of: a) the CDSB
Framework Application Guidance; b) the most recent pronouncements of
other standard-setting bodies whose requirements are designed to meet the
needs of primary users; and c) the information, including metrics, disclosed
by entities that operate in the same industry(s) or geographical region(s).
[IFRS S1.58(b)].
For example, an entity refers to and considers the applicability of the CDSB
Framework Application Guidance in identifying information, including
metrics, about the water- or biodiversity-related risks or opportunities
that could reasonably be expected to affect an entity’s prospects. An entity
may consider the CDSB Framework Application Guidance in applying the core
content requirements that are discussed in section 4 above). The Illustrative
Example below is based on the Implementation Guidance to IFRS S1:
[IFRS S1.IG27].
Illustration 5–3: Identifying material information to disclose about
the sustainability-related risks and opportunities
by referring to and considering the applicability of
CDSB Framework Application Guidance
(a) Governance—in providing disclosures on governance relating to water-
related risks and opportunities, the CDSB Framework Application
Guidance on Water-related Disclosures suggests an entity may provide
information about how water policies, strategy and information are
delegated to management. In relation to collaboration with stakeholders
to achieve effective water management, the guidance also suggests an
entity may provide information about whether there are specific bodies,
individuals or mechanisms located in areas that are affected by significant
water loss whose function is to ensure compliance with water-related
regulation and engagement with stakeholders.
(b) Strategy—in providing disclosures on strategy relating to biodiversity-
related risks and opportunities, the CDSB Framework Application
Guidance on Biodiversity-related Disclosures suggests an entity may
provide, for example, information about the geographic-specificity of
biodiversity-related risks and opportunities and how those risks and
opportunities may vary over the short, medium and long term. The
guidance also suggests the type of quantitative and qualitative
information an entity may consider providing in accordance with
paragraphs 34–40 of IFRS S1, for example, the operational expenses,
cost savings and revenue associated with biodiversity management,
such as information about remediation costs or provisions in the case](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-70-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 70
of accidents such as polluting spills, costs of staff training and revenue
from biodiversity-efficient products and services.
(c) Metrics and targets—the CDSB Framework Application Guidance on
Biodiversity-related Disclosures provides examples of common
biodiversity metrics such as concentrations of key pollutants in
wastewater, the volume of timber and non-timber forest products
harvested and areas of forest, grassland or wetland converted due to
urbanisation. Due to changes in biodiversity over time, the guidance
suggests an entity provides information about the time frames it has
set for targets. The guidance also discusses targets tailored to specific
locations due to geographical variation in biodiversity priorities, as well
as differing legal and regulatory requirements.
Moreover, an entity may refer to and consider the applicability of the sources
specified in Appendix C to IFRS S1, namely the GRI standards and the
European Sustainability Reporting Standards (ESRS). [IFRS S1.58(c), IFRS S1.C2].
Unlike the SASB standards and the CDSB Framework Application Guidance,
the GRI standards and ESRS are intended to meet the information needs of
a different audience than primary users. Therefore, IFRS S1 states that, if
an entity refers to and considers the applicability of the GRI standards and
ESRS, this is only allowed to the extent that these sources assist the entity
in meeting the objective of IFRS S1 (see section 1.1 above) and do not
conflict with the ISSB standards. Allowing an entity to refer to and consider
the applicability of those sources in identifying material information about
sustainability-related risks or opportunities, but not in identifying the
sustainability-related risks or opportunities themselves, is intended to
ensure that any information disclosed by entities relates to a topic that
has been identified as being of interest to primary users. [IFRS S1.58(c),
IFRS S1.C2, IFRS S1.BC137, IFRS S1.BC138].
Although a subset of disclosures provided in accordance with GRI standards
or ESRS could produce information that is useful to primary users, an entity
still needs to consider the requirements in the ISSB standards and not
just repurpose a report prepared in accordance with those standards to
automatically consider it as meeting the requirements in the ISSB standards.
In addition, an entity needs to comply with the requirement of IFRS S1 not
to obscure material information required by the ISSB standards (discussed
in section 3.2.3.B above). Otherwise, if an entity applies these standards
without applying the requirements in the ISSB standards, it will not be able
to make an explicit and unreserved statement of compliance with the ISSB
standards (see discussion about compliance also in section 7 below).
[IFRS S1.58(c), IFRS S1.C3, IFRS S1.BC138, IFRS S1.BC139].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-71-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 72
5.1.3 Disclosure of information about sources of guidance
To enable primary users to understand how sustainability-related financial
disclosures have been prepared, an entity is required to identify and disclose:
• The sources of guidance (e.g., specific standards, pronouncements,
industry practice or other sources, including, if applicable, the disclosure
topics in the SASB standards) it applied in preparing its sustainability-
related financial disclosures. [IFRS S1.59(a)].
• The industry or industries specified in the ISSB standards, the SASB
standards or other sources of guidance relating to a particular industry
or industries that the entity has applied to the disclosures it has
provided, including in identifying applicable metrics. This is intended
to help primary users to understand the materiality judgements made
by a entity in applying the industry-based disclosure requirements (e.g.,
if an SASB standards were used to prepare disclosures). By disclosing
the industry as required above, primary users will be able to understand
if a metric applicable for an entity in that industry has been omitted.
[IFRS S1.59(b), IFRS S1.BC140].
• Information about the judgements an entity has made in the process of
preparing its sustainability-related financial disclosures that have the
most significant effect on the information included in those disclosures
(see section 6.1. below) that include the sources of guidance applied. As
part of this disclosure, it may be necessary for an entity to also disclose
that it considered other sources of guidance but did not apply them.
[IFRS S1.74, IFRS S1.75, IFRS S1.BC141].
5.2 Location of disclosures
The disclosures required by the ISSB standards need to be part of an entity’s
general purpose financial reports. As explained in section 1.1 above, general
purpose financial reports are those that provide financial information about a
reporting entity that is useful to primary users in making decisions relating to
providing resources to the entity. Therefore, requiring sustainability-related
financial disclosures to be part of an entity’s general purpose financial report,
is intended to ensure that the primary users of those reports are provided
with a comprehensive and connected package of reports. [IFRS S1.60,
IFRS S1.BC142].
5.2.1 Flexibility in location of disclosures
Apart from requiring the sustainability-related financial disclosures to be part
of an entity’s general purpose financial report, IFRS S1 does not prescribe
the exact location of those disclosures within general purpose financial
reports. There are various possible locations in which the sustainability-
related financial information can be disclosed, but this may be subject to
regulations or other requirements that apply in the jurisdiction in which an
entity operates. That is, there may be regulations or other requirements
that specify the exact location in which an entity is required to provide its
sustainability-related financial disclosures. For example, in some jurisdictions,
entities prepare management commentary (also known as the ‘management
report’, ‘management’s discussion and analysis’, ‘operating and financial
review’, ‘integrated report’ or ‘strategic report’) or a similar report. When
such a report forms part of an entity’s general purpose financial reports,
this can be considered a possible location for sustainability-related financial
disclosures. [IFRS S1.61, IFRS S1.BC143].
Moreover, the information required by the ISSB standards can be included in
the same location as the information disclosed to meet other requirements,
such as information required by regulators (as discussed in section 3.2.3.C
above). However, in such cases, the entity needs to ensure that the](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-73-320.jpg)
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sustainability-related financial disclosures are clearly identifiable and
not obscured by the additional information provided to meet those
other requirements. [IFRS S1.62]. See also section 3.2.3.B above for the
requirements for not obscuring material information.
5.2.2 Information included by cross-reference
There are cases where information required by the ISSB standards may
be available in another report published by the entity. For example, the
required information could be disclosed in the related financial statements.
As discussed in section 3.4.3 above, IFRS S1 specifies that when the ISSB
standards require the disclosure of common items of information, an entity
is required to avoid unnecessary duplication. In such cases, IFRS S1 permits
an entity to include cross-references in the reports to provide sustainability-
related financial disclosures. [IFRS S1.63, IFRS S1.B45].
Despite the benefit of cost-effectiveness when including information by cross-
reference, IFRS S1 includes specific conditions in which cross-referencing
is permitted. In particular, if material information is included in an entity’s
sustainability-related financial disclosures by cross-reference (cross-
referenced information), that information is required to be available
whenever an entity’s sustainability-related financial disclosures are available.
That is, the cross-referenced information needs to be available on the same
terms and at the same time as all other sustainability-related financial
disclosures. [IFRS S1.B45, IFRS S1.BC144].
When the cross-referenced information is not part of the same report as the
entity’s sustainability-related financial disclosures, an entity needs to explain
how primary users can access that information. In doing so, an entity needs
to clearly identify in its sustainability-related financial disclosures, the report
within which the cross-referenced information is located, and explain how
to access that report. Also, the cross-reference needs to indicate a precisely
specified part of that report. [IFRS S1.B47, IFRS S1.BC144].
The cross-referenced information, effectively, becomes part of the complete
set of sustainability-related financial disclosures and, therefore, it needs to
comply with the requirements of the ISSB standards (e.g., it needs to meet
the qualitative characteristics discussed in section 3.1.1 above). An entity
needs to ensure that this complete set of sustainability-related financial
disclosures is not made less understandable because of including information
by cross-reference. Moreover, the responsibility of the governance body(ies)
or individual(s) authorising general purpose financial reports is the same
for information included by cross-reference as for the information included
directly. [IFRS S1.B45, IFRS S1.B46].
5.3 Timing of reporting
5.3.1 Simultaneous reporting of sustainability-related
financial disclosures and financial statements
IFRS S1 requires an entity to provide its sustainability-related financial
disclosures at the same time as it issues its related financial statements. This
is also a natural consequence of the requirement in IFRS S1 that information
included in an entity’s sustainability-related financial disclosures by cross-
reference needs to be available on the same terms and at the same time as all
other sustainability-related financial disclosures. This simultaneous issuance
is intended to provide primary users with a coherent, holistic and connected
picture of an entity’s financial position and performance, and to provide users
with a comprehensive set of sustainability- related financial disclosures to
enable more informed decisions. [IFRS S1.64, IFRS S1.BC142, IFRS S1.BC145].
Sustainability-related
financial disclosures
need to be provided at
the same time as an
entity issues its related
financial statements.
IFRS S1 allows for cross-
references to avoid
unnecessary duplication
where disclosure of
common items of
information is required.
The cross-referenced
information becomes
part of the complete set
of sustainability-related
financial disclosures.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-74-320.jpg)
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5.3.2 Reporting period of sustainability-related financial
disclosures
An entity normally prepares sustainability-related financial disclosures for
a 12-month period (unless, for practical reasons, an entity prefers to report,
for example, a 52-week period which is not precluded by IFRS S1). Regardless
of this determination, an entity’s sustainability-related financial disclosures
need to cover the same reporting period as the related financial statements.
[IFRS S1.64, IFRS S1.65].
IFRS S1 requires an entity to provide specific disclosures when it changes
the end of its reporting period and provides sustainability-related financial
disclosures for a period longer or shorter than 12 months. In particular, it
needs to disclose the period covered by the sustainability-related financial
disclosures, the reason for using a longer or shorter period, and the fact that
the amounts disclosed in the sustainability-related financial disclosures are
not entirely comparable. [IFRS S1.64, IFRS S1.66].
Sometimes entities receive information after the end of the reporting period
about conditions that existed at the end of that reporting period. If such
information is received before the date on which the sustainability-related
financial disclosures are authorised for issue, the entity needs to update
disclosures that relate to those conditions in the light of the new information.
[IFRS S1.67].
Moreover, there may be transactions, other events and conditions that occur
after the end of the reporting period, but before the date on which the
sustainability-related financial disclosures are authorised for issue. In such
cases, an entity needs to disclose information about those transactions,
other events and conditions if non-disclosure of that information could
reasonably be expected to influence decisions that primary users make
on the basis of those reports. [IFRS S1.68].
5.3.3 Interim reporting
IFRS S1 does not mandate which entities are required to provide interim
sustainability-related financial disclosures, or the frequency, or timing of
such disclosures after the end of an interim period. However, entities may be
required to publish interim general purpose financial reports by governments,
securities regulators, stock exchanges and accountancy bodies, when their
debt or equity securities are publicly traded.
Unlike the IFRS accounting standards, the ISSB standards do not include a
standard that is specific to interim reporting. Instead, there are requirements
within IFRS S1 that relate to interim reporting. In particular, entities that
are required, or elect, to publish interim sustainability-related financial
disclosures may be required, or choose, to provide less information than
is provided in that of their annual sustainability-related financial disclosures.
This is due to timeliness and cost considerations, and to avoid repetition of
information previously reported. In general, interim sustainability-related
financial disclosures are intended to provide an update on the latest
complete set of the respective annual disclosures and therefore, focus on
new information, events and circumstances without duplicating information
previously reported. However, although more condensed sustainability-
related financial disclosures may be provided, IFRS S1 does not prohibit or
discourage an entity from publishing a complete set of sustainability-related
financial disclosures (according to the requirements in IFRS S1) as part of
its interim general purpose financial report. [IFRS S1.69, IFRS S1.B48].
5.4 Comparative information
IFRS S1 requires an entity to disclose comparative information in respect of
the preceding period for all amounts disclosed in the reporting period, unless](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-75-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 75
another ISSB standard permits or requires otherwise. Moreover, IFRS S1
requires an entity to disclose comparative information for narrative and
descriptive sustainability-related financial disclosures if that information
is useful to primary users to understand the reporting period’s disclosures.
[IFRS S1.70, IFRS S1.B49].
The IASB decided to not limit this requirement to metrics, but to expand it
to ‘all amounts’ as this would be more useful to primary users. Amounts
reported in sustainability-related financial disclosures may relate, e.g., to
the current and anticipated financial effects of sustainability-related risks
and opportunities or to metrics and targets. [IFRS S1.71, IFRS S1.BC147].
For specific disclosure requirements about comparative information when
changes occur in amounts that are estimates, see discussion in section 6.2.3
below.
6 Judgements, uncertainties and errors
6.1 Judgements
In preparing and presenting sustainability-related financial disclosures, an
entity will need to apply various judgements. IFRS S1 requires an entity
to disclose information about the judgements (apart from those involving
estimations of amounts discussed in section 6.2 below) an entity has made
in the process of preparing its sustainability-related financial disclosures. This
requirement specifically relates to judgments that have the most significant
effect on the information included in the sustainability-related financial
disclosures. Providing such information to primary users enables them to
understand how sustainability-related financial disclosures have been
prepared. [IFRS S1.74, IFRS S1.BC158].
IFRS S1 provides some examples where judgement is required by an entity in
preparing its sustainability-related financial disclosures. These are when an
entity is: [IFRS S1.75].
• Identifying sustainability-related risks and opportunities that could be
reasonably expected to affect the entity’s prospects (see section 1.2
above)
• Determining which sources of guidance to apply (see section 5 above)
• Identifying material information to include in the sustainability- related
financial disclosures (see section 3.2.2 above)
• Assessing whether an event or change in circumstances is significant and
requires reassessment of the scope of all affected sustainability-related
risks and opportunities throughout the entity’s value chain (see section
1.2.3 above)
This requirement builds on the principle of IAS 1 relating to judgements made
by an entity in applying its accounting policies that have the most significant
effects on the amounts recognised in an entity’s financial statements. The
ISSB decided to include this overarching requirement for judgements made
by an entity in the absence of a specifically applicable disclosure requirement
about judgements in other ISSB standards. Other ISSB standards may require
disclosure of judgements and estimates. In such cases, the requirements
in IFRS S1 would complement those more specific requirements. However,
other ISSB standards may also require disclosure of some of the information
that an entity would otherwise be required to disclose in accordance with this
overarching requirement in IFRS S1. [IFRS S1.76, IFRS S1.BC159, IFRS S1.BC160,
IFRS S1.BC162].
Comparative information
is required in respect of
the preceding period for
all amounts disclosed in
the reporting period,
unless another ISSB
standard permits or
requires otherwise.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-76-320.jpg)
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6.2 Measurement uncertainty
6.2.1 Estimated amounts give rise to measurement
uncertainty
Measurement uncertainty arises when amounts included in sustainability-
related financial disclosures cannot be measured directly and can only be
estimated. Such measurement uncertainty not only arises when estimating
metrics, but also in other cases, such as when providing information about
the effects of sustainability-related risks and opportunities on an entity’s
financial position, financial performance and cash flows for the reporting
period, and the anticipated financial effects over the short, medium and
long term (see further discussion in section 4.3.4 above). [IFRS S1.BC163].
The following example is based on the BC to IFRS S1: [IFRS S1.BC163].
Illustration 6–1: Example of measurement uncertainty
Entity N’s assets are increasingly at risk from climate-related forest fire
events. This risk is considered as part of the impairment analysis and
measurement of those assets. The frequency and severity of these fires
are highly uncertain. Therefore, primary users need information about this
uncertainty, including the fact that there is a significant risk of a material
adjustment within the next annual reporting period to the carrying amounts
of these assets.
6.2.2 IFRS S1 requirements for measurement uncertainties
IFRS S1 requires an entity to disclose information to enable primary users
to understand the most significant uncertainties affecting the amounts
reported in the sustainability-related financial disclosures. In doing so, an
entity identifies the amounts it has disclosed that are subject to a high level
of measurement uncertainty and, for each of those amounts, it needs to
disclose: (i) the sources of measurement uncertainty (e.g., the dependence
of the amount on the outcome of a future event, on a measurement
technique or on the availability and quality of data from the entity’s value
chain), and (ii) the assumptions, approximations and judgements the entity
has made in measuring the amount. [ IFRS S1.78, IFRS S1.82, IFRS S1.BC163].
These disclosure requirements relate to estimates used in preparing
sustainability-related financial disclosures and are the entity’s most difficult,
subjective or complex judgements. In some cases, estimates involve
assumptions about possible future events with uncertain outcomes. The
greater the number of variables and assumptions, the more subjective and
complex those judgements become. Accordingly, the uncertainty affecting
the amounts reported in the sustainability-related financial disclosures
increases. [IFRS S1.79, IFRS S1.80].
The use of reasonable estimates is essential in preparing sustainability-
related financial disclosures. However, estimates need to be accurately
described and explained to avoid undermining the usefulness of the
information that includes those estimates. IFRS S1 is explicit that even
a high level of measurement uncertainty would not necessarily prevent
such an estimate from providing useful information. [IFRS S1.79].
The type and extent of the information an entity may need to disclose will
vary according to the nature of the amount reported in the sustainability-
related financial disclosures, i.e., the sources of and the factors contributing
to the uncertainty and other circumstances.
IFRS S1 provides examples of the type of information an entity may need to
disclose: [IFRS S1.81].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-77-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 77
Extract from IFRS S1
81 The type and extent of the information an entity might need to
disclose vary according to the nature of the amount reported
in the sustainability-related financial disclosures—the sources
of and the factors contributing to the uncertainty and other
circumstances. Examples of the type of information an entity
might need to disclose are:
(a) the nature of the assumption or other source of
measurement uncertainty;
(b) the sensitivity of the disclosed amount to the methods,
assumptions and estimates underlying its calculation,
including the reasons for the sensitivity;
(c) the expected resolution of an uncertainty and the range of
reasonably possible outcomes for the disclosed amount;
and
(d) an explanation of changes made to past assumptions
concerning the disclosed amount, if the uncertainty
remains unresolved.
6.2.3 Revised comparative information for estimated
metrics
6.2.3.A New information for estimated metrics disclosed in
the preceding period
As explained in section 5.4.1 above, an entity is required to provide
comparative information in respect of the preceding period for all amounts
disclosed in the reporting period (unless another ISSB standard permits or
requires otherwise). Sometimes, the amount disclosed for a metric is an
estimate (as discussed in section 6.2.1 above), and there may be cases where
an entity identifies new information in relation to the estimated metric that
was disclosed in the preceding period. If this new information provides
evidence of circumstances that existed in that preceding period, IFRS S1
requires an entity to: [IFRS S1.B50]
• Disclose a revised comparative amount that reflects that new
information
• Disclose the difference between the amount disclosed in the preceding
period and the revised comparative amount
• Explain the reasons for revising the comparative amount
Although the feedback that the ISSB received for the principle of providing
comparative information was widely accepted, there were concerns over
its application specifically to comparative information of amounts that are
estimates. One of the main concerns related to the fact that the requirement
to revise comparative information differs from the approach to changes
in estimates in financial statements prepared under the IFRS accounting
standards. That is, according to the requirements in the IFRS accounting
standards, changes in estimates are recognised in the current and future
periods affected by the change and, therefore, the comparative information
is not changed. Instead, the change in estimate is reflected in the profit or
loss of the reporting period that the change occurs and in equity because
they are part of a double-entry model. However, in sustainability-related
financial disclosures, estimates cannot affect equity (e.g., a change in a
Scope 3 greenhouse gas emissions estimate affects only the estimate itself).
Therefore, revised comparatives that reflect updated estimates are useful
information for primary users to understand trends. Consequently, the ISSB
decided that an entity would provide more useful information if the entity
New information may be
identified in relation to
an estimated metric
disclosed in the
preceding period which
could provide evidence
of circumstances that
existed in that preceding
period. In such case, a
revised comparative
amount needs to be
disclosed.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-78-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 78
revised comparatives to reflect changes in estimates that relate to the
preceding period rather than changing reporting period information.
[IFRS S1.BC149, IFRS S1.BC150, IFRS S1.BC151].
IFRS S1 acknowledges that sometimes it may be impracticable to revise
a comparative amount to achieve comparability with the reporting period
(e.g., data may not have been collected in the preceding period in a way
that allows retrospective application of a new definition of a metric which
may make it impracticable to recreate the data). Therefore, a revised
comparative amount for the preceding period does not need to be disclosed
if it is impracticable to do so, but an entity needs to disclose that fact. [IFRS
S1.B51, IFRS S1.B54].
However, if a metric is forward-looking and relates to possible future
transactions, events and other conditions, the entity is permitted, but not
required, to revise a comparative amount for that forward-looking metric
(e.g., when disclosing expected expenditure on new equipment for a future
year and the price of that equipment subsequently increases). If the entity
chooses to provide comparative information for a forward-looking metric, it
needs to ensure that this does not involve the use of hindsight. [IFRS S1.B51].
How we see it
As more reliable information becomes available in the current reporting
period that supports sustainability-related metrics that are based on
estimates, it may be appropriate to revise previously reported estimates
to improve comparability of the information provided to primary users.
For example, in the case of assessing progress towards net zero targets,
improved or more granular greenhouse gas emissions data may become
available in future periods. Therefore, an entity needs to set up
appropriate processes and controls to collect the necessary data to
provide revised estimates retrospectively and disclose what has changed
compared to the preceding period.
6.2.3.B Revised comparatives for redefined, replaced and new
metrics
If an entity redefines, replaces or introduces a new metric in the reporting
period, it needs to disclose a revised comparative amount for that metric,
unless it is impracticable to do so. IFRS S1 includes a definition for the term
‘impracticable’ in Appendix A, clarifying that “applying a requirement is
impracticable when an entity cannot apply it after making every reasonable
effort to do so”. This definition is based on IAS 1 for consistent use with
the IFRS accounting standards. Accordingly, IFRS S1 also sets a high
threshold for how an entity determines whether it is impracticable to meet
the requirements and this threshold is higher than a cost-benefit threshold.
In addition, an entity needs to explain the changes in the metric and the
reasons for those changes, including why the redefined or replacement
metric provides more useful information than the previous metric. [IFRS
S1.B52, IFRS S1.B53, IFRS S1.BC152, IFRS S1.BC155].
6.3 Errors
IFRS S1 describes prior period errors as omissions from and misstatements
in the entity’s sustainability-related financial disclosures for one or more
prior periods. These errors can be the effects of mathematical mistakes,
mistakes in applying the definitions for metrics or targets, oversights or
misinterpretations of facts, or fraud. Such errors arise from a failure to
use, or the misuse of, reliable information that was available when the
sustainability-related financial disclosures for that period(s) were authorised
for issue. Also, errors arise when such reliable information is not used or](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-79-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 79
misused, while it could reasonably be expected to have been obtained and
considered in the preparation of those disclosures. [IFRS S1.84, IFRS S1.B56].
Potential reporting period errors are corrected before the sustainability-
related financial disclosures are authorised for issue, if these are discovered
in the reporting period to which they relate. However, material errors are
sometimes not discovered until a subsequent period. If an entity identifies
a material error in its prior period sustainability-related financial disclosures,
this needs to be corrected by restating the comparative amounts for the prior
period(s) disclosed, unless it is impracticable to do so. [IFRS S1.83, IFRS S1.86,
IFRS S1.B57].
Moreover, if a material error is identified in the sustainability-related financial
disclosures for its prior periods, an entity needs to disclose the nature of that
error, and the correction (to the extent practicable) for each prior period
disclosed. Also, if correction of that error is impracticable, an entity needs
to disclose the circumstances that led to the existence of that condition and
a description of how and from when the error has been corrected. When
it is impracticable to determine the effect of an error on all prior periods
presented, the comparative information is restated to correct the error
from the earliest date practicable. [IFRS S1.B58, IFRS S1.B59]
Corrections of errors are distinguished from changes in estimates. This is
because estimates are approximations that an entity may need to revise due
to additional information that becomes known (see also discussion in section
6.2 above), rather than omissions or misstatements. Therefore, IFRS S1
distinguishes the requirements for an entity that revises a comparative
amount (e.g., to update an estimate for a metric or redefine a metric), as
discussed in section 6.2.3 above, and the requirements for restating an
amount due to an error. [IFRS S1.85, IFRS S1.BC165].
7 Statement of compliance
An explicit and unreserved statement of compliance can be included only if
an entity’s sustainability-related financial disclosures comply with all the
requirements of the ISSB standards. Qualified statements of compliance with
the ISSB standards are not allowed. Including a statement of compliance is
important information to communicate to primary users about the entity
having applied all the requirements of the ISSB standards, rather than having
been selective in its approach to reporting sustainability-related financial
information. [IFRS S1.72, IFRS S1.BC156].
However, there are situations where IFRS S1 relieves an entity from
disclosing information that is specifically required by an ISSB standard,
without preventing that entity from asserting compliance with them. These
situations relate to where: [IFRS S1.73].
• Law or regulation may prohibit an entity from disclosing information that
is specifically required by an ISSB standard (see discussion on interaction
with law or regulation in section 3.2.3.C above)
• The information about a sustainability-related opportunity is
commercially sensitive (see discussion on commercially sensitive
information in section 3.2.4.B above)
To assert compliance with the ISSB standards, an entity does not necessarily
need to implement strategic goals. For example, an entity does not need
to follow a particular transition plan to a lower-carbon economy, but it is
required to disclose information about the targets it has set or is required to
set by law or regulation. That is, an entity that does not manage some of its
sustainability-related risks and opportunities, or that has not established its
own metrics and targets for them, could still assert compliance with the ISSB
standards by disclosing that fact, as this is often material for primary users
to know. Similarly, an entity may not have governance processes, controls or
An explicit and
unreserved statement
of compliance can
be included only if an
entity’s sustainability-
related financial
disclosures comply with
all the requirements
of the ISSB standards.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-80-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 80
procedures in place to monitor and manage specific sustainability-related
risks and opportunities, but that fact, in itself, is often material for primary
users to know through a disclosure. [IFRS S1.BC157].
8 Effective date
Several stakeholders stressed the fact that, due to the urgency of creating
a global baseline of sustainability-related financial disclosures, the effective
dates for IFRS S1 and IFRS S2 should not be more than 12 months after their
issuance. The ISSB decided that setting an effective date for annual reporting
periods beginning on or after 1 January 2024 is consistent with its current
pace in meeting primary users’ urgent need for sustainability-related and
climate-related financial disclosures. [IFRS S1.BC167, IFRS S1.BC171].
In particular, an entity needs to apply IFRS S1 for annual reporting periods
beginning on or after 1 January 2024. Earlier application is permitted,
however, if doing so, an entity needs to disclose that fact and apply IFRS S2
at the same time. [IFRS S1.E1]. The actual effective date for entities will depend
on when the ISSB standards become mandatory in the jurisdictions in which
they operate, unless those entities voluntarily apply the ISSB standards
before they become mandatory in their jurisdictions.
9 Transition reliefs to IFRS S1 requirements
How well prepared an entity is to apply the ISSB standards will depend
on various factors such as an entity’s current reporting approach for
sustainability-related risks and opportunities, its size and the jurisdiction in
which it operates, etc. Taking into consideration the level of preparedness,
the ISSB acknowledged that entities may need time to create or adjust
internal systems, processes and controls to prepare the disclosures required
by the ISSB standards. Therefore, the ISSB decided to introduce transition
reliefs. [IFRS S1.BC170].
IFRS S1 includes transition reliefs available in the first annual reporting
period in which an entity applies IFRS S1 that are discussed in section 9.1,
9.2 and 9.3 below. [IFRS S1.E3].
9.1 Transition relief for simultaneous reporting
The ISSB considered the feedback received from stakeholders expressing a
number of concerns about data availability and preparer readiness to meet
the requirement of simultaneous reporting of sustainability-related financial
disclosures and financial statements, especially in the first year of application
of the ISSB standards. For example, challenges due to the potential reporting
burden and higher costs, time-consuming collection and aggregation of data
due to underdeveloped systems, delayed calculation of metrics due to later
finalisation of financial statements.
In response to these concerns, the ISSB decided to provide transition relief
to give entities more time to prepare and align reporting of sustainability-
related financial disclosures and financial statements. The transition relief
is available in the first annual reporting period in which an entity applies
IFRS S1 and allows an entity to not report its sustainability-related financial
disclosures at the same time as its related financial statements. [IFRS S1.BC145,
IFRS S1.BC146, IFRS S1.BC172]. In particular, Appendix E states: [IFRS S1.E4].
Extract from IFRS S1
E4 In the first annual reporting period in which an entity applies
this Standard, the entity is permitted to report its sustainability-
related financial disclosures after it publishes its related financial
IFRS S1 includes
the transition reliefs
available in the first
annual reporting period
in which an entity applies
the ISSB standards.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-81-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 81
statements. In applying this transition relief, an entity shall report
its sustainability-related financial disclosures:
(a) at the same time as its next second-quarter or half-year
interim general purpose financial report, if the entity is
required to provide such an interim report;
(b) at the same time as its next second-quarter or half-year
interim general purpose financial report, but within nine
months of the end of the annual reporting period in
which the entity first applies this Standard, if the entity
voluntarily provides such an interim report; or
(c) within nine months of the end of the annual reporting
period in which the entity first applies this Standard, if the
entity is not required to and does not voluntarily provide
an interim general purpose financial report.
As indicated above, the relief permits the annual sustainability-related
financial disclosures to be provided with the following second-quarter or half-
year interim general purpose financial report. The ISSB decided to specify the
timing of delay to enable primary users to know when the information would
be provided. However, this relief is not suggesting that an entity is required
to provide quarterly or half-yearly reporting (see also discussion about
interim reporting in section 5.3.4 above). [IFRS S1.BC172, IFRS S1.BC173].
9.2 Transition relief for comparative information
Considering that entities may be able to apply the requirements in IFRS S1
sooner if comparative information is not required in the first annual reporting
period in which they apply IFRS S1, the ISSB decided to provide a relief from
the requirement to disclose comparative information. This relief allows
an entity to report on only that first annual reporting period without being
required to provide disclosures specified in IFRS S1 for any period before
the date of initial application. That is, an entity is not required to disclose
comparative information in the first annual reporting period in which it
applies IFRS S1. [IFRS S1.E3, IFRS S1.BC174].
9.3 ‘Climate-first’ transition relief
Limiting an entity’s disclosures to information that relates only to climate-
related risks in the first annual reporting period in which an entity applies
IFRS S1, is another relief that the ISSB decided to provide to entities.
Therefore, the entity would apply the requirements in IFRS S1 only to the
extent that they relate to the disclosure of information about climate-related
risks and opportunities. [IFRS S1.E5, IFRS S1.BC175].
In particular, if an entity applies this relief: [IFRS S1.E5, IFRS S1.E6, IFRS S1.BC176].
• It applies IFRS S2 (that is discussed in Part B – Introduction to IFRS S2) to
identify climate-related risks and opportunities and discloses information
about them.
• It is required to disclose that fact.
• The relief from providing comparative information would be extended.
Specifically, in the first annual reporting period in which it applies
IFRS S1, the entity is not required to disclose comparative information
about its climate-related risks and opportunities. Also, in the second
annual reporting period in which the entity applies IFRS S1, the entity is
not required to disclose comparative information about its sustainability-
related risks and opportunities, other than its climate-related risks and
opportunities. Therefore, comparative information in relation to climate-
related risks and opportunities is required in the second annual reporting
period.
In taking advantage of the
‘climate-first’ transition
relief, an entity would
apply the requirements
in IFRS S1 only to the
extent that they relate
to the disclosure of
information about
climate-related risks
and opportunities.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-82-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 82
Some entities that decide to take advantage of this relief in the first year
of application of IFRS S1, may also wish to disclose information about
sustainability-related risks and opportunities, beyond those relating to
climate. The ISSB clarified that this relief is not intended to restrict an
entity from providing incremental information to primary users. Instead,
the relief is still available to entities that want to also provide information
for sustainability-related risks and opportunities, in addition to those relating
to climate, to the extent that this additional information does not reflect
information about all sustainability-related risks and opportunities that could
be reasonably expected to affect the entity’s prospects. Therefore, the ISSB
emphasised the importance of ensuring in those cases where the relief is
used, that the information about climate-related risks and opportunities
provided in accordance with IFRS S1 and IFRS S2 is not obscured by the
incremental information. [IFRS S1.BC177].
How we see it
Entities may already have been disclosing information about sustainability-
related topics, other than climate, in their general purpose financial
reports. In the first annual reporting period that these entities apply
the ISSB standards, they may continue providing information in their
sustainability-related financial disclosures about the other sustainability-
related topics for consistency and comparability purposes with their prior
year reporting. However, they need to be explicit that the ‘climate-first’
transition relief is applied and that the additional information is not
provided for the purposes of complying with the full requirements of
the ISSB standards had the ‘climate-first’ relief not been applied. They
also need to ensure that material information provided in accordance
with the ISSB standards is not obscured by this additional information.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-83-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 84
1 Introduction to IFRS S2
1.1 The objective and scope of IFRS S2
IFRS S2 requires an entity “to disclose information about its climate-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.” [IFRS S2.1]. To meet this objective, an entity is required to disclose
information about the climate-related risks and opportunities that could
reasonably be expected to affect the entity’s prospects. Consistent with
the requirements in IFRS S1, risks and opportunities that could reasonably
be expected to affect the entity’s prospects are those that could reasonably
be expected to affect its cash flows, its access to finance or cost of capital
over the short, medium, and long term. [IFRS S2.2].
Those climate-related risks and opportunities that are not reasonably
expected to affect an entity’s prospects are outside the scope of IFRS S2.
[IFRS S2.4].
An entity’s climate-related risks and opportunities are a subset of its
sustainability-related risks and opportunities that are required to be disclosed
in accordance with IFRS S1. For further information on the identification of
sustainability-related risks and opportunities, refer to section 1.2 of Part A -
Introduction to IFRS S1.
In developing IFRS S2, the ISSB acknowledged that climate change is likely
to present risks for nearly all entities and economic sectors. The ISSB also
acknowledged that climate change opportunities might be available to
entities, such as opportunities arising from an entity’s actions to mitigate
climate change or adapt to the effects of climate change. [IFRS S2.BC2].
An entity’s exposure to climate-related risks and opportunities might be
direct (i.e., the impact is on the entity’s own resources) or indirect through
its value chain and relationships with, for example, suppliers and customers.
[IFRS S2.BC2]. The concept of a ‘value chain’ is explained in section 3.3.2 of
Part A - Introduction to IFRS S1. Furthermore, the extent of an entity’s
exposure to climate-related risks and opportunities will depend on factors
such as the sector, industry, location (geographical and geopolitical) in which
the entity operates and other specific circumstances including its business
model. The nature and extent of an entity’s exposure to climate-related risks
and opportunities will affect how users of general purpose financial reports
assess an entity’s overall risk profile and, therefore, influence users’
decisions about whether they will provide resources to the entity.
When an entity prepares the climate-related financial disclosures required
by IFRS S2 (such as the cross-industry metric disclosures about the amount
and percentage of assets or business activities vulnerable to climate-related
transition risks and physical risks – see section 4.5.1), the entity needs to
consider the linkages between the amounts disclosed in its climate-related
financial disclosures and the amounts recognised and disclosed in its
corresponding financial statements. Connections between these disclosures
may be able to be explained by cross referring to information already
reflected in the entity’s financial statements. [IFRS S2.BC133]. To assist an
entity in assessing and disclosing the extent to which climate change affects
its financial statements prepared in accordance with IFRS accounting
standards, refer to Applying IFRS: Accounting for Climate Change (Updated
August 2023).12
12
Applying IFRS Accounting for Climate Change August 2023](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-85-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 85
2 Climate-related risks and opportunities
IFRS S2 applies to the climate-related risks to which an entity is exposed and
the climate-related opportunities that are available to the entity. [IFRS S2.3].
Consistent with the TCFD Recommendations, climate-related risks to which
IFRS S2 applies are either: [IFRS S2.BC18].
• Physical risks from climate change (‘climate-related physical risks’)
Or
• Transition risks associated with the transition to a lower-carbon economy
(‘climate-related transition risks’)
IFRS S2 defines the ‘climate-related physical risks’ and ‘climate-related
transition risks’, as follows: [IFRS S2 Appendix A].
Extract from IFRS S2
Appendix A
Defined terms
climate-related
physical risks
Risks resulting from climate change that can be
event-driven (acute physical risk) or from longer-
term shifts in climatic patterns (chronic physical
risk). Acute physical risks arise from weather-
related events such as storms, floods, drought
or heatwaves, which are increasing in severity
and frequency. Chronic physical risks arise from
longer-term shifts in climatic patterns including
changes in precipitation and temperature which
could lead to sea level rise, reduced water
availability, biodiversity loss and changes in soil
productivity.
These risks could carry financial implications
for an entity, such as costs resulting from
direct damage to assets or indirect effects of
supply-chain disruption. The entity's financial
performance could also be affected by changes
in water availability, sourcing and quality; and
extreme temperature changes affecting the
entity's premises, operations, supply chains,
transportation needs and employee health and
safety.
climate-related
transition risks
Risks that arise from efforts to transition to
a lower-carbon economy. Transition risks
include policy, legal, technological, market
and reputational risks. These risks could carry
financial implications for an entity, such as
increased operating costs or asset impairment
due to new or amended climate-related
regulations. The entity's financial performance
could also be affected by shifting consumer
demands and the development and deployment
of new technology.
IFRS S2 does not define the scope of the term ‘climate-related’. The ISSB
explained that this is because climate change impacts are wide ranging and
interrelated and their effects on an entity will vary depending on the region,
market and industry in which an entity operates, which means it is not
possible to precisely define the full scope of climate-related risks and
opportunities that might affect an entity. [IFRS S2.BC24].
IFRS S2 does not define
the scope of the term
‘climate-related’ in
the context of climate-
related risks and
opportunities.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-86-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 86
Extract from the BC to IFRS S2
BC25 Although the requirements in IFRS S2 do not explicitly reference
some climate-related matters such as reduced access to fresh
water, biodiversity loss, deforestation and climate-related social
impacts, disclosures about these and other such matters are
required if an entity determines that the information is material
for users of general purpose financial reports. For example,
if a beverage manufacturer determines it is exposed to short-,
medium- or long-term effects of climate change on water
availability—especially in water-stressed regions—the entity might
determine that information about the implications of reduced
water availability for its strategy, operations, capital planning
and asset values is material. Therefore, this information would
be required by IFRS S2.
An entity may seek to manage the physical and transition risks related to
climate change by developing mitigation and adaptation responses:
[IFRS S2.BC21].
• Mitigation efforts relate primarily to an entity’s responses to transition
risks (e.g., adopting new technologies or changing business models to
reduce greenhouse gas (GHG) emissions).
• Adaptation responses primarily involve an entity preparing for both
the current and anticipated effects of physical risks (e.g., infrastructure
investments to improve resilience to physical risks).
The ISSB explained that an entity’s climate-related risks and opportunities
will not necessarily be mutually exclusive. This is because, for example, a
customer preference for low-carbon products might simultaneously represent
both a risk to the demand for an entity’s existing product line and an
opportunity for the entity to produce an alternative low-carbon product or
gain market share. [IFRS S2.BC23].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-87-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 87
3 Identifying climate-related risks and
opportunities
Similar to sustainability-related risks and opportunities (as discussed in
section 1.2 of Part A - Introduction to IFRS S1), climate-related risks and
opportunities arise from an entity’s impacts and dependencies on natural
resources and its relationships with stakeholders and society, the economy
and its interaction with the natural environment. [IFRS S2.BC26].
The importance of understanding the role of impacts and dependencies in
the identification of climate-related risks and opportunities is explained
further in Figure 3-1 below.
Figure 3-1: Impacts and dependencies
Topic Explanation Example
Dependencies A climate-related risk
may arise from
changes in the
availability, quality
or cost-stability of
essential inputs that
an entity depends on.
A sports drink company
depends on the availability and
quality of water to manufacture
its products. Supplies of fresh
water become limited during
times of drought, which
could result in water supply
disruptions and higher water
costs. This could affect
production volumes and
costs and, therefore, affect
the amount of future cash flows
that the sports drink company
can expect to generate from
its operations. [IFRS S2.BC27].
Impacts A climate-related risk
or opportunity may
arise if an entity’s
impacts on climate
change affect the
resources and
relationships on which
the entity depends.
A manufacturing company
expects a carbon tax to be
introduced in a key jurisdiction
in which it has emissions-
intensive operations. The
introduction of a carbon tax
will increase the company’s
costs of production which it will
pass onto consumers through
higher product prices. Higher
prices will affect the demand
of the company’s products and
thus the amount of its future
cash flows and the useful life
of its manufacturing plant.
[IFRS S2.BC28].
The TCFD provided categories for climate-related risks and opportunities,
which may help an entity to identify its climate-related risks and opportunities
under IFRS S2. A list of these categories is provided in Figure 3-2 below.
Furthermore, the ISSB noted that the Industry-based Guidance on
Implementing IFRS S2, which is based on the SASB standards but is not
intended to be comprehensive or interpreted as such, provides some
parameters for identifying climate-related risks and opportunities. This is
discussed further in section 4.3.1.B below. [IFRS S2.BC24].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-88-320.jpg)
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Figure 3-2: Categories of climate-related risks and opportunities
Physical risks Transition risks Opportunities
• Acute risk
• Chronic risk
• Policy and legal
risks
• Market risk
• Technology risk
• Reputation risk
• Resource
efficiency
• Energy source
• Products and
services
• Markets
• Resilience
4 Core content
4.1 Overview
The core content disclosures in IFRS S2 are structured around four thematic
areas that address how an entity oversees and manages its climate-related
risks and opportunities. The core content areas require an entity to disclose
information about its governance, strategy, risk management, and metrics
and targets. This disclosure is intended to provide users of general purpose
financial reports with a complete set of information that enables them to
understand the entity’s exposure to and management of its climate-related
risks and opportunities. [IFRS S2.BC30].
These disclosure requirements in IFRS S2 for climate-related risks and
opportunities are structured around the same core content disclosure
requirements in IFRS S1 for general sustainability-related risks and
opportunities. The purpose of the core content disclosures and guidance
on avoiding duplication in disclosures are discussed in section 4.1 of Part A -
Introduction to IFRS S1.
4.1.1 Comparison with TCFD Recommendations
In July 2023, the ISSB published Comparison IFRS S2 Climate-related
Disclosures with the TCFD Recommendations, which notes that the
requirements of IFRS S2 integrate and are consistent with the 11
recommended disclosures of the TCFD.13
In analysing the core content
requirements in IFRS S2 and the associated core recommendations,
recommended disclosures and guidance in the TCFD, the ISSB categorised
the differences between IFRS S2 and TCFD Recommendations into three
types, which are summarised in Figure 4-1 below:
Figure 4-1: Comparing TCFD Recommendations and IFRS S2
Type of difference What IFRS S2 requires
Different wording In some cases, IFRS S2 uses different wording
to capture the same information as the TCFD
Recommendations. In those cases, the
requirements in IFRS S2 are considered to
be broadly consistent with the TCFD
Recommendations.
More detailed
information
In some cases, IFRS S2 requires the disclosure of
more detailed information, noting that the IFRS S2
disclosure requirements remain in line with the
corresponding TCFD Recommendations.
13
Further guidance provided by the ISSB on the TCFD can be found at IFRS - Making the
transition from TCFD to ISSB](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-89-320.jpg)
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Different guidance In some cases, IFRS S2 requirements differ from
the TCFD Recommendations, but mainly as a result
of providing additional requirements and guidance.
However, there is no intended difference between
IFRS S2 and the TCFD’s overall recommendations.
The specific differences between the IFRS S2 requirements and the TCFD
Recommendations for each of the core content areas are identified and
explained in the sections below.
How we see it
Entities that are currently preparing climate-related disclosures in
accordance with the TCFD Recommendations cannot assume that their
existing disclosures will be sufficient to comply with ISSB standards. As
noted in the table above, IFRS S2 includes additional requirements and
guidance. IFRS S1 also specifies additional disclosure considerations. All
of these requirements need to be met in order to provide a complete set
of sustainability-related financial disclosures in accordance with ISSB
standards.
4.2 Governance
The governance disclosure requirements in IFRS S2 for climate-related risks
and opportunities correspond with the governance disclosure requirements
for sustainability-related risks and opportunities in IFRS S1. As such, the
commentary in Section 4.2 of Part A - Introduction to IFRS S1 on governance
disclosure requirements in IFRS S1 is also applicable to the preparation of
governance disclosures relating to climate-related risks and opportunities.
An entity is not required to provide separate governance disclosures for
each sustainability-related risk and opportunity if oversight of the entity’s
sustainability-related risks and opportunities is managed on an integrated
basis. In such cases, an entity needs to avoid unnecessary duplication by
providing an integrated governance disclosure that meets the requirements
set out in both IFRS S2 and IFRS S1. [IFRS S2.7].
TCFD comparison
The ISSB indicates that IFRS S2 disclosure requirements for an entity’s
governance on climate-related risks and opportunities is broadly consistent
with the TCFD recommended disclosures.
However, in its TCFD comparison document, the ISSB noted that IFRS S2
requires disclosure of more detailed information about the description
of the board’s oversight of climate-related risks and opportunities. For
example, how responsibilities for climate-related risks and opportunities
are reflected in the terms of reference, mandates, role descriptions
and other related policies applicable to the governance body(ies) or
individual(s) who have oversight of those risks and opportunities.
4.3 Strategy
The strategy requirements in IFRS S2 for climate-related risks and
opportunities correspond with the strategy disclosure requirements for
sustainability-related risks and opportunities in IFRS S1, except that IFRS S2
has additional requirements and provides additional guidance in relation to:](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-90-320.jpg)
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• Identifying and classifying climate-related risks and opportunities
that could reasonably be expected to affect the entity’s prospects
• The effects of an entity’s climate-related risks and opportunities on its
strategy and decision-making, including information about its climate-
related transition plan (if it exists)
• The resilience of the entity’s strategy and business model to climate-
related changes, developments and uncertainties
The following sections discuss each of these additional requirements and
guidance.
For the remainder of the strategy disclosure requirements in IFRS S2, the
commentary in section 4.3 of Part A - Introduction to IFRS S1 on strategy
disclosure requirements in IFRS S1 is also applicable to the preparation of
strategy disclosures relating to climate-related risks and opportunities.
4.3.1 Disclosures about climate-related risks and
opportunities
4.3.1.A Classifying climate-related risks
IFRS S2 requires an entity to classify each climate-related risk identified
as either a climate-related physical risk or climate-related transition risk.
[IFRS S2.10(b), IFRS S2.B5]. The differences between physical risks and transition
risks are discussed in sections 2 and 3 above.
4.3.1.B Using industry-based guidance to identify climate-
related risks and opportunities
In identifying the climate-related risks and opportunities that could
reasonably be expected to affect an entity’s prospects, IFRS S2 requires
an entity to refer to and consider the applicability of the industry-based
disclosure topics defined in the Industry-based Guidance on Implementing
IFRS S2, which was issued by the ISSB at the same time as IFRS S1 and
IFRS S2. [IFRS S2.12].
In the Exposure Draft of IFRS S2, the ISSB proposed industry-based
requirements that were derived from SASB standards (with enhancements
made to the international applicability of some requirements) to enable
comparable disclosures among industry peer entities. Feedback on the
proposed industry-based requirements was mixed, in part because of
concerns about the ability and relevance of applying some of the proposals
internationally given the SASB standards were primarily developed for the US
market. In response to that feedback, the ISSB decided to retain the industry-
based guidance but issued it as non-authoritative guidance that “suggests
possible ways to apply some of the disclosure requirements in IFRS S2 but
does not create additional requirements”.14
The disclosure topics identified and defined in the industry-based guidance
list climate-related risks and opportunities that are typically associated
with particular business models, activities or other common features that
characterise participation in an industry. For example, in the real estate
industry, the industry-based guidance identifies energy management, water
management, management of tenant sustainability impacts and climate
change adaption as disclosure topics. [IFRS S2.BC135, IFRS S2.BC136].
The industry-based guidance also suggests possible ways to measure and
disclose information about climate-related risks and opportunities. This is
discussed further in relation to metrics and targets in section 4.5 below.
14
Industry-based Guidance on implementing Climate-related Disclosures, IFRS Foundation,
2023, page 4
IFRS S2 requires an
entity to classify each
climate-related risk
identified as either a
climate-related physical
risk or climate-related
transition risk.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-91-320.jpg)
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IFRS S2 requires an entity to “refer to and consider the applicability of” the
disclosure topics defined in the Industry-based Guidance on Implementing
IFRS S2. [IFRS S2.12]. The same requirements are included in IFRS S1 in
relation to the sources of guidance. As discussed in section 5.1 of Part A -
Introduction to IFRS S1, this requirement means that, after referring to the
industry-based guidance, an entity is not required to apply that guidance if
the entity considers that it is not applicable.
The ISSB included this requirement to refer to the industry-based guidance
because it considers the guidance to be a helpful starting point for identifying
climate-related risks and opportunities about which an entity might need
to prepare disclosures. The ISSB also noted that the disclosure topics and
associated metrics set out in the guidance are not intended to be exhaustive.
Consequently, an entity will also need to disclose climate-related financial
information about topics that are not included in the industry-based guidance
if those topics relate to climate-related risks and opportunities that could
reasonably be expected to affect the entity’s prospects. [IFRS S2.BC137].
4.3.1.C Using reasonable and supportable information to identify
climate-related risks and opportunities
In identifying the climate-related risks and opportunities that could
reasonably be expected to affect an entity’s prospects, IFRS S2 requires
an entity to use all reasonable and supportable information that is available
to the entity at the reporting date without undue cost or effort. This
information includes information about past events, current conditions
and forecasts of future conditions. [IFRS S2.11].
The requirement that an entity “use all reasonable and supportable
information that is available to the entity at the reporting date without undue
cost or effort” is a concept that is employed in both IFRS S1 and IFRS S2 so
that the ISSB could clarify its expectations about the level of effort needed
to comply with a specific disclosure requirement.
More information about the application of the “use all reasonable and
supportable information that is available to the entity at the reporting date
without undue cost or effort” concept is provided in section 1.2.2.B of
Part A - Introduction to IFRS S1.
4.3.2 Disclosures about the effects of climate-related risks
and opportunities on the entity’s strategy and
decision-making
Consistent with IFRS S1, IFRS S2 requires an entity to disclose information to
enable users of general purpose financial reports to understand the effects of
climate-related risks and opportunities, including how it has responded, and
plans to respond, to such risks and opportunities in its strategy and decision-
making. However, IFRS S2 is more prescriptive by also requiring the
disclosure of: [IFRS S2.14(a)].
• How the entity plans to achieve any climate-related targets it has set,
and
• Any targets it is required to meet by law or regulation
Figure 4-2 below outlines the specific disclosures that IFRS S2 requires an
entity to provide about its responses or planned responses to climate-related
risks and opportunities.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-92-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 92
Figure 4-2: An entity’s responses to climate-related risks and
opportunities
Required disclosure Remarks
Information about current and
anticipated changes to the entity’s
business model, including its
resource allocation, to address
climate-related risks and
opportunities. [IFRS S2.14(a)(i)].
Examples include:
• Plans to manage or
decommission operations
that are carbon, energy or
water-intensive
• Reallocation of resources due
to demand or supply-chain
changes
• Reallocation of resources due
to new business development
resulting in capital expenditure
or additional expenditure on
research and development
• Acquisitions or divestments
Information about current and
anticipated direct mitigation and
adaptation efforts. [IFRS S2.14(a)(ii)].
Examples include:
• Changes in production
processes
• Equipment changes
• Relocation of facilities
• Workforce adjustments
• Product specification changes
Information about current and
anticipated indirect mitigation and
adaptation efforts. [IFRS S2.14(a)(iii)].
Examples include:
• Working with customers
• Working with supply chains
Information about an entity’s
climate-related transition plan (if it
has one). [IFRS S2.14(a)(iv)].
Information to be disclosed about
an entity’s transition plan includes:
• Key assumptions used in
developing the transition plan
• Dependencies on which the
transition plan relies upon
Information about how the entity
plans to achieve any climate-related
targets, including any GHG emission
targets. [IFRS S2.14(a)(v)].
This includes targets that the entity
has set and targets that the entity
is required to meet by law or
regulation. The targets are
discussed further in section 4.5
below.
With respect to the entity’s plans, IFRS S2 also requires an entity to disclose:
• Information about how the entity is resourcing, and intends to resource,
those plans [IFRS S2.14(b)].
• Information (both quantitative and qualitative) about the progress of
those plans compared to previous reporting periods [IFRS S2.14(c)].
4.3.2.A Climate-related transition plans
IFRS S2 defines the ‘climate-related transition plan’ as follows:
[IFRS S2 Appendix A].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-93-320.jpg)
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Extract from IFRS S2
Appendix A
Defined terms
climate-related
transition plan
An aspect of an entity’s overall strategy that lays
out the entity’s targets, actions or resources for
its transition towards a lower-carbon economy,
including actions such as reducing its
greenhouse gas emissions.
The ISSB considers that disclosure of an entity’s transition plan, or set of
plans, to respond to the expected transition to a lower-carbon economy (if
it has such plans) will help users of general purpose financial reports assess
the effects of climate-related risks and opportunities on the entity’s cash
flows, its access to finance and cost of capital. [IFRS S2.BC46].
IFRS S2 does not specify what is included in a transition plan. The ISSB
notes that a transition plan will reflect an entity’s individual circumstances,
therefore, its focus is to enhance the comparability and consistency of
disclosures about transition plans. [IFRS S2.BC52]. Transition plans can vary;
for some entities, their transition plans form part of their overall business
strategy as the plan is being used to adjust the entity’s business model in
response to its climate-related risks and opportunities. Whereas for some
other entities, the plan does not form part of the overall business strategy
and instead applies only to a particular product line, business unit or set of
activities. [IFRS S2.BC47].
To assess the credibility of an entity’s transition plan and to be able to make
comparisons between entities’ transition plans, users of general purpose
financial reports need to understand the assumptions and dependencies that
underpin an entity’s transition plan. For that reason, IFRS S2 requires an
entity to disclose:
• The assumptions it made in developing its climate-related transition plan
• The dependencies on which the plan’s achievement relies
The ISSB explains the difference between assumptions and dependencies in
the context of transition plans in Figure 4.3 below [IFRS S2.BC52].
Figure 4-3: Differences between assumptions and dependencies
in transition plans
Meaning Examples
Assumption A belief, expectation,
hypothesis or premise
that the entity expects
will occur and, therefore,
builds into its climate-
related transition plan.
Assumptions are
uncertain.
• Expectations about
regulatory requirements
• Expectations about the
ability of an entity to
implement planned
changes within its value
chain
Dependencies Critical factors and
conditions that are
required for an entity’s
transition plan to be
realised.
• An emission removal
technology that an entity
will rely upon to meet its
GHG emission targets
• The minimum level of
resource availability
needed so that the
entity can implement
its transition plan](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-94-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 94
In preparing its climate-related financial disclosures, an entity needs to
consider how to make connections between information disclosed in its
transition plan and the disclosure of other information such as its GHG
emissions, its emission targets and climate resilience. [IFRS S2.BC49].
How we see it
IFRS S2 does not require an entity to develop a transition plan. The
standard only requires the disclosure of particular information about
transition plans if an entity has such a plan. In our view, given the
importance that users of general purpose financial reports place on
information about an entity’s transition plan, an entity that does not
have a transition plan needs to consider disclosing that fact.
Some organisations that are external to the ISSB have also been working on
guidance on the preparation of transition plans. One such initiative is the
Transition Plan Taskforce (TPT) which was launched by the UK Government
with the intention to set out good practices for robust and credible transition
plan disclosures as part of an entity’s annual reporting on forward business
strategy. The TPT published its Disclosure Framework in October 2023,
which sets out five key elements of a good practice transition plan, which
are expanded upon through 19 sub-elements and a series of disclosure
recommendations for each sub-element.
TPT’s five key elements of a good practice transition plan are summarised in
Figure 4.4 below.
Figure 4-4: Key elements of a transition plan
Key element Details
Foundations “An entity shall disclose the Strategic Ambition of its
plan. This shall comprise the entity's objectives and
priorities for responding and contributing to the
transition towards a low GHG emissions, climate-
resilient economy, and set out whether and how the
entity is pursuing these objectives and priorities in a
manner that captures opportunities, avoids adverse
impacts for stakeholders and society, and safeguards
the natural environment. Under this element, an entity
should also disclose the high-level implications that this
transition plan will have on its business model and value
chain, as well as the key assumptions and external
factors on which the plan depends”.
Implementation
Strategy
“An entity shall disclose the actions it is taking within its
business operations, products and services, and policies
and conditions to achieve its Strategic Ambition, as well
as the resulting implications for its financial position,
financial performance, and cash flows”.
Engagement
Strategy
“An entity shall disclose how it is engaging with its
value chain, industry peers, government, public sector,
communities, and civil society in order to achieve its
Strategic Ambition”.
Metrics &
Targets
“An entity shall disclose the metrics and targets that
it is using to drive and monitor progress towards its
Strategic Ambition”.
Governance “An entity shall disclose how it is embedding its
transition plan within its governance structures and
organisational arrangements in order to achieve the
Strategic Ambition of its transition plan”.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-95-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 95
The ISSB’s Vice-Chair, Sue Lloyd, stated in a foreword to the TPT Disclosure
Framework that the TPT Disclosure Framework, “provides a practical and
useful complement to [the ISSB] Standards. It will be a useful tool for
companies in developing transition plans and informing the disclosure
requirements in IFRS S2”.15
How we see it
External initiatives such as the TPT Disclosure Framework may provide
a useful source of insight and guidance that entities may choose to refer
to when preparing their transition plan disclosures in accordance with
IFRS S2. In our view, these initiatives may help to improve good disclosure
practices and, as such, an entity may wish to consider the relevance
of those initiatives to its own disclosures. However, entities need to be
mindful that ISSB standards do not require an entity to comply with the
guidance or recommendations in the TPT Disclosure Framework or other
external initiatives and that, similarly, compliance with the TPT Disclosure
Framework or other external initiatives will not necessarily mean that the
entity’s disclosures comply with ISSB standards.
All requirements in IFRS S1 and IFRS S2 need to be met in order to provide
a complete set of sustainability-related financial disclosures in accordance
with ISSB standards.
4.3.3 Disclosures about the resilience of the entity’s
strategy and business model
Because the likelihood, magnitude and timing of climate-related risks and
opportunities affecting an entity are uncertain and often complex, users
of general purpose financial reports have indicated that they need to
understand the resilience of the entity’s strategy and business model to
climate change. [IFRS S2.BC57].
IFRS S2 defines ‘climate resilience’ as follows: [IFRS S2 Appendix A].
Extract from IFRS S2
Appendix A
Defined terms
climate resilience The capacity of an entity to adjust to climate-
related changes, developments or uncertainties.
Climate resilience involves the capacity to
manage climate-related risks and benefit from
climate-related opportunities, including the
ability to respond and adapt to climate-related
transition risks and climate-related physical
risks. An entity’s climate resilience includes
both its strategic resilience and its operational
resilience to climate-related changes,
developments and uncertainties.
Compared to IFRS S1, the climate resilience disclosure requirements in
IFRS S2 are more extensive and prescriptive and require a scenario analysis
to be completed. In providing quantitative information, IFRS S2 permits an
entity to disclose a single amount or a range. [IFRS S2.22].
IFRS S2 requires disclosure of:
15
TPT Disclosure Framework, October 2023, page 3
An entity is not required
to disclose the specific
results of its scenario
analysis. Instead, an
entity is required to
disclose information
about its interpretation
of those results.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-96-320.jpg)
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• An entity’s assessment of its climate resilience as at the reporting date.
[IFRS S2.22(a)].
• How and when the entity carried out climate-related scenario analysis,
which is used to inform the resilience assessment. [IFRS S2.22(b)].
The relationship between a resilience assessment and scenario analysis is
explained in Figure 4.5 below.
Figure 4-5: Difference between a resilience assessment and
scenario analysis
Topic Explanation
Resilience assessment Using a range of plausible but uncertain climate
outcomes (i.e., scenarios), management
assesses the implications for the entity’s
business model and strategy and its capacity
to adapt or respond. [IFRS S2.BC59].
Information about an entity’s assessment of its
climate resilience has to be disclosed as at each
reporting date. [IFRS S2.BC68].
Scenario analysis An analytical exercise used to inform that
resilience assessment.
An entity is not required to disclose the specific
results of its scenario analysis. Instead, an
entity is required to disclose information about
its interpretation of those results. [IFRS S2.BC59].
A scenario analysis does not need to be
performed every year. [IFRS S2.BC68].
4.3.3.A Resilience assessment
Within the context of an entity’s identified climate-related risks and
opportunities, paragraph 22(a) requires disclosure of information about
the resilience of the entity’s strategy and business model to the following
factors described in Figure 4.6 below, [IFRS S2.BC58].
Figure 4-6: Assessing resilience
Factor Explanation Example
Climate-related
changes
Such as events or changes
resulting from climate
change
• Pervasive wildfires
• Rising sea levels
Climate-related
developments
Such as evolving
macroeconomic factors,
e.g., regulatory responses
and demographic shifts
• Regulatory limits
on the use of
particular fossil
fuels
Climate-related
uncertainties
Such as different confidence
intervals associated with
climate-related changes
and climate-related
developments
• Assumptions
about the
pervasiveness
of wildfires
• Assumptions
about the
stringency of
regulation
A resilience assessment involves interpreting the results of the scenario
analysis. [IFRS S2.BC59]. In particular, IFRS S2 requires that an entity’s
disclosure of the assessment of its climate resilience as at the reporting date](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-97-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 97
enables users of general purpose financial reports to understand:
[IFRS S2.22(a)].
• The implications (if any) for its strategy and business model, including
how the entity would need to respond to the effects identified in the
scenario analysis
• The significant areas of uncertainty considered in the entity’s
assessment of its climate resilience
• The entity’s capacity to adjust or adapt its strategy and business model
to climate change over the short, medium and long term, including:
• The availability of, and flexibility in, the entity’s existing financial
resources to respond to the effects identified in the climate-related
scenario analysis, including to address climate-related risks and to
take advantage of climate-related opportunities
• The entity’s ability to redeploy, repurpose, upgrade or decommission
existing assets
• The effect of the entity’s current and planned investments in
climate-related mitigation, adaptation and opportunities for climate
resilience
The following illustration is based on the example used in the BC to IFRS S2
to explain the type of information that an entity might disclose about
the significant areas of uncertainty considered in its climate resilience
assessment: [IFRS S2.BC60].
Illustration 4-1: Example showing disclosure of significant areas of
uncertainty
In performing scenario analysis, Entity A identifies that future climate-driven
migration could have implications in the long term for some of the assets and
operations of Entity A and its major suppliers that are located near Region X
which might become uninhabitable due to rising sea levels. Depending upon
where those affected local communities relocate, the ability for Entity A and its
suppliers to continue to run their operations at full capacity could be adversely
impacted. It is not known whether, where or when the local communities may
relocate and the consequential impact on Entity A’s operations and its supply
chain is also uncertain.
In accordance with paragraph 22(a)(ii) of IFRS S2, Entity A discloses that its
resilience assessment is subject to significant uncertainty arising from the
effects of future climate-driven migration from Region X, which, in turn, has
implications for the stability of Entity A’s supply chain and the resilience of
its own assets and operations that are located near Region X. Given the time
horizon that applies to this risk in the long term, Entity A also discloses that
the degree of judgement required to interpret the results of this scenario
analysis also increases.
4.3.3.B Scenario analysis
As noted above, IFRS S2 does not require an entity to disclose the results
of its scenario analysis. Instead, IFRS S2 requires disclosure of information
about the approach the entity used to carry out its scenario analysis.
In relation to how the scenario analysis was carried out, IFRS S2 requires
disclosure of: [IFRS S2.22(b)].
• Information about the inputs used in the analysis
• Key assumptions made in the analysis
Disclosures about inputs and assumptions used in the analysis are discussed
in Figure 4.7 below (noting these lists are not exhaustive).](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-98-320.jpg)
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Figure 4-7: Scenario analysis inputs and assumptions
Disclosures about inputs Disclosures about assumptions
• Which climate-related scenarios
were used for the analysis and
the sources of those scenarios
• Whether the analysis included a
diverse range of climate-related
scenarios
• Whether the scenarios used are
associated with climate-related
transition risks or climate-
related physical risks
• Whether a climate-related
scenario aligned with the ‘latest
international agreement on
climate change’ was used
• Why the entity decided that its
chosen scenarios are relevant
to assessing its resilience to
climate-related changes,
developments or uncertainties
• The time horizons used in the
analysis
• What scope of operations (e.g.,
the operating locations and
business units) was used in the
analysis
• Climate-related policies in the
jurisdictions in which the entity
operates
• Macroeconomic trends
• National- or regional-level
variables (e.g., local weather
patterns, demographics, land
use, infrastructure and
availability of natural
resources)
• Energy usage and mix
• Developments in technology
The ‘latest international agreement on climate change’ is defined by IFRS S2
to mean “An agreement by states, as members of the United Nations
Framework Convention on Climate Change, to combat climate change. The
agreements set norms and targets for a reduction in greenhouse gases.”
[IFRS S2 Appendix A].
When the ISSB issued IFRS S2, the Paris Agreement of April 2016 was the
latest international agreement on climate change. Signatories to the Paris
Agreement agreed to: [IFRS S2.BC145].
• Limit the increase in the global average temperature to well below 2
degrees Celsius above pre-industrial levels
• Pursue efforts to limit the temperature increase to 1.5 degrees Celsius
above pre-industrial levels
However, the ISSB decided against requiring the use of scenarios consistent
with the latest international agreement on climate change or particular
science-based scenarios for the following reasons: [IFRS S2.BC67].
• It would not be practical to specify which scenarios an entity should be
required to use.
• Any scenarios specified in the standards might quickly become out of
date and could lead to an entity disclosing information that does not
reflect its circumstances or the views of management on what might
be plausible.
IFRS S2 requires disclosure of the reporting period in which the climate-
related scenario analysis was carried out. This is because the ISSB decided
that, for the purposes of IFRS S2, an entity could carry out scenario analysis
as part of its multi-year strategic planning cycle (e.g., every 3-5 years) rather
than be required to update its scenario analysis at each reporting date.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-99-320.jpg)
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Although an entity is not required to update its scenario analysis at each
reporting date, IFRS S2 requires the entity to: [IFRS S2.B18, IFRS S2.BC68].
• At a minimum, update its climate-related scenario analysis in line with its
strategic planning cycle
• Assess its climate resilience on an annual basis to reflect updated insight
into the implications of climate uncertainty for the entity’s business
model
• Disclose the information required in section 4.3.3 at each reporting date,
including the information about how and when the scenario analysis was
carried out, even if the scenario analysis had not been updated during
the reporting period
IFRS S2 only requires scenario analysis to be used in assessing an entity’s
climate resilience. However, an entity may choose to use scenario analysis to
inform a variety of other disclosures that are required by IFRS S2, including:
[IFRS S2.BC69].
• Identifying and assessing climate-related risks and opportunities (see
section 3)
• Assessing the anticipated financial effects associated with those risks
and opportunities (see section 4.3.3.C)
• Developing transition plans (see section 4.3.2.A)
4.3.3.C Application guidance on preparing climate-related
scenario analysis
During the development of IFRS S2, the ISSB received feedback that scenario
analysis might be challenging, and especially so for entities that lack the
skills, capabilities and resources to carry out that analysis. As a consequence
of that feedback, the ISSB: [IFRS S2.BC62, IFRS S2.BC63].
• Included application guidance in IFRS S2 for preparing climate-related
scenario analysis, noting that scenario analysis encompasses a range
of practices, from qualitative scenario narratives to sophisticated
quantitative modelling.
• Clarified that the approach an entity uses for scenario analysis needs to
be ‘commensurate with its circumstances’.
The application guidance in IFRS S2 was developed to support an entity
to select an approach to scenario analysis that is commensurate with its
circumstances. This application guidance is based on the range of practices
outlined in documents published by the TCFD, including, Technical
Supplement: The Use of Scenario Analysis in Disclosure of Climate-related
Risks and Opportunities (2017)16
and Guidance on Scenario Analysis for Non-
Financial Companies (2020).17
[IFRS S2.BC64].
This application guidance requires an entity to use an approach to scenario
analysis that enables it to consider all reasonable and supportable
information available to the entity at the reporting date without undue cost
or effort. In making judgements on the selection of an approach to scenario
analysis, the application guidance specifies: [IFRS S2.B1].
• The factors to consider when assessing an entity’s circumstances (see (i)
in this section below)
• The factors to consider when determining an entity’s appropriate
approach to climate-related scenario analysis (see (ii) in this section
below)
• Additional factors to consider when determining an entity’s approach to
climate-related scenario analysis over time (see (iii) in this section below)
16
TCFD Technical Supplement
17
TCFD Guidance on Scenario Analysis for Non-Financial Companies](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-100-320.jpg)
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(i) Assessing an entity’s circumstances
Assessing an entity’s circumstances requires consideration of: [IFRS S2.B2].
• The entity’s exposure to climate-related risks and opportunities
• The skills, capabilities and resources available to the entity for the
climate-related scenario analysis
An entity’s approach to climate-related scenario analysis needs to be
commensurate with the entity’s circumstances at the time the climate-related
scenario analysis is carried out. For example, an entity with a relatively
low climate risk exposure and limited resources might develop a scenario
narrative that is focused on a key product, business unit or operating
location. In contrast, a large entity that is highly exposed to climate risks
and has strong analytical expertise might perform sophisticated quantitative
modelling that uses a range of scenarios to capture multiple risk transmission
channels across the entity’s own operations and value chain. [IFRS S2.BC65].
Figure 4-8: Assessing an entity’s circumstances
Factors to consider Explanation
Exposure to climate-
related risks and
opportunities
An entity’s exposure to climate-related risks and
opportunities will inform the entity’s assessment of:
• Its circumstances
• The approach to use for its climate-related
scenario analysis
Generally speaking, the greater the entity’s
exposure to climate-related risks or opportunities,
the more likely it is the entity would determine that
a more technically sophisticated form of climate-
related scenario analysis is required. [IFRS S2.B4].
Skills, capabilities
and resources
available
An entity considers both internal and external skills,
capabilities and resources when determining an
appropriate approach to use for its climate-related
scenario analysis.
Context is necessary when assessing an entity’s
skills and capabilities, noting also that the ISSB
expects entities to develop their skills and
capabilities and strengthen their disclosures over
time through a process of learning and iteration.
For instance, an entity that is only just starting
to explore scenario analysis in assessing climate
resilience or that participates in an industry where
scenario analysis is not commonly used might need
more time to develop its skills and capabilities.
Consequently, such entities might be unable to use
a quantitative or technically sophisticated approach
to scenario analysis without undue cost or effort. In
contrast, an entity that participates in an industry
whereby scenario analysis is an established
practice (such as the extractive industries) would
be expected to have had experience to develop its
skills and capabilities.
However, if an entity’s climate-related risk
exposure warrants a sophisticated approach to
scenario analysis, IFRS S2 states that the entity
cannot use a lack of skills or capabilities to justify
using a less sophisticated approach if it has the
resources available to invest in obtaining or](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-101-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 101
developing the necessary skills and capabilities.
[IFRS S2.B6, IFRS S2.B7, IFRS S2.BC65].
Each time an entity carries out scenario analysis, it is required to assess its
circumstances. The following illustration is based on the example used in
IFRS S2 to explain when an entity reassesses its circumstances: [IFRS S2.B3].
Illustration 4-2: Reassessing an entity’s circumstances
Entity A carries out its climate-related scenario analysis every three years to
align with its strategic planning cycle. In accordance with paragraph B3 of
IFRS S2, Entity A would be required to assess its circumstances every three
years when it carries out its scenario analysis. Each time Entity A assesses its
circumstances, it needs to reconsider its exposure to climate-related risks and
opportunities and the skills, capabilities and resources available at that time.
(ii) Determining the appropriate approach to climate-related scenario
analysis
Determining an approach to climate-related scenario analysis that considers
all reasonable and supportable information available to the entity at the
reporting date without undue cost or effort involves: [IFRS S2.B8].
• Selecting inputs to the climate-related scenario analysis
• Making analytical choices about how to carry out the climate-related
scenario analysis
According to IFRS S2, reasonable and supportable information includes
information that is obtained from an external source or owned or developed
internally and is about: [IFRS S2.B9].
• Past events
• Current conditions
• Forecasts of future conditions
• Quantitative or qualitative information
Judgement is needed to determine the mix of inputs and analytical choices
that enables an entity to consider all reasonable and supportable information
that is available to it at the reporting date without undue cost or effort.
The degree of judgement required depends on the availability of detailed
information and the time horizon (i.e., the degree of judgement required
increases as the time horizon increases and the availability of detailed
information decreases). [IFRS S2.B10].
Selecting inputs
An entity also needs to consider all reasonable and supportable information
available to it at the reporting date without undue cost or effort when
selecting the scenarios, variable and other inputs to use in its climate-related
scenario analysis. [IFRS S2.B11]
The ISSB clarified that publicly available climate-related scenarios from
authoritative sources that describe future trends and a range of pathways to
plausible outcomes are inputs that are available to the entity without undue
cost or effort. [IFRS S2.B11].
Having a reasonable and supportable basis for selecting a particular scenario
or set of scenarios means that the inputs to an entity’s climate-related
scenario analysis need to be relevant to the entity’s circumstances.
Therefore, when selecting a scenario or set of scenarios, the entity considers
factors such as: [IFRS S2.B12, IFRS S2.13, IFRS S2.BC66].
• The type and nature of activities undertaken by the entity
• The geographical location of those activities
• The physical and transition risks to which it is exposed](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-102-320.jpg)
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IFRS S2 does not specify the scenarios that an entity is required to use
because the ISSB decided that it would not be practical, the scenarios
specified might become outdated and it could lead to information being
disclosed that fails to reflect the entity’s specific circumstances and
management’s view of what is plausible. [IFRS S2.BC67].
The below illustration is based on an example used in IFRS S2: [IFRS S2.B12].
Illustration 4-3: Selecting relevant scenarios
Entity A’s assets and operations are concentrated in Jurisdiction X where
emissions are likely to be regulated in the near future. To carry out scenario
analysis, Entity A selects a scenario that is consistent with Jurisdiction X’s
commitments to the latest international agreement on climate change.
IFRS S2 also requires an entity to disclose information such as the number
of scenarios used and whether the scenarios cover different outcomes or
pathways (such as, orderly and disorderly transition scenarios). This forms
part of the requirement to disclose whether the analysis included a diverse
range of scenarios. [IFRS S2.22(b)(i)(2), IFRS S2.BC66].
Making analytical choices
Analytical choices include whether an entity uses qualitative analysis or
quantitative modelling in carrying out climate-related scenario analysis.
IFRS S2 requires an entity to prioritise the analytical choices that will enable
it to consider all reasonable and supportable information that is available to
it at the reporting date without undue cost or effort. For example, an entity’s
resilience assessment needs to incorporate multiple carbon price pathways
associated with a given outcome (e.g., a 1.5 degree Celsius outcome) if
information about those pathways is available without undue cost or effort
and this approach is warranted by the entity’s risk exposure. [IFRS S2.B14].
In making those analytical choices, the ISSB noted that: [IFRS S2.B15].
• The use of quantitative information will often enable a more robust
assessment of an entity’s climate resilience.
• The use of qualitative information including scenario narratives, which
might or might not be combined with quantitative data, can also provide
a reasonable and supportable basis for an entity’s resilience assessment.
(iii) Additional considerations when determining an entity’s approach to
climate-related scenario analysis over time
IFRS S2 states that an entity’s approach to climate-related scenario analysis
may not be the same from one reporting period or strategic planning cycle to
the next. [IFRS S2.B16]. This is because:
• Climate-related scenario analysis is an evolving practice.
• The approach to scenario analysis that an entity uses is based on its
particular circumstances (i.e., its exposure to climate-related risks and
opportunities and the skills, capabilities and resources available to the
entity). Therefore, as those circumstances change over time, the entity’s
approach to climate-related scenario analysis will change too.
For example, an entity that is highly exposed to climate-related risks might
initially carry out scenario analysis by using qualitative scenario narratives
because it does not currently have the skills, capabilities or resources to
carry out quantitative climate-related scenario analysis. However, as the
entity builds its capabilities through experience over time, the entity would
begin to apply a more advanced quantitative approach to climate-related
scenario analysis. In contrast, an entity that is highly exposed to climate-
related risks which does have access to the necessary skills, capabilities or
resources, is required to apply a more advanced quantitative approach to
climate-related scenario analysis. [IFRS S2.B17].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-103-320.jpg)
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to identify, assess, prioritise and monitor climate-related opportunities.
[IFRS S2.25(b)].
In respect of the remainder of the risk management disclosure requirements
in IFRS S2, the commentary in section 4.4 of Part A - Introduction to IFRS S1
on risk management disclosure requirements also applies to the preparation
of risk management disclosures relating to climate-related risks and
opportunities.
An entity is not required to provide separate risk management disclosures
for each sustainability-related risk and opportunity if oversight of the entity’s
sustainability-related risks and opportunities is managed on an integrated
basis. In such cases, an entity is required to avoid unnecessary duplication
by providing an integrated risk management disclosure that meets the
requirements set out in IFRS S2 and IFRS S1. [IFRS S2.26].
TCFD comparison
The ISSB indicates that IFRS S2 disclosure requirements about risk
management for climate-related risks and opportunities is broadly
consistent with the TCFD recommended disclosures, which focus more
on risks.
For disclosures that describe an entity’s processes for identifying,
assessing, and managing climate-related risks, the ISSB noted in its TCFD
comparison document that IFRS S2:
• Requires more detailed information about: the input parameters that
an entity uses to identify risks; if and how the entity uses scenario
analysis to identify risks; and whether the entity’s processes for
identifying, assessing, prioritising and monitoring risks have changed
since the last reporting period
• Includes additional disclosures of the entity’s processes for
identifying, assessing, prioritising and monitoring opportunities
For disclosures related to describing how an entity’s processes for
identifying, assessing, and managing climate-related risks are integrated
into the entity’s overall risk management, the ISSB noted that IFRS S2
includes additional disclosures on the extent to which, and how, the
processes used to identify, assess, prioritise and monitor opportunities are
integrated into and inform the entity’s overall risk management process.
4.5 Metrics and targets
The disclosure requirements in IFRS S2 for metrics and targets are much
more detailed than the general disclosure requirements for metrics and
targets in IFRS S1 because IFRS S2 specifically addresses the metrics and
targets that are relevant to climate-related risks and opportunities.
To enable users of general purpose financial reports to understand an
entity’s performance in relation to its climate-related risks and opportunities,
including progress towards any of the climate-related targets it has set, and
any targets it is required to meet by law or regulation, IFRS S2 requires an
entity to disclose:
• Information related to seven cross-industry metric categories (i.e.,
metrics that are industry agnostic) (see section 4.5.1 below)
• Industry-based metrics associated with the entity’s business model and
economic activities (i.e., metrics that are relevant to the industry that
the entity participates in) (see section 4.5.2 below)
• Climate-related targets, which may be set either by the entity or required
by laws or regulations that apply to the entity, to mitigate or adapt to
climate-related risks or take advantage of climate-related opportunities,
including metrics used by the government body or management to](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-105-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 105
measure progress towards these targets (see section 4.5.3 below)
[IFRS S2.27, IFRS S2.28].
IFRS S2 requires an entity to disclose information about metrics even if
the entity does not have governance arrangements, strategies or risk
management processes that address climate-related risks and opportunities.
The ISSB clarified that the objective of the disclosures on metrics is to require
an entity to disclose information about its performance against: [IFRS S2.BC73].
• The metrics it uses for measuring and monitoring climate-related risks
and opportunities (which may include metrics that are not specified by
IFRS S2)
• The metrics specified by IFRS S2 (even in cases where the entity does
not use those metrics to measure and monitor its climate-related risks
and opportunities)
4.5.1 Cross-industry metrics
IFRS S2 requires entities to disclose information about seven cross-industry
metric categories that the ISSB derived from the TCFD’s Guidance on Metrics,
Targets and Transition Plans18
, which was published in October 2021.
The seven cross-industry metric categories are summarised in Figure 4.9
below. [IFRS S2.29].
Figure 4-9: Cross-industry metrics
# Category Information to be disclosed
1 GHG emissions Absolute gross GHG emissions generated
during the reporting period (in metric
tonnes of CO2 equivalent), classified as:
• Scope 1 GHG emissions
• Scope 2 GHG emissions
• Scope 3 GHG emissions
This disclosure and other GHG-related
disclosures are discussed further in
sections 4.5.1.A and 5 below.
2 Climate-related
transition risks
The amount and percentage of assets or
business activities vulnerable to climate-
related transition risks (see section 4.5.1.B
below)
3 Climate-related
physical risks
The amount and percentage of assets or
business activities vulnerable to climate-
related physical risks (see section 4.5.1.B
below).
4 Climate-related
opportunities
The amount and percentage of assets or
business activities aligned with climate-
related opportunities (see section 4.5.1.B
below)
5 Capital deployment The amount of capital expenditure,
financing or investment deployed towards
climate-related risks and opportunities (see
section 4.5.1.C below)
6 Internal carbon
pricing
• An explanation of whether and how
the entity is applying a carbon price in
decision-making
18
TCFD Guidance on Metrics, Targets and Transition Plans](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-106-320.jpg)
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• The price of GHG emissions (per metric
tonne) that the entity uses to assess the
costs of its GHG emissions
See section 4.5.1.D below.
7 Remuneration • A description of whether and how
climate-related considerations are
factored into executive remuneration
• The percentage of executive
management remuneration recognised
in the current reporting period that is
linked to climate-related considerations
See section 4.5.1.E below.
By requiring entities to provide common information to users of general
purpose financial reports regardless of the industries to which they belong,
the cross-industry metrics are intended to allow users to: [IFRS S2.BC75].
• Assess an entity’s exposure to, and management of, its climate-related
risks and opportunities
• Gain an understanding of key aspects and drivers of climate-related risks
and opportunities
• Gain insight into the potential effects of climate change on the entity
4.5.1.A GHG emissions disclosures
An entity is required to disclose its absolute gross GHG emissions generated
during the reporting period. An entity’s gross GHG emissions are classified as:
[IFRS S2.29(a)(i)].
• Scope 1 GHG emissions
• Scope 2 GHG emissions
• Scope 3 GHG emissions
An entity’s disclosure of its GHG emissions is expressed as metric tonnes
of CO2 equivalent. This means that the entity needs to aggregate the seven
constituent GHG gases into CO2 equivalent value. Refer to section 5.3.2 for
further discussion..
IFRS S2 requires the Greenhouse Gas Protocol: A Corporate Accounting and
Reporting Standard (2004) to be used to measure an entity’s GHG emissions
unless a jurisdictional authority or a securities exchange on which the entity
is listed requires a different method to be used to measure the entity’s
GHG emissions. [IFRS S2.29(a)(ii)]. The Greenhouse Gas Protocol: A Corporate
Accounting and Reporting Standard (2004) is one of the publications that
are collectively referred to as the GHG Protocol. Refer to section 5 for more
details on the GHG Protocol and the use of other methods.
An entity is required to disclose the approach that it uses to measure GHG
emissions, including: [IFRS S2.29(a)(iii)].
• The measurement approach, inputs and assumptions used to measure its
GHG emissions
• The reason why the entity has chosen the measurement approach, inputs
and assumptions used to measure its GHG emissions
• Any changes the entity made to the measurement approach, inputs
and assumptions during the reporting period and the reasons for those
changes( see section 5.3.1 below for further discussion)
Additional disclosure requirements relating to an entity’s absolute gross
Scope 1, Scope 2 and Scope 3 GHG emissions are outlined in Figure 4.10
below. [IFRS S2.29(a)(iv)].
IFRS S2 requires the
GHG Protocol to be
used to measure an
entity’s GHG emissions
unless a jurisdictional
authority or securities
exchange requires a
different method to
be used.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-107-320.jpg)
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asset management, commercial banking or
insurance activities. Financed emissions are
discussed further in section 5.7 below.
The following illustration is based on Illustrative Example 1 in Accompanying
Guidance on Climate-related Disclosures: [IFRS S2.IE3-IE5]
Illustration 4-4: Disaggregating Scope 1 and Scope 2 GHG
emissions
Entity A has an 80% interest in SubCo and a 40% interest in an incorporated
joint venture, JVCo. Entity A and the other parties to the joint venture jointly
control JVCo. Entity A has been appointed as the operator of JVCo, which
means that Entity A is responsible for managing and conducting the activities
and operations approved by the joint venturers.
Entity A prepares financial statements in accordance with IFRS accounting
standards. In accordance with IFRS accounting standards, Entity A prepares
consolidated financial statements which present the assets, liabilities, equity,
income, expenses and cash flows of Entity A and the entities it controls as
single economic entity. Entity A determines that it controls SubCo. The
reporting entity of Entity A’s consolidated financial statements, therefore,
consists of Entity A and SubCo. The assets, liabilities, equity, income, expenses
and cash flows of JVCo are not included in the Entity A consolidated group
because Entity A does not control JVCo. Instead, Entity A recognises its
interest in JVCo as an equity accounted investment.
Entity A’s consolidated group is also the reporting entity for the preparation of
Entity A’s sustainability-related financial disclosures, including its disclosure
of GHG emissions. Entity A has selected the operational control approach19
to measure its GHG emissions. Because Entity A has operational control over
JVCo, all of JVCo’s GHG emissions are included in Entity A’s GHG emissions (as
the reporting entity).
The Scope 1 and Scope 2 GHG emissions for each individual entity is:
GHG emissions (metric tonnes CO2e)
Scope 1 Scope 2 Total
Entity A (parent) 1,000 350 1,350
SubCo 3,000 800 3,800
JVCo 6,000 1,400 7,400
The Scope 1 and Scope 2 GHG emissions for the Entity A reporting entity in
accordance with operational control is measured as follows (noting that by
having operational control, Entity A would include 100% of the GHG emissions
into the measurement of its GHG emissions):
GHG emissions (metric tonnes CO2e)
Scope 1 Scope 2 Total
Entity A
(parent)
1,000 350 1,350
SubCo 3,000 800 3,800
JVCo 6,000 1,400 7,400
Total 10,000 2,550 12,550
In accordance with paragraph 29(a)(iii) of IFRS S2, Entity A discloses the
disaggregation of its Scope 1 and Scope 2 GHG emissions between the
consolidated group and its other investee as follows:
19
The operational control approach is discussed is section 5.2.2.B (ii)](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-109-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 109
GHG emissions (metric tonnes CO2e)
Scope 1 Scope 2 Total
Entity A consolidated group 4,000 1,150 5,150
Investment in JVCo 6,000 1,400 7,400
Total Scope 1 and Scope 2 GHG
emissions (operational control
basis)
10,000 2,550 12,550
4.5.1.B Assets or business activities vulnerable to climate-
related risks or aligned to climate-related opportunities
An entity is required to disclose the amount and percentage of assets or
business activities that are:
• Vulnerable to climate-related transition risks
• Vulnerable to climate-related physical risks
• Aligned with climate-related opportunities
These disclosures are required separately for transition risks, physical risks
and opportunities.
In preparing these disclosures, IFRS S2 states that an entity must use all
reasonable and supportable information that is available to the entity at
the reporting date without undue cost or effort. [IFRS S2.30]. The application
of this requirement is discussed further in sections 4.3.1.C and 1.2.2.B of
Part A - Introduction to IFRS S1.
4.5.1.C Capital deployment
An entity is required to disclose the amount of capital expenditure, financing
or investment deployed towards climate-related risks and opportunities.
[IFRS S2.29(e)].
IFRS S2 does not provide application guidance that is specific to this
disclosure requirement, but it does provide some general guidance, which
is outlined in section 4.5.1.F below.
4.5.1.D Internal carbon prices
An entity is required to disclose: [IFRS S2.29(f), IFRS S2.BC130].
• An explanation of whether and how the entity is applying a carbon price
in decision-making (e.g., investment decisions, transfer pricing and
scenario analysis)—this is referred to as an ‘internal carbon price’
• The price of GHG emissions (per metric tonne) that the entity uses, if
any, to assess the costs of its GHG emissions
Extract from IFRS S2
Appendix A
Defined terms
Internal carbon
price
Price used by an entity to assess the financial
implications of changes to investment,
production and consumption patterns, and
of potential technological progress and future
emissions-abatement costs. An entity can use
internal carbon prices for a range of business
applications. Two types of internal carbon prices
that an entity commonly uses are:](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-110-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 110
(a) a shadow price, which is a theoretical
cost or notional amount that the entity
does not charge but that can be used to
understand the economic implications or
trade-offs for such things as risk impacts,
new investments, the net present value
of projects, and the cost and benefit of
various initiatives; and
(b) an internal tax or fee, which is a carbon
price charged to a business activity,
product line, or other business unit based
on its greenhouse gas emissions (these
internal taxes or fees are similar to
intracompany transfer pricing).
In explaining how the internal carbon price is used in decision-making, an
entity is expected to explain whether it is using a current price, shadow price
or another price to represent the price for each metric tonne of carbon.
However, if the entity does not have an internal carbon price, the entity
needs to consider disclosing that fact. [IFRS S2.BC130].
4.5.1.E Executive remuneration
An entity is required to disclose: [IFRS S2.29(g)].
• A description of whether and how climate-related considerations are
factored into executive remuneration
• The percentage of executive management remuneration recognised in
the current period that is linked to climate-related considerations
How we see it
IFRS S2 does not define ‘executive management’. As such, entities will
need to exercise judgement in determining which management roles will
represent ‘executive management’ and are, therefore, within the scope of
this disclosure requirement.
In our view, this disclosure would allow users of general purpose financial
reports to understand whether, and to what extent, the managers of an
entity that have the authority and responsibility for managing the activities
of the entity are incentivised through remuneration for their performance
in managing the entity’s climate-related risks and opportunities. In that
context, to identify the management roles that represent ‘executive
management’, an entity could consider the definition of ‘key management
personnel’ in IAS 24 Related Party Disclosures, which states that
“Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the activities of
the entity, directly or indirectly, including any director (whether executive
or otherwise) of that entity”.
IFRS S2 also does not define ‘remuneration’. In our view, the ordinary
meaning of ‘remuneration’ would be sufficient to apply this disclosure
requirement. In determining what constitutes ‘remuneration’, an entity
could also consider referring to the definition of ‘compensation’ in
IAS 24, which includes short-term employee benefits (e.g., wages), post-
employment benefits (e.g., pensions), other long-term employee benefits
(e.g., long-service leave), termination benefits and share-based payment.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-111-320.jpg)
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4.5.1.F Preparation guidance
In preparing the cross-industry metric disclosures other than GHG emissions
mentioned above, IFRS S2 states that an entity is required to consider:
[IFRS S2.B65].
• The time horizons over which the effects of climate-related risks and
opportunities could reasonably be expected to occur (refer to section
4.3.1 of Part A – Introduction to IFRS S1)
• Where in the entity’s business model and value chain climate-related
risks and opportunities are concentrated (e.g., geographical areas,
facilities or types of assets) (refer to section 4.3.2 of Part A –
Introduction to IFRS S1)
• The information disclosed in relation to the effects of climate-related
risks and opportunities on the entity’s financial position, financial
performance and cash flows for the reporting period (refer to section
4.3.4 of Part A – Introduction to IFRS S1)
• Whether industry-based metrics partially or completely provide the
information required by the cross-industry metric disclosures
• Connectivity between the cross-industry metric disclosures and the
amounts recognised and disclosed in the related financial statements.
Connectivity also includes consistency in the data and assumptions used
(to the extent possible) in the disclosures and in the preparation of the
financial statements
4.5.2 Industry based metrics
In addition to cross-industry metrics, IFRS S2 requires an entity to disclose
industry-based metrics that are associated with one or more particular
business models, activities or other common features that characterise
participation in an industry.
IFRS S2 requires an entity to refer to the Industry-based Guidance on
Implementing IFRS S2 and consider the applicability of the industry-based
metrics corresponding to the disclosure topics identified for the relevant
industry. [IFRS S2.32].
4.5.3 Climate-related targets
IFRS S2 requires an entity to disclose:
• Its climate-related targets (see section 4.5.3.A below)
• Information about its approach to setting, reviewing and monitoring
progress against each target (see section 4.5.3.B below)
• Information about its performance against each target (see section
4.5.3.C below)
• Specific information for each GHG emission target the entity has (if any)
(see section 4.5.3.D below)
4.5.3.A Disclosures about an entity’s climate-related targets
IFRS S2 requires an entity to disclose its quantitative and qualitative climate-
related targets. These may be either: [IFRS S2.33].
• Targets that the entity has set to monitor progress towards achieving its
strategic goals
Or
• Targets that the entity is required to meet by law or regulation (if any)
These targets include any GHG emissions targets.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-112-320.jpg)
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For each target, IFRS S2 requires an entity to disclose the following:
Figure 4-11: Climate-related target disclosures
Information to disclose Further information
The metric used to set
the target [IFRS S2.33(a)]
IFRS S2 also requires an entity to consider
cross-industry metrics and industry-based
metrics when identifying and disclosing
metrics used to set climate-related targets
and to measure progress. [IFRS S2.B67].
For metrics that were developed by an entity
to measure progress towards a target, IFRS S1
specifies additional disclosures that the entity
is required to make (see section 4.5.2 of Part
A - Introduction to IFRS S1).
The objective of the
target [IFRS S2.33(b)]
An entity might refer to, for example,
mitigation, adaptation or conformance with
science-based initiatives.
The part of the entity to
which the target applies
[IFRS S2.33(c)]
An entity might refer to, for example, whether
the target applies to the entity in its entirety
or only a part of the entity (e.g., a specific
business unit or specific geographical region).
Target measurement
considerations
Specifically, an entity is required to disclose:
• The period over which the target applies
[IFRS S2.33(d)]
• The base period from which progress is
measured [IFRS S2.33(e)]
• Any milestones and interim targets.
[IFRS S2.33(f)].
If the target is
quantitative, whether it is
an absolute target or an
intensity target
[IFRS S2.33(g)]
IFRS S2 describes:
• An absolute target as “a total amount of
a measure or a change in the total amount
of a measure”
• An intensity target as “a ratio of a
measure, or a change in the ratio of
a measure, to a business metric”
[IFRS S2.B66]
How the latest
international agreement
on climate change has
informed the target
[IFRS S2.33(h)]
This disclosure includes any jurisdictional
commitments that arise from the latest
international agreement.
4.5.3.B Approach to set, review and monitor progress against
targets
An entity is required to disclose information about the entity’s approach to:
[IFRS S2.34].
• Setting and reviewing each target
• Monitoring its progress against each target
The information to be disclosed includes: [IFRS S2.34].
• Whether a third party has validated the target and the methodology for
setting the target
• The entity’s processes for reviewing the target](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-113-320.jpg)
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• The metrics used by the entity to monitor its progress towards reaching
the target
• Any revisions that have been made to the target and an explanation for
those revisions
4.5.3.C Reporting performance against each target
An entity is required to disclose information about its performance against
each climate-related target. The information disclosed also needs to include
an analysis of trends or changes in the entity’s performance. [IFRS S2.35].
In identifying and disclosing the metrics used to set and monitor progress
towards reaching a target, IFRS S2 requires that an entity refers to and
considers the applicability of cross-industry metrics and industry-based
metrics. The metrics include those described in an applicable ISSB standard
and metrics that otherwise satisfy the IFRS S1 requirements. [IFRS S2.37].
4.5.3.D GHG emission targets
In addition to the requirements outlined above, IFRS S2 also requires
information to be disclosed in relation to any GHG emissions target(s) that
an entity has set (or is required to meet by law or regulation) which is
summarised in Figure 4-12 below. [IFRS S2.36].
Figure 4-12: GHG emission target disclosures
Information to disclose Further information
The scope of the GHG
emissions target
Specifically, an entity is required to disclose:
• Which GHG emissions are covered by the
target (noting that the various constituent
gases are described in section 5.2 below)
[IFRS S2.36(a)]
• Whether the target covers Scope 1,
Scope 2 or Scope 3 GHG emissions
[IFRS S2.36(b)]
Whether the target is a
gross GHG emissions
target or net GHG
emissions target
[IFRS S2.36(c)].
IFRS S2 describes:
• Gross GHG emissions targets as
“reflect[ing] the total changes in
greenhouse gas emissions planned within
the entity’s value chain”.
• Net GHG emissions targets as “the entity’s
targeted gross greenhouse gas emissions
minus any planned offsetting efforts (for
example, the entity’s planned use of
carbon credits to offset its greenhouse
gas emissions)”.
For net GHG emissions targets, the entity is
also required to separately disclose its
associated gross GHG emissions target.
IFRS S2 also clarifies that the net GHG
emissions target disclosure cannot obscure
information about the entity’s gross GHG
emissions target. [IFRS S2.B68, IFRS S2.B69].
Whether the target was
derived using a sectoral
decarbonisation
approach [IFRS S2.36(d)].
In the BC to IFRS S2 the ISSB explains that a
sectoral decarbonisation approach sets GHG
emissions targets on a sector-by-sector basis
by translating GHG gas emissions targets made
at the international level (e.g., established
through the latest international agreement on](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-114-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 114
climate change) into sector-based benchmarks,
against which the performance of individual
entities can be compared.
A sectoral decarbonisation approach
acknowledges that entities operating in
different sectors will have specific challenges
associated with the transition to a lower-carbon
economy (because, for example, the location
of where in an entity’s value chain that GHG
emissions are concentrated will vary by sector).
The Science Based Targets Initiative (SBTi)
uses a sectoral decarbonisation approach.
[IFRS S2.BC150].
The entity’s planned use
of carbon credits to
offset GHG emissions to
achieve any net GHG
emissions target
[IFRS S2.36(e)].
IFRS S2 defines a carbon credit as “An
emissions unit that is issued by a carbon
crediting programme and represents an
emission reduction or removal of greenhouse
gases. Carbon credits are uniquely serialised,
issued, tracked and cancelled by means of
an electronic registry”. [IFRS S2 Appendix A].
Information to be disclosed about an entity’s
planned use of carbon credits includes:
[IFRS S2.36(e)].
• The extent of the entity’s use of carbon
credits to achieve its net GHG emissions
targets (if any)
• The identity of the third-party scheme(s)
that will verify or certify the carbon credits
• The type of carbon credit — this includes
whether the underlying offset will be
nature-based or based on technological
carbon removals (see further discussion
below)
• Any other factors that users of general
purpose financial reports might need to
understand the credibility and integrity
of the scheme from which the entity
obtains carbon credits (e.g., assumptions
regarding the permanence of the carbon
offset)
An entity might also disclose information about
carbon credits it has already acquired and
which the entity is planning to use to meet
its GHG emissions targets. [IFRS S2.B71].
Carbon credits
Carbon credits may be nature-based (i.e., aim to enhance natural carbon
sinks, such as through afforestation, soil-based carbon sequestration and
the use of other biomass stores) or based on technological carbon removals.
The ISSB noted that disclosure about the type of carbon credit helps users
of general purpose financial reports to assess an entity’s risk profile. For
example, if an entity plans to use carbon credits based on technological
carbon removals, a user will want to understand whether the technological
solution is currently economical at commercial scales or whether it will likely
require substantial investment to be economically viable in the future. In
contrast, nature-based approaches are often more cost-effective than
Disclosure about the
type of carbon credit
helps users of general
purpose financial reports
to assess an entity’s risk
profile.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-115-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 115
technological solutions. However, nature-based approaches may be subject
to concerns about:
• Quality of the carbon offset scheme based on ‘permanence’ (i.e., how
long the GHG emissions will be safely removed from the atmosphere) and
‘additionality’ (i.e., whether any new climate benefits have been brought
about by a particular investment that would not have occurred anyway)
And
• Their secondary effects on other social and environmental issues, such
as food production
Consequently, disclosures about an entity’s reliance on carbon credits, how
credits are generated, and the credibility and integrity of the scheme from
which the entity obtains the credits provide important information to users
because additional climate-related risks and opportunities may arise from
uncertainty about the suitability of some schemes, the available technology
and future prices of carbon credits. The ISSB notes that this may happen
because, for example: [IFRS S2.BC154, IFRS S2.BC155, IFRS S2.BC156].
• Carbon capture and storage technology solutions might prove to be
ineffective.
Or
• Regulations might be introduced or revised to discourage or ban the use
of specified carbon credit schemes due to climate activism efforts, policy
changes or concerns about food shortage issues that might arise as
a consequence of decisions made.
TCFD comparison
The ISSB indicates that some of the IFRS S2 disclosure requirements for
metrics and targets relating to climate-related risks and opportunities are
broadly consistent with the TCFD recommended disclosures.
For disclosures related to the metrics used by an entity to manage and
assess its climate-related risks, the ISSB noted in its TCFD comparison
document that IFRS S2 requires the disclosure of industry-based metrics in
addition to the categories of cross-industry metrics which are also included
in TCFD guidance.
For disclosures related to GHG emissions, the ISSB noted that IFRS S2
includes additional requirements to:
• Separately disclose Scope 1 and Scope 2 GHG emissions for the
consolidated group and for investees that are not part of the
consolidated group (e.g., equity accounted investments)
• Disclose Scope 2 GHG emissions according to the location-based
approach and to disclose information about any contractual
instruments relating to Scope 2 GHG emissions
• Disclose ‘financed emissions’ if the entity has activities in asset
management, commercial banking or insurance
• Disclose the measurement approach, inputs and assumptions used
to measure Scope 3 GHG emissions
IFRS S2 also specifies a Scope 3 measurement framework for preparing
disclosures on Scope 3 GHG emissions. The general 'disaggregation’
principle in IFRS S1 would also require an entity to disaggregate its GHG
emissions disclosure by constituent gases if that disaggregation provides
material information to users of the entity’s general purpose financial
reports.
For disclosures related to targets used by the entity to manage its climate-
related risks and opportunities and its performance against those targets,
the ISSB noted that IFRS S2:](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-116-320.jpg)
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• Differs from the TCFD Recommendations by requiring an entity to
disclose how the latest international agreement on climate change
has informed its target and whether the target has been validated by .
a third party
• Requires more detailed information to be disclosed about the entity’s
GHG emissions targets and additional requirements about the planned
use of carbon credits to achieve the entity’s net GHG emissions targets
• Includes additional requirements to disclose information about the
entity’s approach to setting and reviewing targets, monitoring
progress against those targets, including whether a sectoral
decarbonisation approach was used in setting the targets
5 Greenhouse gas emissions
5.1 Measurement of GHG emissions
IFRS S2 requires an entity’s disclosure of its GHG emissions to be measured
in accordance with the Greenhouse Gas Protocol: A Corporate Accounting
and Reporting Standard (2004). The ISSB clarified that an entity applies the
requirements in the GHG Protocol only to the extent that those requirements
do not conflict with IFRS S2. Therefore, as an example, an entity is required
to disclose its Scope 3 emissions because that it is a requirement in IFRS S2
even though the GHG Protocol does not require the disclosure of Scope 3
GHG emissions. [IFRS S2.29(a)(ii), IFRS S2.B23].
An exception to the general requirement in IFRS S2 to use the GHG Protocol
to measure GHG emissions applies if an entity is required by a jurisdictional
authority, or a securities exchange on which it is listed, to use a different
method for measuring its GHG emissions. This exception applies for as long
as the jurisdiction’s, or securities exchange’s, requirement to use a different
method applies to the entity. Furthermore, in some cases, the jurisdiction’s,
or securities exchange’s, specific requirements might apply only to one part
of the reporting entity (e.g., its operations in a specific jurisdiction) or for
only some categories of GHG emissions (e.g., Scope 1 and Scope 2 GHG
emissions). In such cases, the exception that IFRS S2 allows does not exempt
the entity from being required to disclose its Scope 1, Scope 2 and Scope 3
GHG emissions for the whole of the entity. [IFRS S2.B24, IFRS S2.B25].
5.2 Overview of GHG Protocol
The GHG Protocol provides standards and guidance for accounting for,
measuring and reporting emissions of the following seven GHGs identified by
the United Nations Framework Convention on Climate Change (UNFCCC):
• Carbon dioxide (CO2)
• Methane (CH4)
• Nitrous oxide (N2O)
• Hydrofluorocarbons (HFCs)
• Perfluorocarbons (PFCs)
• Sulphur hexafluoride (SF6)
• Nitrogen trifluoride (NF3)
These gases are classified as GHGs because they trap heat in the
atmosphere.
The following publications are collectively known as the GHG Protocol:](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-117-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 121
or unbundled attribute claims (e.g., renewable energy certificates, energy
attribute certificates, guarantees of origin, supplier-specific emission rates,
residual mix factors).
While the GHG Protocol requires the disclosure of Scope 2 GHG emissions
on both location-based as well as the market-based method, IFRS S2
only requires the disclosure of the location-based method. In addition
to this, entities are required to provide information about any contractual
instruments that is necessary to inform users’ understanding of the entity’s
Scope 2 GHG emissions. [IFRS S2.29(a)(v)]. Even though the information about
any contractual instruments may seem comparable to the market-based
method, IFRS S2 does not mention the market-based method itself.
5.3 Categories of GHG emissions
Appendix A to IFRS S2 includes definitions of:
• Direct GHG emissions, specifically Scope 1 GHG emissions
• Indirect GHG emissions, which refer to Scope 2 and Scope 3 GHG
emissions
These definitions from IFRS S2 are reproduced below:
Extract from IFRS S2
Appendix A
Defined terms
indirect greenhouse
gas emissions
Emissions that are a consequence of the
activities of an entity, but occur at sources
owned or controlled by another entity.
Scope 1 greenhouse
gas emissions
Direct greenhouse gas emissions that occur
from sources that are owned or controlled by
an entity.
Scope 2 greenhouse
gas emissions
Indirect greenhouse gas emissions from the
generation of purchased or acquired electricity,
steam, heating or cooling consumed by an entity.
Purchased and acquired electricity is electricity
that is purchased or otherwise brought into
an entity’s boundary. Scope 2 greenhouse gas
emissions physically occur at the facility where
electricity is generated.
Scope 3 greenhouse
gas emissions
Indirect greenhouse gas emissions (not included
in Scope 2 greenhouse gas emissions) that
occur in the value chain of an entity, including
both upstream and downstream emissions.
Scope 3 greenhouse gas emissions include
the Scope 3 categories in the Greenhouse Gas
Protocol Corporate Value Chain (Scope 3)
Accounting and Reporting Standard (2011):
…
5.3.1 Measurement approach, inputs and assumptions
As noted in section 4.5.1.A above, IFRS S2 requires an entity to disclose the
measurement approach, inputs and assumptions used to measure its GHG
emissions. This disclosure required includes information about: [IFRS S2.B26].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-122-320.jpg)
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• The measurement approach the entity uses in accordance with the GHG
Protocol (see section 5.3.1.A below)
• The applicable method if the entity is not using the GHG Protocol and
the measurement approach the entity uses (see section 5.3.1.B below)
• The emission factors the entity uses (see section 5.3.1.C below)
5.3.1.A GHG Protocol measurement approaches
Because the GHG Protocol includes different measurement approaches for
measuring its GHG emissions, IFRS S2 requires an entity to disclose:
[IFRS S2.B27].
• The approach it uses to determine its GHG emissions (e.g., the equity
share or control approach)
• The reason(s) for the entity’s choice of measurement approach and how
that approach enables users of the entity’s general purpose financial
reports to understand the entity’s performance in relation to its climate-
related risks and opportunities, including progress towards its climate-
related targets (if any)
5.3.1.B Other methods and measurement approaches
If an entity discloses its GHG emissions measured in accordance with another
method (as outlined in section 5.1), IFRS S2 requires the entity to disclose:
[IFRS S2.B28].
• The applicable method and measurement approach the entity uses to
determine its GHG emissions
• The reason(s) for the entity’s choice of method and measurement
approach and how that approach enables users of the entity’s general
purpose financial reports to understand the entity’s performance in
relation to its climate-related risks and opportunities, including progress
towards its climate-related targets (if any)
5.3.1.C Emissions factors
If an entity estimates the GHGs emitted using activity data and emissions
factors as its basis for measuring its GHG emissions, IFRS S2 requires the
entity to use the emissions factors that best represent the entity’s activity.
IFRS S2 does not specify the emissions factors that an entity is required to
use. [IFRS S2.B29]. These estimates require:
• ‘Activity data’, which refers to the number of times that a specific
activity occurs for which an emissions factor is available and can be
applied. For Scope 1 emissions, activity data is often denominated in
fuel consumed (e.g., litres of petrol, cubic feet of natural gas) or units
of product produced
• An ‘emissions factor’, which refers to a value that represents the
quantity of a specific GHG (or CO2e) emitted for a specific unit of activity.
For example, CO2e emissions by fuel type for specific vehicles are
common emissions factors used for calculating Scope 1 mobile emissions
Consequently, IFRS S2 requires an entity to disclose information so that
users of general purpose financial reports can understand the emission
factors that the entity has used to measure its GHG emissions. [IFRS S2.B29].
5.3.2 Aggregation of GHGs into CO2 equivalents
Although there are seven constituent GHGs, IFRS S2 requires an entity’s
disclosure of its absolute gross GHG emissions generated during the
reporting period to be expressed in metric tonnes of CO2 equivalent (CO2e).
[IFRS S2.29(a)(i)].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-123-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 123
If an entity uses direct measurement (also known as ‘direct monitoring’) to
measure its GHG emissions by measuring the concentration of GHGs and the
rate of emissions from operations and processes, this means that the entity
will be directly, and separately, measuring the specific constituent GHG
emitted (e.g., the units of methane (CH4) emitted). To convert the constituent
GHGs into a CO2 equivalent value, IFRS S2 requires an entity to use global
warming potential (GWP) values based on a 100-year time horizon, from the
latest Intergovernmental Panel on Climate Change assessment available at
the reporting date. [IFRS S2.B21].
Each of the seven constituent GHGs have a different GWP. The GWP of a
given GHG indicates how much energy one unit of the GHG absorbs (i.e., the
ability of that gas to trap heat in the atmosphere) compared to one unit of
carbon dioxide, generally over a 100-year period. The larger the GWP, the
more that the GHG warms the earth compared to carbon dioxide over the
stated time period. For example, PFCs and HFCs often absorb thousands
of times more energy than carbon dioxide. The GWP of each GHG is used
to convert GHGs, other than carbon dioxide, into carbon dioxide equivalent
(CO2e) units. Therefore, the CO2e unit of measurement is used to evaluate
releasing (or avoiding releasing) different GHGs against a common basis.
[IFRS S2 Appendix A].
If an emission factor used by an entity has already converted the constituent
gases into CO2e values, IFRS S2 does not require the entity to recalculate the
emission factors using GWP values based on a 100-year time horizon from
the latest Intergovernmental Panel on Climate Change assessment available
at the reporting date. However, if the emission factors are not converted
into CO2e values, then the entity is required to use the GWP values based on
a 100-year time horizon from the latest Intergovernmental Panel on Climate
Change assessment available at the reporting date. [IFRS S2.B22].
5.3.3 Using information from reporting periods that are
different from the entity’s reporting period
An entity’s reporting period may be different from the reporting periods used
by some or all the entities in its value chain. A consequence of mismatched
reporting periods is that GHG emissions information that relates to the
entity’s value chain may not be readily available for the entity to use when it
prepares its own disclosures for its reporting period. The ISSB acknowledged
that different reporting periods can cause challenges in preparing disclosures
that rely on value chain information. For that reason, where an entity’s
reporting period is different from the reporting periods of entities in its
value chain, IFRS S2 permits an entity to measure its GHG emissions using
information for reporting periods that are different from its own reporting
period if all of the following conditions are met: [IFRS S2.B19].
• The entity uses the most recent data available from those entities in
its value chain without undue cost or effort to measure and disclose
its GHG emissions.
• The length of the reporting periods is the same.
• The entity discloses the effects of significant events and changes in
circumstances (relevant to its GHG emissions) that occur between
the reporting dates of the entities in its value chain and the date of
the entity’s general purpose financial reports.
5.4 Scope 1 GHG emissions
Scope 1 emissions are emissions from sources owned or controlled by
a reporting entity. For example, emissions from equipment, a vehicle or
production processes that are owned or controlled by the reporting entity are
considered Scope 1 emissions. These emissions include all direct emissions](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-124-320.jpg)
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within the entity’s inventory boundary. The combination of organisational
and operational boundaries make up a reporting entity’s inventory boundary,
which is also called the reporting boundary.
Two or more reporting entities should never account for the same emissions
as Scope 1 emissions. For example, emissions from the generation of heat,
electricity or steam that is sold to another entity are not subtracted from
Scope 1 emissions but are reported as Scope 2 emissions by the entity
that purchases the related energy. Theoretically, if every entity and
individual throughout the world reported their GHG emissions using the
same organisational boundary (e.g., equity share, financial control or
operational control approach), the total of all Scope 1 emissions would
equal the total GHGs emitted throughout the world.
5.5 Scope 2 GHG emissions
According to the GHG Protocol, an entity’s Scope 2 GHG emissions need to
be measured using either a location-based approach or a markets-based
approach. This is described further in section 5.2.3 above on the application
of the GHG Protocol.
As noted in section 5.2.3 above, IFRS S2 requires an entity to: [IFRS S2.29(a)(v),
IFRS S2.B30].
• Disclose its location-based Scope 2 GHG emissions
• Provide information about any ‘contractual instruments’ the entity has
entered into if it has entered into those instruments and information
about those instruments would inform users’ understanding of the
entity’s Scope 2 GHG emissions
The meaning of a ‘contractual instrument’ is explained in IFRS S2:
[IFRS S2.B31].
Extract from IFRS S2
B31 Contractual instruments are any type of contract between an
entity and another party for the sale and purchase of energy
bundled with attributes about the energy generation or for
unbundled energy attribute claims (unbundled energy attribute
claims relate to the sale and purchase of energy that is separate
and distinct from the greenhouse gas attribute contractual
instruments). Various types of contractual instruments are
available in different markets and the entity might disclose
information about its market-based Scope 2 greenhouse gas
emissions as part of its disclosure.
5.6 Scope 3 GHG emissions
IFRS S2 requires an entity to disclose information about its Scope 3 GHG
emissions according to the 15 categories of Scope 3 GHG emissions as
described in the GHG Protocol. The purpose of this disclosure is to enable
users of general purpose financial reports to understand the source of
the entity’s Scope 3 emissions. [IFRS S2.29(a)(vi), IFRS S2.B32].
As such, when an entity prepares its Scope 3 GHG emissions disclosures,
IFRS S2 requires the entity to: [IFRS S2.B32, IFRS S2.B34].
• Consider its entire value chain (upstream and downstream)
• Reassess which Scope 3 categories and entities throughout its value
chain to include in the measurement of its Scope 3 GHG emissions if a
significant event or a significant change in circumstances has occurred.
This reassessment is consistent with the requirements in IFRS S1 about
reassessing the scope of sustainability-related risks and opportunities](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-125-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 125
(see relevant discussion in section 1.2.3 of Part A – Introduction to
IFRS S1)
5.6.1 Scope 3 measurement framework
Scope 3 GHG emissions can be quantified by either direct measurement
(i.e., the direct monitoring of GHG emissions) or estimation (which involves
approximate calculations of data based on assumptions and appropriate
inputs). The ISSB considers that, in theory, direct measurement provides
the most accurate evidence of an entity’s Scope 3 GHG emissions. However,
the ISSB also acknowledges that, due to the challenges of directly measuring
Scope 3 GHG emissions, an entity's measurement of Scope 3 GHG emissions
is likely to include the use of estimation rather than solely comprising direct
measurement. [IFRS S2.B38, IFRS S2.B43, IFRS S2.B44, IFRS S2.B45].
IFRS S2 requires an entity to use a measurement approach, inputs and
assumptions that result in a faithful representation of its measurement of
Scope 3 GHG emissions. Although IFRS S2 does not specify the inputs an
entity is required to use to measure its Scope 3 GHG emissions, the standard
does require the entity to prioritise inputs and assumptions using the
following identifying characteristics:
• Data based on direct measurement (see section 5.6.1.A below)
• Data from specific activities within the entity’s value chain (see section
5.6.1.B below)
• Timely data that faithfully represents the jurisdiction of, and the
technology used for, the value chain activity and its GHG emissions (see
section 5.6.1.C below)
• Data that has been verified (see section 5.6.1.D below)
Each of these characteristics are explained further in the sections below,
noting that these characteristics are not listed in a particular order and,
as such, an entity’s prioritisation of the measurement approach, inputs and
assumptions may require management to use judgement to make trade-offs
between data. [IFRS S2.B40, IFRS S2.B42].
An example of a trade-off that management may need to make is between
the timeliness of the data and specificity of the data. Recent data may
provide less detail about the specific value chain activity (such as technology
used, location and jurisdiction of the activity) whereas data that is older and
published infrequently might be more representative of the value chain
activity and its GHG emissions. [IFRS S2.B42].
When an entity selects the measurement approach, inputs and assumptions
to measure its Scope 3 GHG emissions, IFRS S2 specifies that the entity is
required to use all reasonable and supportable information that is available
to the entity at the reporting date without undue cost or effort. [IFRS S2.B39].
IFRS S2 states that an entity is required to apply the Scope 3 measurement
framework to prioritise inputs and assumptions even if: [IFRS S2.B41].
• The entity is required by a jurisdictional authority or securities exchange
to use a method other than the GHG Protocol to measure its GHG
emissions
• The entity has elected to use the transition relief that allows the entity to
measure its GHG emissions using a method other than the GHG Protocol
for its first annual reporting period when its applies IFRS S2
5.6.1.A Data based on direct measurement
IFRS S2 requires an entity to prioritise direct measurement of Scope 3 GHG
emissions, but acknowledges that it expects that Scope 3 GHG emissions data
will include estimation. [IFRS S2.B43, IFRS S2.B44].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-126-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 126
IFRS S2 outlines that estimates of Scope 3 GHG emissions are likely to use
two types of inputs: [IFRS S2.B45].
• Data that represents the entity’s activity that results in GHG emissions
(activity data). For example, the entity might use distance travelled as
activity data to represent the transport of goods within its value chain.
• Emission factors that convert activity data into GHG emissions. For
example, the entity will convert the distance travelled (activity data) into
GHG emissions data using emission factors.
5.6.1.B Data from specific activities within the entity’s value
chain
Measurement of an entity’s Scope 3 GHG emissions will be based on:
[IFRS S2.B46].
• Primary data — data obtained directly from specific activities within
the entity’s value chain (e.g., data provided by suppliers)
• Secondary data — data not obtained directly from activities within
the entity’s value chain (e.g., data from third party data providers
and industry-average data)
• A combination of both primary and secondary data
IFRS S2 requires an entity to prioritise primary data when estimating the
entity’s Scope 3 GHG emissions. This is because the ISSB considers that
data from specific activities within an entity’s value chain provides a more
accurate representation of the entity’s specific value chain activities and,
thus, primary data provides a better basis to measure an entity’s Scope 3
GHG emissions. However, if an entity uses secondary data to measure its
Scope 3 GHG emissions, IFRS S2 requires the entity to consider the extent
to which the secondary data faithfully represents the entity’s activities.
[IFRS S2.B47, IFRS S2.B48, IFRS S2.B49].
Examples of primary and secondary data are provided in Figure 5-3 below:
Figure 5-3: Primary and secondary data
Type of data Examples
Primary data • Data sources include meter readings,
utility bills and other methods that
represent specific activities in the
entity’s value chain.
• Data sources may be from internal
sources such as from the entity’s own
records or from external sources such
as from suppliers and other value chain
partners (e.g., supplier-specific emission
factors for purchased goods or services).
[IFRS S2.B48].
Secondary data • Data sources include third-party data
providers and industry-average data
(e.g., from published databases,
government statistics, literature
studies and industry associations).
• Secondary data includes both:
[IFRS S2.B49].
• Data used to approximate the
activity or emission factors
• Primary data from a specific activity
(proxy data) that is used to estimate
GHG emissions for another activity](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-127-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 127
5.6.1.C Timely data that faithfully represents the jurisdiction of,
and the technology used for, the value chain activity and
its GHG emissions
If an entity uses secondary data to measure its Scope 3 GHG emissions,
IFRS S2 requires the entity to prioritise the use of activity or emissions
data that is: [IFRS S2.B50, IFRS S2.B51, IFRS S2.B52].
• Based on, or represents, the technology used in the value chain activity
the data is intended to represent (see Illustration 5-1 below)
• Based on, or represents, the jurisdiction in which the activity happened
(e.g., where the entity operates or where the activity took place)
• Timely and representative of the entity’s value chain activity during the
reporting period (e.g., considering whether the secondary data sources
relied on information collected in the entity’s current reporting period or
in a reporting period that is different from the entity’s current reporting
period)
The illustration below is based on an example used in IFRS S2: [IFRS S2.B50].
Illustration 5-1: Use of secondary data
In measuring its Scope 3 GHG emissions from business travel, Entity A obtains
primary data from its business travel activities including data about:
• The specific aircraft model used for each flight
• Distance travelled for each flight
• Travel-class used by the travelling employees
Entity A would then estimate its GHG emissions from business travel by
applying this primary data with secondary data on the GHG emissions relating
to each of those activities.
5.6.1.D Verified data
IFRS S2 requires an entity to prioritise Scope 3 GHG emissions data that is
verified. Data can be subject to internal or external verification and may
involve on-site checking, reviewing calculations, or cross-checking of data
against other sources. [IFRS S2.B53].
The ISSB acknowledges that an entity might need to use unverified data if it
is unable to verify its Scope 3 GHG emissions without undue cost or effort.
[IFRS S2.B54].
5.6.1.E Disclosure of inputs to Scope 3 GHG emissions
As part of an entity’s disclosure of information about the measurement
approach, inputs and assumptions that the entity uses to measure its Scope 3
GHG emissions in accordance with IFRS S2 (as discussed in section 5.3.1
above), the entity is required to disclose information about: [IFRS S2.B55,
IFRS S2.B56].
• The characteristics of the data inputs referred to in section 5.6.1 on
Scope 3 measurement framework that are used in the measurement
of Scope 3 GHG emissions
• How the entity has prioritised the highest quality data available, which
faithfully represents the value chain activity and its Scope 3 GHG
emissions
• The extent to which the entity’s Scope 3 GHG emissions are measured
using:
• Inputs from specific activities within the entity’s value chain
• Inputs that are verified](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-128-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 128
IFRS S2 includes a specifically stated presumption that Scope 3 GHG
emissions can be estimated reliably using secondary data and industry
averages. However, if an entity determines it is impracticable to estimate
its Scope 3 GHG emissions (i.e., the entity cannot apply the requirement
after making every reasonable effort to do so), IFRS S2 requires the entity
to disclose how it is managing its Scope 3 GHG emissions. The ISSB expects
that cases when measuring Scope 3 GHG emissions is impracticable will be
rare. [IFRS S2.B57].
5.7 Financed emissions
IFRS S2 requires an entity participating in financial activities, including
commercial and investment banks, asset managers and insurance entities
to provide additional and specific disclosures about its Category 15 Scope 3
GHG emissions or those emissions associated with its investments,
specifically its ‘financed emissions’ in: [IFRS S2.B59].
• Asset management (see section 5.7.1 below)
• Commercial banking (see section 5.7.2 below)
• Insurance (see section 5.7.3 below)
Extract from IFRS S2
Appendix A
Defined terms
financed emissions The portion of gross greenhouse gas emissions
of an investee or counterparty attributed to
the loans and investments made by an entity
to the investee or counterparty. These emissions
are part of Scope 3 Category 15 (investments)
as defined in the Greenhouse Gas Protocol
Corporate Value Chain (Scope 3) Accounting
and Reporting Standard (2011).
The amount of financed emissions of an entity participating in financial
activities is a key focus area for users of general purpose financial reports
because it is an indicator of an entity’s exposure to climate-related risks and
opportunities and how the entity might need to adapt its financial activities
over time. This is because: [IFRS S2.B58].
• Investees, borrowers and counterparties with high GHG emissions could
be more susceptible to risks associated with technological changes, shifts
in supply and demand and policy changes.
• As a consequence, those risks could increase the exposure of entities
providing financial services to counterparties, borrowers and investees
to credit risk, market risk, reputational risk and other financial and
operational risks (such as credit risk associated with financing borrowers
affected by carbon taxes or reputational risks from financing fossil fuel
projects).
The application guidance in IFRS S2 supports the use of different
measurement approaches to calculate an entity’s financed emissions. In
developing this application guidance, the ISSB’s intention was to allow for
measurement methodologies for different asset classes to emerge and be
accepted by the market, such as the measurement methodologies developed
by the Partnership for Carbon Accounting Financials. [IFRS S2.BC125].](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-129-320.jpg)
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5.7.1 Asset management
IFRS S2 requires an entity that participates in asset management activities
to disclose the information set out in Figure 5-4 below:
Figure 5-4: Asset management disclosures
Information to disclose Further considerations
The entity’s absolute gross
financed emissions,
disaggregated by Scope 1,
Scope 2 and Scope 3 GHG
emissions
[IFRS S2.B61(a)]
-
For each of the
disaggregated Scope 1,
Scope 2 and Scope 3 GHG
emissions disclosures,
the total amount of assets
under management (AUM)
included in the entity’s
financed emissions
disclosures, expressed in
the presentation currency
of the entity’s financial
statements [IFRS S2.B61(b)]
-
The percentage of the
entity’s total AUM included
in the financed emissions
calculation [IFRS S2.B61(c)]
For exclusions Explain the exclusions,
including the type of
assets excluded and
associated amount of
AUM, if the percentage
of the entity’s total AUM
included in the financed
emissions calculation is
less than 100%.
The methodology used by
the entity to calculate its
financed emissions
[IFRS S2.B61(d)]
Describe the allocation method used by the
entity to attribute its share of emissions in
relation to the size of its gross exposure.
5.7.2 Commercial banking
IFRS S2 requires an entity that participates in commercial banking activities
to disclose the information set out in Figure 5-5 below:
Figure 5-5: Commercial banking disclosures
Information to
disclose Further considerations
The entity’s absolute
gross financed
emissions,
disaggregated by
Scope 1, Scope 2
and Scope 3 GHG
emissions for each
industry by asset
class.
For disaggregation
by industry
The Global Industry
Classification Standard
(GICS) 6-digit industry-level
code is required to classify
counterparties (using
the latest version of the
classification system
available at the reporting
date).](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-130-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 130
[IFRS S2.B62(a)].
For disaggregation
by asset class
Asset classes include:
• Loans
• Project finance
• Bonds
• Equity investments
• Undrawn loan
commitments
If financed emissions are
calculated and disclosed
for other asset classes,
the entity is required to
explain why including those
additional asset classes
provides relevant information
to users of general purpose
financial reports.
The entity’s gross
exposure to each
industry by asset
class, expressed
in the presentation
currency of the
entity’s financial
statements.
[IFRS S2.B62(b)].
For funded
amounts
Gross exposure is to be
calculated as the funded
carrying amounts (before
subtracting any loss
allowance), whether
prepared in accordance
with IFRS accounting
standards or other GAAP.
For undrawn loan
commitments
The full amount of the
commitment is disclosed
separately from the drawn
portion of loan commitments.
The percentage of
the entity’s gross
exposure included in
the financed
emissions
calculation.
[IFRS S2.B62(c)].
For exclusions Explain the exclusions,
including the type of assets
excluded, if the percentage
of the entity’s gross exposure
included in the financed
emissions calculation is less
than 100%.
For funded
amounts
Exclude all impacts of risk
mitigants (if applicable) from
gross exposure.
For undrawn loan
commitments
Separately disclose the
percentage of the entity’s
undrawn loan commitments
included in the financed
emissions calculation.
The methodology
used by the entity
to calculate its
financed emissions.
[IFRS S2.B62(d)].
Describe the allocation method used by the entity
to attribute its share of emissions in relation to the
size of its gross exposure.
5.7.3 Insurance
IFRS S2 requires an entity that participates in insurance activities to disclose
the information set out in Figure 5-6 below:](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-131-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 131
Figure 5-6: Insurance disclosures
Information to disclose Further considerations
The entity’s absolute
gross financed
emissions,
disaggregated by
Scope 1, Scope 2 and
Scope 3 GHG emissions
for each industry by
asset class.
[IFRS S2.B63(a)].
For disaggregation
by industry
The GICS 6-digit industry-
level code is required to
classify counterparties
(using latest version of
the classification system
available at the reporting
date).
For disaggregation
by asset class
Asset classes include:
• Loans
• Bonds
• Equity investments
• Undrawn loan
commitments
If financed emissions are
calculated and disclosed
for other asset classes,
the entity is required to
explain why including
those additional asset
classes provides relevant
information to users of
general purpose financial
reports.
The entity’s gross
exposure for each
industry by asset
class, expressed in the
presentation currency
of the entity’s financial
statements.
[IFRS S2.B63(b)].
For funded amounts Gross exposure is to be
calculated as the funded
carrying amounts (before
subtracting any loss
allowance), whether
prepared in accordance
with IFRS accounting
standards or other GAAP.
For undrawn loan
commitments
The full amount of the
commitment is disclosed
separately from the
drawn portion of loan
commitments.
The percentage of the
entity’s gross exposure
included in the
financed emissions
calculation.
[IFRS S2.B63(c)].
For exclusions Explain the exclusions,
including the type of
assets excluded, if the
percentage of the entity’s
gross exposure included
in the financed emissions
calculation is less than
100%.
For undrawn loan
commitments
Separately disclose the
percentage of the entity’s
undrawn loan
commitments included
in the financed emissions
calculation.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-132-320.jpg)
![December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 132
The methodology
used by the entity to
calculate its financed
emissions.
[IFRS S2.B63(d)].
Describe the allocation method used by the
entity to attribute its share of emissions in
relation to the size of its gross exposure.
6 Effective date
IFRS S2 is effective for annual reporting periods beginning on or after 1
January 2024. An entity is permitted to apply IFRS S2 earlier than 1 January
2024, but to do so, the entity is required to disclose that fact and it is also
required to apply IFRS S1 at the same time. [IFRS S2.C1].
The actual effective date for entities will depend on when the ISSB standards
become mandatory in the jurisdictions in which they operate, unless those
entities voluntarily apply the standards before they become mandatory
in their jurisdictions. See also relevant discussion in section 8 of Part A –
Introduction to IFRS S1.
7 Transition reliefs to IFRS S2
In developing IFRS S2, the ISSB decided to provide some relief to ease
an entity’s transition to the new requirements in the entity’s first year of
applying those requirements.
The transition reliefs set out in Table 7-1 below are available for an entity
to use in the first annual reporting period in which the entity applies IFRS S2.
The entity can choose to use all, some, or none of those reliefs in its first
annual reporting period. [IFRS S2.C4, IFRS S2.BC174].
Figure 7-1: Transition reliefs for IFRS S2
Relief topic Nature of relief that applies to the first annual
reporting period in which the entity applies IFRS S2
Comparative
information
An entity is not required to disclose comparative
information. [IFRS S2.C3].
GHG Protocol An entity is permitted to continue to use a method other
than the GHG Protocol to measure its GHG emissions
if the entity used that method to measure its GHG
emissions in the annual reporting period immediately
preceding the date of initial application of IFRS S2.
[IFRS S2.C4(a)]. The date of initial application is the start
of the reporting period in which an entity first applies
IFRS S2.
Scope 3 GHG
emissions
An entity is not required to disclose its Scope 3 GHG
emissions, including the additional information about
financed emissions (if applicable). [IFRS S2.C4(b)].
If an entity uses either of the abovementioned reliefs relating to the GHG
Protocol or Scope 3 GHG emissions, IFRS S2 allows the entity to continue
to use that relief so that it is not required to present that information as
comparative information in subsequent reporting periods. [IFRS S2.C5]. This
is explained further in Illustration 7-1 below:
Illustration 7-1: Comparative information transition relief
Entity A applies ISSB standards for the first time for the annual reporting
period ending 31 December 2024.](https://image.slidesharecdn.com/anintroductiontotheifrsissbstndards-250807175321-88ada3cb/85/An-introduction-to-the-IFRS-ISSB-Stndards-pdf-133-320.jpg)
An introduction to the IFRS (ISSB) Stndards.pdf
- 1. Applying IFRS IFRS sustainability disclosure standards Introduction to IFRS S1 and IFRS S2 December 2023
- 2. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 1 Contents Overview 8 Part A - Introduction to IFRS S1 12 1 Introduction to IFRS S1 13 1.1 The objective of IFRS S1 13 1.1.1 Primary users 13 1.1.2 Description of sustainability-related risks and opportunities 14 1.1.2.A Broad term of sustainability 14 1.1.2.B The concept of value 14 1.1.2.C The concept of value in the description of sustainability in IFRS S1 15 1.1.2.D Requirement to identify sustainability-related risks and opportunities based on the description of sustainability in IFRS S1 16 1.2 Identifying sustainability-related risks and opportunities 16 1.2.1 The identification process 16 1.2.2 Use of reasonable and supportable information 17 1.2.2.A The concept of reasonable and supportable information 17 1.2.2.B Application of the concept of reasonable and supportable information in IFRS S1 18 1.2.3 Reassessing the scope of sustainability-related risks and opportunities 19 2 Scope 20 2.1 The scope of IFRS S1 20 2.2 Application by public sector or entities other than profit- oriented entities 21 3 Conceptual foundations 21 3.1 Fair presentation of sustainability-related risks and opportunities 21 3.1.1 Qualitative characteristics of sustainability-related financial information 22 3.2 Materiality 28 3.2.1 Definition of materiality 28 3.2.2 Identifying material information 29 3.2.2.A Information needs of primary users 29 3.2.2.B Sources applied in assessing materiality 31
- 3. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 2 3.2.2.C Possible future events with uncertain outcomes 31 3.2.3 Additional information disclosed by an entity 32 3.2.3.A Additional information provided when the requirements of the ISSB standards are not sufficient 32 3.2.3.B Requirements for not obscuring material information 32 3.2.3.C Interaction with law or regulation 34 3.2.4 Other characteristics of material information 34 3.2.4.A Aggregation and disaggregation 34 3.2.4.B Commercially sensitive information 35 3.2.5 Reassessment of material information 35 3.2.6 Interoperability considerations 36 3.3 Reporting entity 37 3.3.1 Definition of a reporting entity 37 3.3.2 Breadth of reporting 37 3.3.3 Determining the scope of value chain 38 3.4 Connected information 39 3.4.1 Connections between items to which the information relates 39 3.4.2 Connections between disclosures provided in general purpose financial reports 39 3.4.2.A Connections between disclosures provided within an entity’s sustainability-related financial disclosures 40 3.4.2.B Connections between disclosures provided across sustainability-related financial disclosures and other general purpose financial reports published by the entity 40 3.4.3 Characteristics of connections 41 4 Core content 42 4.1 Overview of TCFD 42 4.2 Governance 44 4.2.1 Information about the oversight role 45 4.2.2 Information about management’s role 45 4.3 Strategy 47 4.3.1 Disclosures about sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects 48 4.3.2 Disclosures about the effects of sustainability-related risks and opportunities on the entity’s business model and value chain 49
- 4. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 3 4.3.3 Disclosures about the effects of sustainability-related risks and opportunities on the entity’s strategy and decision- making 49 4.3.4 Disclosures about current and anticipated financial effects of sustainability-related risks and opportunities 50 4.3.4.A Disclosures about current financial effects 51 4.3.4.B Disclosures about anticipated financial effects – next annual reporting period 51 4.3.4.C Disclosures about anticipated financial effects – Short, medium and long term 51 4.3.4.D Measurement of current and anticipated financial effects 52 4.3.4.E Preparing disclosures about anticipated financial effects 52 4.3.4.F Criteria and disclosures when quantitative information about current and anticipated financial effects is not required 53 4.3.5 Disclosures about the resilience of the entity’s strategy and business model to sustainability-related risks 54 4.4 Risk management 55 4.4.1 Processes for sustainability-related risks 55 4.4.2 Processes for sustainability-related opportunities 56 4.4.3 Integrating disclosures 56 4.5 Metrics and targets 57 4.5.1 Metrics required by an ISSB standard 57 4.5.2 Metrics developed by the entity 57 4.5.3 Targets 58 5 General requirements 58 5.1 Sources of guidance 58 5.1.1 Use of sources of guidance when identifying sustainability-related risks and opportunities 59 5.1.1.A Considerations when referring to the SASB standards to identify sustainability-related risks and opportunities 60 5.1.1.B Considerations when referring to other sources of guidance to identify sustainability-related risks and opportunities 63 5.1.2 Sources of guidance when identifying material sustainability-related financial information 65
- 5. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 4 5.1.2.A Considerations when referring to the SASB standards to identify material information about sustainability-related risks and opportunities 65 5.1.2.B Considerations when referring to other sources of guidance to identify material information about sustainability- related risks and opportunities 69 5.1.3 Disclosure of information about sources of guidance 72 5.2 Location of disclosures 72 5.2.1 Flexibility in location of disclosures 72 5.2.2 Information included by cross-reference 73 5.3 Timing of reporting 73 5.3.1 Simultaneous reporting of sustainability-related financial disclosures and financial statements 73 5.3.2 Reporting period of sustainability-related financial disclosures 74 5.3.3 Interim reporting 74 5.4 Comparative information 74 6 Judgements, uncertainties and errors 75 6.1 Judgements 75 6.2 Measurement uncertainty 76 6.2.1 Estimated amounts give rise to measurement uncertainty 76 6.2.2 IFRS S1 requirements for measurement uncertainties 76 6.2.3 Revised comparative information for estimated metrics 77 6.2.3.A New information for estimated metrics disclosed in the preceding period 77 6.2.3.B Revised comparatives for redefined, replaced and new metrics 78 6.3 Errors 78 7 Statement of compliance 79 8 Effective date 80 9 Transition reliefs to IFRS S1 requirements 80 9.1 Transition relief for simultaneous reporting 80 9.2 Transition relief for comparative information 81 9.3 ‘Climate-first’ transition relief 81 Part B – Introduction to IFRS S2 83 1 Introduction to IFRS S2 84 1.1 The objective and scope of IFRS S2 84
- 6. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 5 2 Climate-related risks and opportunities 85 3 Identifying climate-related risks and opportunities 87 4 Core content 88 4.1 Overview 88 4.1.1 Comparison with TCFD Recommendations 88 4.2 Governance 89 4.3 Strategy 89 4.3.1 Disclosures about climate-related risks and opportunities 90 4.3.1.A Classifying climate-related risks 90 4.3.1.B Using industry-based guidance to identify climate- related risks and opportunities 90 4.3.1.C Using reasonable and supportable information to identify climate-related risks and opportunities 91 4.3.2 Disclosures about the effects of climate-related risks and opportunities on the entity’s strategy and decision-making 91 4.3.2.A Climate-related transition plans 92 4.3.3 Disclosures about the resilience of the entity’s strategy and business model 95 4.3.3.A Resilience assessment 96 4.3.3.B Scenario analysis 97 4.3.3.C Application guidance on preparing climate-related scenario analysis 99 4.4 Risk management 103 4.5 Metrics and targets 104 4.5.1 Cross-industry metrics 105 4.5.1.A GHG emissions disclosures 106 4.5.1.B Assets or business activities vulnerable to climate- related risks or aligned to climate-related opportunities 109 4.5.1.C Capital deployment 109 4.5.1.D Internal carbon prices 109 4.5.1.E Executive remuneration 110 4.5.1.F Preparation guidance 111 4.5.2 Industry based metrics 111 4.5.3 Climate-related targets 111 4.5.3.A Disclosures about an entity’s climate-related targets 111
- 7. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 6 4.5.3.B Approach to set, review and monitor progress against targets 112 4.5.3.C Reporting performance against each target 113 4.5.3.D GHG emission targets 113 5 Greenhouse gas emissions 116 5.1 Measurement of GHG emissions 116 5.2 Overview of GHG Protocol 116 5.2.1 Accounting for, measuring and reporting GHG emissions 117 5.2.2 Organisational boundary 118 5.2.2.A Equity share approach 118 5.2.2.B Control approach 119 5.2.3 Scope 2 GHG emissions calculation methods 120 5.2.3.A Location-based method 120 5.2.3.B Market-based method 120 5.3 Categories of GHG emissions 121 5.3.1 Measurement approach, inputs and assumptions 121 5.3.1.A GHG Protocol measurement approaches 122 5.3.1.B Other methods and measurement approaches 122 5.3.1.C Emissions factors 122 5.3.2 Aggregation of GHGs into CO2 equivalents 122 5.3.3 Using information from reporting periods that are different from the entity’s reporting period 123 5.4 Scope 1 GHG emissions 123 5.5 Scope 2 GHG emissions 124 5.6 Scope 3 GHG emissions 124 5.6.1 Scope 3 measurement framework 125 5.6.1.A Data based on direct measurement 125 5.6.1.B Data from specific activities within the entity’s value chain 126 5.6.1.C Timely data that faithfully represents the jurisdiction of, and the technology used for, the value chain activity and its GHG emissions 127 5.6.1.D Verified data 127 5.6.1.E Disclosure of inputs to Scope 3 GHG emissions 127 5.7 Financed emissions 128 5.7.1 Asset management 129 5.7.2 Commercial banking 129
- 8. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 7 5.7.3 Insurance 130 6 Effective date 132 7 Transition reliefs to IFRS S2 132
- 9. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 8 Overview Current landscape Sustainability reporting has attracted increasing interest from various stakeholders in recent years. The demand for a holistic approach to corporate reporting, with key components that include sustainability reporting, financial reporting, and assurance, has emerged. In response to both the demand for information from the investment community and broader public expectations of the role of businesses in society, a plethora of frameworks, methodologies and metrics for sustainability reporting have been developed. Currently, there are various sustainability-related reporting frameworks, standards and metrics. Some focus on non-financial information and sustainability-related matters, while others focus specifically on climate- related disclosures. The target audience for those frameworks, standards and metrics varies, e.g., investors and wider society. Although the information may overlap in certain respects, the differences in subject matter and audience lead to diverging approaches to materiality with either an emphasis on the impact of sustainability matters on an entity, or an entity’s impact on the external environment or both. The diversity in objectives and approaches indicated the urgent need for a global framework to provide greater comparability and reduce the complexity in sustainability reporting. Background The IFRS Foundation was encouraged by stakeholders to be involved in the work towards a coherent and comprehensive corporate-reporting system and the development of a converged, global framework on sustainability- related reporting. Therefore, the Trustees of the IFRS Foundation, through a consultation process, assessed the demand for sustainability reporting at a global level and explored the IFRS Foundation’s role in the development of global sustainability standards.1 The feedback received by the IFRS Foundation from multiple stakeholder consultations on both the need to play a role in sustainability standard setting and on the changes to its constitution gave a clear message – there is a growing demand to improve the global consistency and comparability of sustainability reporting and an urgent need for action. The IFRS Foundation, which had been responsible for setting global accounting standards for several years, started to deliberate and plan for the establishment of the International Sustainability Standards Board (or the ISSB). In April 2021, in response to demands from global capital markets for the development of standards to provide a comprehensive global baseline of sustainability disclosures, the Trustees of the IFRS Foundation published a proposal to amend the IFRS Foundation’s Constitution to accommodate the formation and operation of the ISSB. The establishment of the ISSB was announced by the Trustees of the IFRS Foundation on 3 November 2021, during the Finance Day of the COP26 climate change conference. To lay the groundwork for the new board, prior to the establishment of the ISSB, the IFRS Foundation set up a Technical Readiness Working Group (TRWG) with the objectives to accelerate convergence in global sustainability reporting standards and to undertake technical preparation for the ISSB under the governance of the IFRS Foundation. The TRWG was comprised of representatives from the Taskforce for Climate-related Financial Disclosures (TCFD), the Value Reporting Framework (VRF), the Climate Disclosure Standards Board (CDSB)2 , the World Economic Forum (WEF) and the 1 Consultation Paper on Sustainability Reporting 2 The VRF (which houses the Integrated Reporting Framework and the SASB Standards) and the CDSB have now been consolidated into the ISSB.
- 10. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 9 International Accounting Standards Board (IASB), supported by the International Organization of Securities Commissions (IOSCO) and its Technical Expert Group of securities regulators. The TRWG’s work on general requirements for the disclosure of sustainability-related financial information and the climate-related disclosure resulted in prototype standards titled General Requirements for Disclosure of Sustainability-related Financial Information Prototype and Climate-related Disclosures Prototype respectively, published on the IFRS Foundation’s website in November 2021. The prototype standards were not subject to the IFRS Foundation’s formal due process or that of any TRWG member. Calls from users of general purpose financial reports for more consistent, complete, comparable and verifiable sustainability-related financial information, led the ISSB, in March 2022, to publish its first two Exposure Drafts on IFRS S1 General Requirements for Disclosure of Sustainability- related Financial Information and IFRS S2 Climate-related Disclosures for public comment that ended in July 2022. The Exposure Drafts were built on the TRWG’s prototype standards, as well as the work of standard-setters and framework-providers, which had been subject to extensive public consultation and redeliberation. The Exposure Drafts attracted significant interest in the market and the ISSB received over 700 comment letters and survey responses as feedback on each of the Exposure Drafts, with respondents representing a range of stakeholder groups and geographies. Issuance of IFRS S1 and IFRS S2 On 26 June 2023, after a year of deliberations on the feedback received on the two Exposure Drafts, the ISSB issued its first two IFRS sustainability disclosure standards (the ISSB standards). The standards are aimed to enable users of general purpose financial reports to assess an entity’s exposure to and management of sustainability-related risks and opportunities over the short, medium and long term, and inform their decisions relating to providing resources to an entity. Moreover, the sustainability-related financial information supplements and complements the information in the entity’s general purpose financial statements. Under the governance of the IFRS Foundation, the ISSB works closely with the International Accounting Standards Board (the IASB), to ensure connectivity and compatibility between the IFRS accounting standards and the ISSB standards. IFRS S1 and IFRS S2 are comprised of their main text, as well as five and three appendices respectively. The appendices are integral parts of IFRS S1 and IFRS S2 and have the same authority as their main text. IFRS S1 and IFRS S2 are accompanied by Illustrative Guidance, Illustrative Examples and Basis for Conclusions (BC), but these are not part of IFRS S1 and IFRS S2 nor are they intended to provide interpretative guidance. In addition, IFRS S2 is accompanied by Industry-based Guidance on Implementing IFRS S2, which is not intended to create additional requirements. The Implementation Guidance and Illustrative Examples of IFRS S1 and IFRS S2 as well as the Industry- based Guidance on Implementing IFRS S2, accompany those standards and illustrate aspects of them, while the BC summarises the considerations of the ISSB in developing those standards. Interoperability The ISSB standards can be used on a standalone basis or integrated into jurisdictional requirements to serve broader stakeholder or other public policy needs. The ISSB, with fourteen board members from various parts of the world, is committed to formal engagement with jurisdictions that develop their own sustainability reporting requirements. Within the context of interoperability with other jurisdictions, several initiatives have been taken so far, including:
- 11. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 10 • Forming the Jurisdictional Working Group (JWG) to discuss important strategic matters relating to IFRS S1 and IFRS S2 and jurisdictional initiatives on sustainability reporting • Establishing the Sustainability Standards Advisory Forum (SSAF) as a formal technical advisory body to the ISSB which is represented by jurisdictional and regional bodies that contribute their technical input and expertise to inform the ISSB’s standard-setting work • Collaborating with Global Reporting Initiative standards (GRI standards) • Working closely with the European Commission and the European Financial Reporting Advisory Group (EFRAG) to facilitate interoperability • Developing guidance for jurisdictions on how to adopt the ISSB standards into the various jurisdictions In addition to the ongoing actions of the ISSB to achieve interoperability of the ISSB standards with other jurisdictional requirements, IFRS S1 already includes requirements to support this goal. For example, sustainability- related financial information in accordance with the ISSB standards is: • Aimed at meeting the information needs of primary users, i.e., current and potential investors, creditors and other lenders • Based on a materiality assessment consistent with that used in the application of the IFRS accounting standards • Presented with information disclosed to meet other requirements, such as specific jurisdictional requirements, but must not be obscured by such additional information • Aligned with TCFD Recommendations on governance, strategy, risk management, and metrics and targets • Required for short, medium and long-term time horizons without defining those horizons as this would be an entity- or industry-specific determination The role of IFRS S1 in the ISSB standards IFRS S1 sets out the general requirements for a complete set of sustainability-related financial disclosures and requires an entity to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects. The effect on the entity’s prospects refers to the effect on the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term. The information required by IFRS S1 relates to general aspects of how an entity operates, in particular, its governance, strategy, risk management, and metrics and targets associated with sustainability-related risks and opportunities. IFRS S1 refers to these four aspects as the ‘core content’, meaning the respective information is essential to users’ understanding of how an entity identifies, assesses, prioritises, monitors and manages sustainability-related risks and opportunities. This focus on core content builds on the widely accepted recommendations of the TCFD. IFRS S1 also deals with some general matters such as the requirement for fair presentation of those sustainability-related risks and opportunities and the requirement to provide comparative information. An entity is required to apply IFRS S1 in conjunction with all the other ISSB standards before it can assert compliance with the ISSB standards. The other ISSB standards are intended to set out specific requirements for the sustainability-related topics with which they deal. The purpose of IFRS S1 is to establish the basis of application of all topic-based ISSB standards that will be developed by the ISSB in the future, in addition to IFRS S2 which is the first topic-based standard and covers disclosure requirements that are specific to climate. This purpose, in the context of sustainability-related financial disclosures is similar, in some respects, to that of the IASB’s Conceptual Framework, IAS 1 Presentation of Financial Statements and
- 12. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 11 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, which are applicable to general purpose financial statements prepared in accordance with the IFRS accounting standards. Relationship between IFRS S1 and IFRS S2 IFRS S2 is the first topic-based standard issued by the ISSB and is to be applied in conjunction with IFRS S1. Although the ISSB standards, in this first phase of their development, include IFRS S2 as the ISSB’s only topic-based standard, IFRS S1 requires entities to disclose material sustainability-related financial information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects. This requirement effectively covers sustainability-related topics beyond climate (subject to the ‘climate first’ transition relief which allows an entity to provide only climate-related disclosures in its first year of applying IFRS S1 and IFRS S2). IFRS S1 also provides a list of other sources of guidance to help entities identify the relevant sustainability-related risks and opportunities and the material information about them, which includes references to pronouncements of other standard-setting bodies. This publication deals with the requirements of IFRS S1 in Part A – Introduction to IFRS S1 and the requirements of IFRS S2 in Part B – Introduction to IFRS S2. Effective date of IFRS S1 and IFRS S2 Both IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024. However, the mandatory application of the ISSB standards depends on each jurisdiction’s endorsement or regulatory processes and it is not linked to the application of the IFRS accounting standards. Therefore, an entity applying the IFRS accounting standards for financial reporting purposes is not required to also apply the ISSB standards, and vice versa. What you need to know • The Trustees of the IFRS Foundation established the ISSB in November 2021. • The ISSB issued its first two standards, namely IFRS S1 and IFRS S2 in June 2023. • The ISSB standards can be used on a standalone basis or integrated into jurisdictional requirements. • In applying the ISSB standards, IFRS S1 must be applied in conjunction with the other ISSB standards that provide requirements for specific sustainability-related topics (e.g., IFRS S2 for climate-related matters). • IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024, but mandatory application of the ISSB standards will depend on each jurisdiction’s endorsement or regulatory processes. • The application of IFRS S1 and IFRS S2 is not linked to the application of the IFRS accounting standards. Therefore, entities that apply the IFRS accounting standards for financial reporting purposes are not required to also apply the ISSB standards. • This publication deals with the requirements of IFRS S1 (Part A) and IFRS S2 (Part B)
- 13. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 12 Part A - Introduction to IFRS S1
- 14. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 13 1 Introduction to IFRS S1 1.1 The objective of IFRS S1 IFRS S1 sets out the general requirements for the content and presentation of information that an entity needs to provide about sustainability-related risks and opportunities. [IFRS S1.4]. The objective of providing such information is to support users of general purpose financial reports in their decision-making process that relates to providing resources to the entity which prepares the general purpose financial report. [IFRS S1.1]. That is, this information is intended to enable those users to assess the entity’s exposure to sustainability-related risks and opportunities over the short, medium and long term, as well as to assess how the entity manages those risks and opportunities in order to inform their decisions in providing resources to that entity. General purpose financial reports are defined by IFRS S1 as those that provide financial information about an entity that is useful for the users of those reports in making decisions related to providing resources to the entity, and include, but are not restricted to, an entity’s general purpose financial statements (or financial statements) and sustainability-related financial disclosures. [IFRS S1 Appendix A]. Information about an entity’s sustainability-related risks and opportunities is incorporated in disclosures, referred to as sustainability-related financial disclosures, that constitute a particular form of general purpose financial report and which supplements and complements the information provided in the entity’s financial statements. To further clarify the objective of IFRS S1, there are certain components embedded in the standard as further discussed in the next sections: • Who does IFRS S1 consider to be the users of general purpose financial statements (see section 1.1.1 below) • How does IFRS S1 describe the sustainability-related risks and opportunities addressed by the ISSB standards (see section 1.1.2 below) 1.1.1 Primary users IFRS S1 defines primary users of general purpose financial reports (primary users) as the “existing and potential investors, lenders and other creditors”.3 [IFRS S1 Appendix A]. This definition was built on what is stated in paragraph 1.7 of the Conceptual Framework: “General purpose financial reports are not designed to show the value of a reporting entity; but instead, they provide information to help existing and potential investors, lenders and other creditors estimate the value of the reporting entity”. According to this definition, the ISSB standards focus on the information needs of primary users in making their decisions about providing resources to an entity, rather than of a broader group of stakeholders. The BC to IFRS S1 states that “Disclosures made in accordance with IFRS Sustainability Disclosure Standards are conceptually and practically complementary to — but not a replacement for — reporting on an entity’s significant impacts on people, the environment and the economy”. This clearly distinguishes sustainability-related financial information provided in accordance with the ISSB standards from the broader, multi-stakeholder perspective adopted by other sustainability-related frameworks that focus on how an entity contributes to sustainable development. [IFRS S1.BC49]. For further discussion 3 The terms users of general purpose financial reports, or primary users, or users are used within the IFRS sustainability disclosure standards to describe the same population. [IFRS S1 Appendix A]. The ISSB standards focus on the information needs of primary users in making their decisions relating to providing resources to an entity, rather than on a broader group of stakeholders.
- 15. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 14 on the perspective adopted by other sustainability frameworks, see section 3.2.6 below. Although focusing on the information needs of primary users is widely accepted by the market, identifying and assessing the information that would be useful to primary users may not always be straightforward. Primary users need sufficient and relevant information to make their decisions about where and when to provide resources to the entity that prepares the general purpose financial reports, as well as what type of resources to provide. Also, primary users are a diverse group with potentially differing objectives and types of risk exposure and the range of their interests on sustainability matters is rather wide and varies across industries, locations as well as business models and business activities. For further discussion on the identification of information that is useful to primary users, see section 3.2.2 below. 1.1.2 Description of sustainability-related risks and opportunities 1.1.2.A Broad term of sustainability The term sustainability is a broad term and applies widely across environmental, social and governance matters and encompasses a wide range of notions. Sustainability is frequently linked to ‘sustainable development’, defined by the United Nations in 1987 as: “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.4 IFRS S1 focuses on requiring disclosures about sustainability-related financial information related to an entity’s governance, strategy, risk management and metrics, and targets in relation to those risks and opportunities. Therefore, the relationship of sustainability-related risks and opportunities with the established notions of sustainability and sustainable development, is fundamental to an understanding of the scope of IFRS S1 and the ISSB standards in general. [IFRS S1.BC42, IFRS S1.BC43]. 1.1.2.B The concept of value In line with its commitment to leverage from the existing material available from other frameworks and standard-setters, the ISSB based the description of sustainability-related risks and opportunities on the concepts of the Integrated Reporting Framework.5 One of the fundamental concepts in the Integrated Reporting Framework is that an entity’s ability to create, preserve and erode value for itself over time (and thus to generate returns for the entity’s investors, lenders and other creditors) is inextricably linked to value that the entity creates, preserves or erodes for others. [IFRS S1.BC46]. In particular, the Integrated Reporting Framework contains the following key points: Extract from the Integrated Reporting Framework 2.2 An integrated report explains how an organization creates, preserves or erodes value over time. Value is not created, preserved or eroded by or within an organization alone. It is: • Influenced by the external environment • Created through relationships with stakeholders • Dependent on various resources. 4 Sustainability | United Nations 5 Integrated Reporting Framework | Integrated Reporting
- 16. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 15 … 2.6 The ability of an organization to create value for itself is linked to the value it creates for others. This concept is also broadly consistent with the IASB’s Exposure Draft on Management Commentary6 . [IFRS S1.BC47]. The broader concept of value reflects that primary users are interested not just in the value the entity creates for itself, but also in the value that the entity creates for others since that value may ultimately affect, for example, the cash flows generated by the entity, its cost of capital, or the availability of funding. The value concept also clarifies how important longer time horizons are. This is because, although the sources of value may not affect the entity’s financial performance in the near term, they may impact its performance, and ultimately its value, as assessed by primary users over time. 1.1.2.C The concept of value in the description of sustainability in IFRS S1 IFRS S1 explains how an entity’s ability to create, preserve or erode value is influenced by its interactions within the interdependent system in which it operates. In particular, an entity interacts, directly or indirectly, with its stakeholders, society, the economy and the natural environment throughout its value chain. Such interactions result from an entity’s own actions in operating its business model to achieve its strategic purposes, as well as from the influences it receives from the external environment in which it operates. In the context of IFRS S1, these interactions take place within an interdependent system and have a dual meaning. That is, an entity both: a) depends on resources and relationships throughout its value chain to generate cash flows; and b) affects those resources and relationships through its activities and outputs by contributing to the preservation, regeneration and development of those resources and relationships or to their degradation and depletion. [IFRS S1.2, IFRS S1.B2]. IFRS S1 provides the following example of the close relationship between the value the entity creates, preserves or erodes for others and the entity’s own ability to succeed and achieve its goals: [IFRS S1.B3]. Extract from IFRS S1 B3 For example, if an entity’s business model depends on a natural resource—such as water—the entity could both affect and be affected by the quality, availability and affordability of that resource. Specifically, degradation or depletion of that resource— including resulting from the entity’s own activities and from other factors—could create a risk of disruption to the entity’s operations and affect the entity’s business model or strategy and could ultimately negatively affect the entity’s financial performance and financial position. In contrast, regeneration and preservation of that resource—including resulting from the entity’s own activities and from other factors—could positively affect the entity. Similarly, if an entity operates in a highly competitive market and requires a highly specialised workforce to achieve its strategic purposes, the entity’s future success will likely depend on the entity’s ability to attract and retain that resource. At the same time, that ability will depend, in part, on the entity’s employment practices—such as whether the entity invests in employee training and wellbeing—and the levels of employee 6 Exposure Draft: Management Commentary (ifrs.org)
- 17. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 16 satisfaction, engagement and retention. These examples illustrate the close relationship between the value the entity creates, preserves or erodes for others and the entity’s own ability to succeed and achieve its goals. 1.1.2.D Requirement to identify sustainability-related risks and opportunities based on the description of sustainability in IFRS S1 IFRS S1 requires an entity to provide information about its sustainability- related risks and opportunities arising from the interactions described in section 1.1.2.C above. That is, the impacts and dependencies on resources and relationships that an entity both relies on and affects by its activities and outputs may give rise to sustainability-related risks and opportunities. However, the sustainability-related risks and opportunities about which an entity is expected to provide information are limited to those that “could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term”. For the purposes of IFRS S1, these sustainability-related risks and opportunities are referred to as “sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects”. [IFRS S1.3]. The enhanced description of concepts that underlie sustainability-related risks and opportunities in IFRS S1 is intended to assist entities in identifying them. How we see it IFRS S1 provides a description of the concepts underlying sustainability- related risks and opportunities, rather than a definition for sustainability. This broad description does not set exact boundaries for the universe of topics covered by sustainability-related financial disclosures so as to reflect the evolving nature of these topics. It follows that the identification of sustainability-related risks and opportunities by an entity may change over time and reassessment of that identification may become necessary (see relevant discussion on reassessing the scope of sustainability-related risks and opportunities in section 1.2.3 below). 1.2 Identifying sustainability-related risks and opportunities 1.2.1 The identification process To meet the objective of IFRS S1, an entity is required to identify the sustainability-related risks and opportunities that could reasonably be expected to affect its prospects and make a materiality assessment to identify and disclose the material information about the identified risks and opportunities. For the purposes of identifying sustainability-related risks and opportunities, materiality is not an attribute of a risk or opportunity, rather it is an attribute of information about that risk and/or opportunity. This distinction is similar to the IASB’s Conceptual Framework.7 Also, the IASB’s Exposure Draft on Management on Commentary has proposed requirements 7 Paragraph 2.21 of the IASB’s Conceptual Framework states: “The most efficient and effective process for applying the fundamental qualitative characteristics would usually be…First, identify an economic phenomenon, information about which is capable of being useful to users of the reporting entity’s financial information. Second, identify the type of information about that phenomenon that would be most relevant. Third, determine whether that information is available and whether it can provide a faithful representation of the economic phenomenon.” Sustainability-related risks and opportunities about which an entity is expected to provide information are limited to those that could reasonably be expected to affect the entity’s prospects.
- 18. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 17 for an entity to focus on key matters and to provide material information about those key matters. IFRS S1 does not explicitly require the two steps of: a) identifying the sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects; and b) identifying material information about those risks and opportunities, to be performed sequentially. In practice, the assessment performed under these two steps is likely to be iterative. An entity needs to disclose information about the judgements it has made to prepare its sustainability-related financial disclosures that most significantly affect those disclosures. An example where judgement is expected to occur that can significantly affect the information reported by an entity is when identifying sustainability-related risks and opportunities that could be reasonably expected to affect the entity’s prospects (see further discussion on judgements in section 6.1 below). [IFRS S1.74]. Moreover, IFRS S1 provides additional guidance in the section on ‘sources of guidance’ to help entities identify sustainability-related risks and opportunities, including those across a range of sustainability-related issues and those that are specific to industries. For further information please see section 5.1.1 below. 1.2.2 Use of reasonable and supportable information 1.2.2.A The concept of reasonable and supportable information Many stakeholders, during the consultation process for the Exposure Draft of IFRS S1, shared their concerns with the ISSB about the range of capabilities and preparedness of entities around the world to apply the requirements of the ISSB standards. The cost of investing in and operating the systems and processes necessary to prepare the disclosures required by the ISSB standards can be relatively high for some entities. Also, the availability of high-quality external data can be limited in some markets, industries and parts of the value chain, and some entities can struggle to access the skills or expertise needed to prepare the disclosures. [IFRS S1.BC8]. For example, despite the guidance provided in IFRS S1 to assist in the identification of sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects (discussed in section 1.2.1 above), entities may still find it challenging to make such an assessment and understand how far they should go within their value chain. These concerns led the ISSB to make decisions about proportionality in the application of the ISSB standards to ease the burden of disclosure and assist entities in this application process. One of these decisions was to introduce in IFRS S1 the concept of “all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort”. This concept is not unique to sustainability-related financial disclosures. There are amounts recognised and measured according to the IFRS accounting standards by also referring to this concept, but its use is limited to specific circumstances to guide an entity in applying requirements that involve a high level of measurement uncertainty, rather than being used as a broad principle. [IFRS S1.BC9, IFRS S1.BC10, IFRS S1.BC11]. Similarly, this concept only applies to specific requirements of IFRS S1 where judgement is involved. The ISSB believes that the use of this concept is beneficial where entities apply requirements that involve a high level of judgement or uncertainty because it establishes parameters for the type of information to consider, and for the effort required to obtain such information. [IFRS S1.BC15]. In identifying sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects, only supportable and reasonable information that is available to the entity at the reporting date needs to be used. An entity should not carry out an exhaustive search for this information that would represent ‘undue cost or effort’.
- 19. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 18 1.2.2.B Application of the concept of reasonable and supportable information in IFRS S1 IFRS S1 requires this concept to be applied in the identification process of sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects, as well as in the determination of the scope of an entity’s value chain (including its breadth and composition) in relation to each of those sustainability-related risks and opportunities. [IFRS S1.B6, IFRS S1.B7]. For further discussion about the determination of the scope of the value chain, see section 3.3.3 below. The ISSB’s intention is to avoid situations where entities overstate or understate their reported sustainability-related risks and/or opportunities. [IFRS S1.BC51]. IFRS S1 also requires this concept to be used with respect to the preparation of disclosures about the anticipated financial effects of a sustainability-related risk or opportunity (see discussion in section 4.3.4 below). IFRS S1 goes on to determine what qualifies as reasonable and supportable information as follows: [IFRS S1.B8, IFRS S1.B9, IFRS S1.B10]. Extract from IFRS S1 Reasonable and supportable information B8 Reasonable and supportable information used by an entity in preparing its sustainability-related financial disclosures shall cover factors that are specific to the entity as well as general conditions in the external environment. In some cases—such as in identifying sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects — reasonable and supportable information includes information about past events, current conditions and forecasts of future conditions. Other IFRS Sustainability Disclosure Standards may specify what is reasonable and supportable information in specific cases. B9 An entity may use various sources of data that may be both internal and external. Possible data sources include the entity’s risk management processes; industry and peer group experience; and external ratings, reports and statistics. Information that is used by the entity in preparing its financial statements, operating its business model, setting its strategy and managing its risks and opportunities is considered to be available to the entity without undue cost or effort. B10 An entity need not undertake an exhaustive search for information to identify sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects. The assessment of what constitutes undue cost or effort depends on the entity’s specific circumstances and requires a balanced consideration of the costs and efforts for the entity and the benefits of the resulting information for primary users. That assessment can change over time as circumstances change. This concept, in itself, does not introduce additional disclosure requirements, nor does it intend to exempt an entity from providing a disclosure. Rather, it is intended to emphasise that relevant and appropriate information is required. Also, it is intended to assist those entities that find it challenging to apply the requirements in the ISSB standards and would otherwise be unable to comply fully with them. Entities need to provide only information that is supportable and reasonable and use all information that is available to them at the reporting date, without carrying out an exhaustive search that would represent ‘undue cost or effort’. This is determined based on an entity’s
- 20. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 19 circumstances (e.g., a less exhaustive search for information is permitted if the cost of obtaining particular information is proportionately higher for the entity than for other entities with more resources). This does not mean that no effort is necessary, especially given the fact that such information relates to a risk or opportunity that could reasonably be expected to affect the entity’s prospects. [IFRS S1.BC16, IFRS S1.BC17]. How we see it In identifying sustainability-related risks and opportunities, an entity needs to consider its specific circumstances when searching for reasonable and supportable information without undue cost or effort. However, we expect that searching for such information will only infrequently involve undue cost or effort. Although an entity is not required to carry out exhaustive search for information, the effort an entity takes in this identification process needs to be commensurate with the processes set up for identifying its sustainability-related risks and opportunities, as discussed in section 1.2.1 above. 1.2.3 Reassessing the scope of sustainability-related risks and opportunities An entity’s sustainability-related risks and opportunities, along with their effects and expectations of those effects on an entity, change over time and in relation to the interdependent system in which an entity operates. The ISSB initially considered requiring entities to reassess the scope of each sustainability-related risk and opportunity throughout their value chain at each reporting date. However, the ISSB decided that primary users would typically benefit from a reassessment only if a significant event or a significant change in circumstances occurs and that doing so at each reporting date was not necessary. However, an entity may choose to reassess the scope of any sustainability-related risk or opportunity throughout its value chain more frequently (e.g., annually). [IFRS S1.B12, IFRS S1.BC45, IFRS S1.BC59, IFRS S1.BC60, IFRS S1.BC61, IFRS S1.B62]. According to IFRS S1 “a significant event or significant change in circumstances can occur without the entity being involved in that event or change in circumstances, or as a result of a change in what the entity assesses to be important to users of general purpose financial reports”. [IFRS S1.B11]. Generally, assessing whether an event or change in circumstances is significant and, therefore, reassessment of the scope of all affected sustainability-related risks and opportunities is required throughout the entity’s value chain, is a matter of judgement. [IFRS S1.75(d)]. For further discussion on judgements, see section 6.1 below. IFRS S1 provides examples of the types of events or changes in circumstances that would be considered significant. They also illustrate that a significant event or significant change in circumstances can occur without the entity being involved in that event or change in circumstances, or as a result of a change in what the entity assesses to be important to primary users. [IFRS S1.B11]. Extract from IFRS S1 B11 On the occurrence of a significant event or significant change in circumstances, an entity shall reassess the scope of all affected sustainability-related risks and opportunities throughout its value chain. A significant event or significant change in circumstances can occur without the entity being involved in that event or change in circumstances or as a result of a change in what the entity assesses to be important to users of general purpose
- 21. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 20 financial reports. For example, such significant events or significant changes in circumstances might include: (a) a significant change in the entity’s value chain (for example, a supplier in the entity’s value chain makes a change that significantly alters the supplier’s greenhouse gas emissions); (b) a significant change in the entity’s business model, activities or corporate structure (for example, a merger or acquisition that expands the entity’s value chain); and (c) a significant change in an entity’s exposure to sustainability-related risks and opportunities (for example, a supplier in the entity’s value chain is affected by the introduction of a new regulation that the entity had not anticipated). While an entity is required to reassess the scope of all affected sustainability- related risks and opportunities arising throughout its value chain when such a significant event or significant change in circumstances occurs, not all sustainability-related risks and opportunities will necessarily be affected. This is further explained by the example provided in the BC to IFRS S1. [IFRS S1.BC61]. Illustration 1–1: Reassessing the scope of sustainability-related risks and opportunities A regulation is introduced for greenhouse gas emissions associated with employee travel that an entity had not anticipated. Because of this regulation, the entity may be required to reassess which categories to include in the measurement of its Scope 3 greenhouse gas emissions. However, this regulation does not affect the entity’s other sustainability-related risks and opportunities in its value chain (e.g., the entity’s identified risk of water scarcity). Therefore, the entity is not required to reassess the scope of those other sustainability-related risks and opportunities. It is not necessary to have a change in the entity’s value chain to conclude that a significant event or significant change in circumstances has occurred. That is, the scope of a sustainability-related risk or opportunity may change even though the entity’s value chain has not changed. [IFRS S1.BC61]. 2 Scope 2.1 The scope of IFRS S1 Entities apply IFRS S1 when preparing and reporting sustainability-related financial disclosures in accordance with the ISSB standards. The scope of IFRS S1 covers sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects (as discussed in section 1.1.2 above). Therefore, any sustainability-related risks and opportunities that could not reasonably be expected to affect an entity’s prospects are outside the scope of IFRS S1. [IFRS S1.5, IFRS S1.6]. IFRS S1 sets out the general requirements for providing primary users with a complete set of sustainability-related financial disclosures (as discussed in section 1.1 above). This means that IFRS S1 focuses on the overall sustainability-related financial disclosures, while other ISSB standards specify information an entity is required to disclose about specific sustainability- related risks and opportunities (e.g., IFRS S2). [IFRS S1.7]. In order to comply with the specific requirements set out by other ISSB standards for sustainability-related risks and opportunities related to specific topics that The sustainability-related financial disclosures in accordance with the ISSB standards are provided regardless of which generally accepted accounting principles or practices (GAAP) the entity uses in preparing the related financial statements.
- 22. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 21 could reasonably be expected to affect an entity’s prospects, it is also necessary to take into account the relevant requirements of IFRS S1. The sustainability-related financial disclosures provided in accordance with the requirements of the ISSB standards are part of an entity’s general purpose financial reports (as discussed in section 1.1 above). Such disclosures can be applied regardless of which generally accepted accounting principles or practices (GAAP) the entity uses in preparing the related financial statements. [IFRS S1.8]. IFRS S1 uses definitions and requirements that are consistent, if applicable, with the IASB’s Conceptual Framework, IAS 1 and IAS 8. However, its rationale is to introduce a base for decision- useful and comparable reporting of sustainability-related financial information by requiring the application of some established practices from financial reporting, rather than mandating the use of the IFRS accounting standards used for the preparation of financial statements. [IFRS S1.BC5]. 2.2 Application by public sector or entities other than profit-oriented entities The terminology used in the ISSB standards is suitable for profit-oriented entities, including public-sector business entities. However, the ISSB identified interest in the ISSB standards from, among others, the public sector, entities other than profit-oriented entities, as well as regulators and other organisations that oversee financial market stability. Considering this interest, the ISSB decided not to preclude not-for-profit activities in the private sector or public sector from applying the ISSB standards, but if they do so, IFRS S1 specifies that they may need to amend the descriptions used for particular items of information. [IFRS S1.9, IFRS S1.BC4]. 3 Conceptual foundations 3.1 Fair presentation of sustainability-related risks and opportunities The concept of fair presentation is well-understood in the IFRS accounting standards (as described in the IASB’s Conceptual Framework and IAS 1) and in other GAAP. IFRS S1 adapted this concept in the context of sustainability- related financial disclosures. IFRS S1 requires an entity to provide a complete set of sustainability-related financial disclosures that presents fairly all sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects. [IFRS S1.11]. Moreover, to meet the objective of IFRS S1, sustainability-related financial disclosures need to include information that is useful to primary users to enable their decision-making relating to providing resources to the entity (see section 1.1 above). To achieve fair presentation of sustainability-related risks and opportunities and ensure that the information about them is useful, sustainability-related financial information needs to meet the fundamental qualitative characteristics of being relevant and faithfully representing what it purports to represent in accordance with the principles set out in IFRS S1. Along with the fundamental qualitative characteristics, IFRS S1 includes a list of additional qualitative characteristics that enhance the usefulness of sustainability-related financial information. These enhancing qualitative characteristics are: comparability; verifiability; timeliness; and understandability of the sustainability-related financial information. [IFRS S1.10, IFRS S1.13]. The qualitive characteristics are further discussed in section 3.1.1 below. Fair presentation of sustainability-related risks and opportunities is achieved when the information provided to primary users meets the fundamental qualitative characteristics set out in IFRS S1. The usefulness of sustainability-related financial information is enhanced by the additional qualitative characteristics also set out in IFRS S1.
- 23. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 22 In addition to meeting the qualitative characteristics mentioned above, to achieve fair presentation, IFRS S1 also requires an entity to disclose additional information if compliance with the specifically applicable requirements in the ISSB standards is insufficient to enable primary users to understand the effects of sustainability-related risks and opportunities on the entity’s cash flows, its access to finance and cost of capital over the short, medium and long term. [IFRS S1.15, IFRS S1.BC63]. For further discussion on the additional information, see section 3.2.3.A below. Figure 3–1: Fair presentation 3.1.1 Qualitative characteristics of sustainability-related financial information While the nature of some of the information required to meet the objective of IFRS S1 differs in some respects from the information provided in financial statements (see further discussion in section 3.2.1 below), the qualitative characteristics have been adapted from the IASB’s Conceptual Framework. The IASB’s Conceptual Framework describes the objective of, and the concepts that apply to, general purpose financial reports and one of its purposes is to assist the IASB to develop the IFRS accounting standards for preparing financial statements based on consistent concepts. Since the sustainability-related financial information is part of the general purpose financial reports, the qualitative characteristics of the IASB’s Conceptual Framework also apply to sustainability-related financial disclosures. [IFRS S1.D1, IFRS S1.D2]. Given that there is no separate conceptual framework directly applicable to the ISSB standards, IFRS S1 includes guidance on the qualitative characteristics (both the fundamental and the enhancing ones) of sustainability-related financial information. These qualitative characteristics are intended to assist entities in preparing their sustainability-related financial disclosures by explaining their applicability to sustainability-related financial information (e.g., the fact that information in the form of explanations or forward-looking statements is still verifiable). It is also intended to ensure that information in general purpose financial reports (both in sustainability-related financial disclosures and in financial statements) is useful to users of those reports. [IFRS S1.BC64, IFRS S1.BC65]. A description for each qualitative characteristic of sustainability-related financial information is included in Figure 3-2 below which is based on Appendix D of IFRS S1. [IFRS S1 Appendix D].
- 24. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 23 Figure 3-2: Qualitative characteristic of sustainability-related financial information Qualitative characteristic of sustainability-related financial information Fundamental qualitative characteristics Relevance Faithful representation Relevant sustainability-related financial information is capable of making a difference in the decisions made by primary users. This occurs when it has predictive value, confirmatory value or both. In particular: • Sustainability-related financial information with predictive value exists if the information can be used as an input to processes employed by primary users to predict future outcomes. This information does not need to be a prediction or forecast, rather it is employed by primary users in making their own predictions. For example, information about water quality, which can include information about the water being polluted, could inform the expectations of primary users about the ability of an entity to meet local water-quality requirements. • Sustainability-related financial information has confirmatory value if it provides feedback (confirms or changes) about previous evaluations. These values (predictive and confirmatory) are interrelated; information that has predictive value often also has confirmatory value. For example, information for the current year about greenhouse gas emissions, which can be used as the basis for predicting greenhouse gas emissions in future years, can also be compared with predictions about greenhouse gas emissions for the current year that were made in past years. The results of those comparisons can help a primary user to correct and improve their processes to make those previous predictions. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or are already aware of it from other sources. Moreover, materiality is an entity-specific aspect of relevance. The materiality of information is assessed in the context of an entity’s sustainability-related financial disclosures and is based on the nature or magnitude of the item to which the information relates, or both. For further information about materiality, see section 3.2 below. Sustainability-related financial information represents phenomena in words and numbers. To be useful, other than representing relevant phenomena, the information must also faithfully represent the substance of the phenomena that it purports to represent. Such faithful representation is achieved when the depiction of a sustainability-related risk or opportunity is complete, neutral and accurate. The objective of general purpose financial reports is to maximise those qualities to the extent possible. In particular: • A complete depiction of a sustainability-related risk or opportunity includes all material information necessary for primary users to understand that risk or opportunity. • A neutral depiction is one without bias in the selection or disclosure of information. The information is neutral if it is not slanted, weighted, emphasised, de-emphasised or otherwise manipulated to make it more likely that primary users will receive that information favourably or unfavourably. Neutral information is relevant (which, by definition, is capable of making a difference in primary users’ decisions), rather than without purpose or without influence on behaviour. Some sustainability-related financial information (e.g., targets or plans) is aspirational. A neutral discussion of such matters covers both aspirations and the factors that could prevent an entity from achieving these aspirations. Neutrality is supported by the exercise of prudence, which is the exercise of caution when making judgements under conditions of uncertainty (i.e., that opportunities are not overstated and risks are not understated and vice versa). • Information can be accurate without being perfectly precise in all respects. The required,
- 25. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 24 [IFRS S1.D4, IFRS S1.D5, IFRS S1.D6, IFRS S1.D7, IFRS S1.D8]. attainable precision, and the factors that make information accurate, depend on the nature of the information and the nature of the matters to which it relates. For example, accuracy requires that: • Factual information is free from material error • Descriptions are precise • Estimates, approximations and forecasts are clearly identified as such • No material errors are made in selecting and applying an appropriate process for developing an estimate, approximation or forecast • Assertions and inputs used in developing estimates are reasonable and based on information of sufficient quality and quantity • Information on judgements about the future faithfully reflects both those judgements and the information on which they are based. [IFRS S1.D9, IFRS S1.D10, IFRS S1.11, IFRS S1.D12, IFRS S1.D13, IFRS S1.D14, IFRS S1.15]. The ISSB noted that, according to the IASB’s Conceptual Framework, to be a perfectly faithful representation, a depiction would have three characteristics: it would be complete, neutral and free from error. However, considering that entities may not be familiar with the term ‘free from error’ in the context of sustainability- related financial disclosures, the ISSB decided to use the term ‘accurate’, instead of ‘free from error’, to describe a ‘complete depiction’ of an entity’s sustainability-related financial information. [IFRS S1.BC66]. Enhancing qualitative characteristics Comparability Verifiability Timeliness Understandability The decisions made by the primary users involve choosing between alternatives (e.g., selling or holding an investment, or investing in one reporting entity or another). Verifiability helps to give primary users confidence that information is complete, neutral and accurate (see also description for faithful representation above). Information is verifiable if it is Timeliness means having information available to decision- makers in time to be capable of influencing their Information is understandable when it is clear and concise. In particular: • The level of clarity in disclosures depends on the nature of the information. In
- 26. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 25 Comparability is the characteristic that enables primary users to identify and understand similarities in, and differences among, items. Unlike the other qualitative characteristics, comparability does not relate to a single item as it requires at least two items. Information is more useful if it can also be compared with information provided by the entity in previous periods, as well as by other entities, in particular, those with similar activities or operating within the same industry. Comparability is not uniformity. For information to be comparable, like things need to look alike and different things need to look different. Comparability is not enhanced by making unlike things look alike any more than it is enhanced by making like things look different. Appendix D of IFRS S1 differentiates consistency from comparability by stating that, although they are related, the former refers to the use of the same approaches or methods for providing disclosures about the same sustainability- related risks and opportunities, from period to period, both by a possible to corroborate either the information itself or the inputs used to derive it. Verifiability means that various knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. Quantified information need not be a single point estimate to be verifiable, rather a range of possible amounts and the related probabilities could also be verified. Verifiable information is more useful to primary users than information that is not verifiable and can be enhanced by, for example: • Including information that can be corroborated by comparing it with other information available to primary users about an entity’s business, about other businesses or about the external environment in which the entity operates; • Providing information about inputs and methods of calculation used to produce estimates or approximations; and • Providing information reviewed and agreed by the decisions. Although older information may be less useful, some may continue to be timely long after the end of a reporting period (e.g., when primary users need to identify and assess trends). [IFRS S1.D25]. some cases, in addition to narrative text, an entity may need to add tables, graphs or diagrams (or even additional text or tables for those additions to avoid obscuring material detail). Clarity can be enhanced by distinguishing information about developments in the reporting period from ‘standing’ information that remains unchanged, or changes little, from one period to the next (e.g., by separately describing features of an entity’s sustainability- related governance and risk management processes that have changed since the previous reporting period). In some cases, information about sustainability- related risks and opportunities may be inherently complex and difficult to present in a manner that is easy to understand. Such information needs to be presented as clearly as possible, rather than excluding
- 27. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 26 reporting entity and other entities. That is, consistency helps in achieving comparability, which is the goal. [IFRS S1.D17, IFRS S1.D18, IFRS S1.D19, IFRS S1.D20]. entity’s board, board committees or equivalent bodies. Some sustainability- related financial information will be presented as explanations or forward-looking information. That information can be supportable, for example by faithfully representing fact- based strategies, plans and risk analyses. To help primary users decide whether to use such information, a description of the underlying assumptions and methods of producing the information, as well as other factors that provide evidence that the information reflects the actual plans or decisions made by the entity would be necessary. [IFRS S1.D21, IFRS S1.D22, IFRS S1.D23, IFRS S1.D24]. it. Excluding such information would render those reports incomplete and potentially misleading. • Disclosures are concise if they include only material information. Any immaterial information included needs to be provided in a way that avoids obscuring material information (see also section 3.2.3.B below). Having clear and concise information can be achieved when an entity: • Avoids generic (i.e., ‘boilerplate’) information, that is not specific to the entity; • Avoids duplication of information in its general purpose financial reports, including unnecessary duplication of information also provided in the related financial statements; and • Uses clear language and clearly structured sentences and paragraphs The completeness, clarity and comparability of sustainability- related financial information all rely
- 28. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 27 on information being presented as a coherent whole. Coherence is also important in meeting the requirements of IFRS S1 about connected information (see relevant discussion in section 3.4 below). For the information to be coherent, an entity needs to: • Present it in a way that explains the context and the connections between the related items of information. That is, if sustainability- related risks and opportunities located in one part of an entity’s general purpose financial reports have implications for information disclosed in other parts, the entity needs to include the information necessary for primary users to assess those implications. • Provide it in a way that allows primary users to relate information about its sustainability- related risks and opportunities to information in the entity’s financial statements. [IFRS S1.D26-33].
- 29. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 28 3.2 Materiality 3.2.1 Definition of materiality In meeting the objective of IFRS S1, an entity is required to disclose information about its sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects (see section 1.2 above). [IFRS S1.17, IFRS S1.B13]. IFRS S1 also states that this information needs to be useful to primary users so that they make their decisions relating to providing resources to the entity (see section 1.1 above), and this occurs when the information disclosed is material. IFRS S1 defines materiality as follows: [IFRS S1.18]. Extract from IFRS S1 18 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. The definition of materiality was developed based on the definitions of ‘material information’ and ‘material’ in the IASB’s Conceptual Framework and IAS 1, respectively. This definition is used in IAS 1 with a specific reference to the financial statements. The materiality assessment in the IASB’s Conceptual Framework is not constrained to what is financially material in the financial statements but focuses on the identification of information that is useful to primary users. These primary users are consistent with those of the sustainability-related financial disclosures prepared in accordance with the ISSB standards (see section 1.1.1 above). Such a consistency emphasises that the purpose of the materiality assessment is to ensure that the primary users have the information that is relevant to their decision-making and that users do not make their decisions on the basis of just one form of general purpose financial reports published by the entity. [IFRS S1.BC68]. The alignment in the concept and definition of materiality, applicable to both sustainability-related financial information and information in the financial statements, facilitates the connectivity between them (for further discussion on connected information, see section 3.4 below) and it supports the application of the ISSB standards, given the broad use of the IFRS accounting standards. However, the materiality judgements for sustainability-related financial disclosures will inevitably differ from those for financial statements since they serve their specific objectives and provide different types of information about an entity. In fact, information about sustainability-related risks and opportunities is intended to capture a broader set of information that is not constrained by the definitions of assets, liabilities, equity, income and expenses under the IFRS accounting standards, nor the criteria for recognising them. Compared with information included in financial statements, sustainability-related financial information may have different measurement bases and considers financial implications over longer time periods, including interactions throughout an entity’s value chain. It follows that the material information about sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects, aim to complement the information provided in the financial statements about the entity’s assets, liabilities, equity, income and expenses. [IFRS S1.BC1, IFRS S1.BC69]. Including a specific definition of materiality in IFRS S1 (applicable to all ISSB standards) was a deliberate decision by the ISSB given that the ISSB
- 30. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 29 standards are not designed to be applied only with the IFRS accounting standards, but any GAAP (see section 2.1 above) that may not share the same definition of materiality. Also, given the variation in how the concept of materiality is interpreted, applied and enforced in various jurisdictions in the context of sustainability-related financial information, a definition of materiality in IFRS S1 was a key decision to make it clear to entities how the materiality concept needs to be applied and assessed under the ISSB standards. [IFRS S1.BC71, IFRS S1.BC72]. How we see it Applying the materiality concept in the context of sustainability-related financial disclosures is relatively new and this is expected to evolve over time. Although this application can be informed by the assessment of materiality in financial statements, more judgement may be needed by an entity given the more qualitative nature of sustainability-related financial disclosures. Therefore, an entity needs to establish the appropriate processes to make materiality judgements based on its specific circumstances. 3.2.2 Identifying material information As mentioned in section 3.2.1 above, an entity needs to disclose material information about its sustainability-related risks and opportunities such that the information is useful to primary users in making their decisions about providing resources to the entity. However, the identification of such material information requires judgement. IFRS S1 requires an entity to disclose information about the judgements it has made to prepare its sustainability- related financial disclosures that have the most significant effect on those disclosures. An example of making such a judgement is when an entity identifies material information to be included in the sustainability-related financial disclosures. For further discussion on judgements, see section 6.1 below. [IFRS S1.74]. Therefore, similar to the process of identifying the sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects (discussed in section 1.2 above), the ISSB indicated in IFRS S1, various ways to assist in the identification of material information about those risks and opportunities. In particular, apart from the definition of materiality discussed in section 3.2.1 above, the following sections include: • Guidance relating to identifying and meeting primary users’ information needs (see section 3.2.2.A below) • Requirements to be applied while identifying material information by considering: • The sources of guidance an entity uses in this identification process (see section 3.2.2.B below) • Possible future events with uncertain outcomes (see section 3.2.2.C below) • Other characteristics of material information (i.e., additional information disclosed by an entity, aggregation and disaggregation of information, interaction with law or regulation, commercially sensitive information) (see section 3.2.3 and 3.2.4 below) 3.2.2.A Information needs of primary users In identifying the material information to be disclosed, apart from understanding the definition of materiality underpinned in the application of standards (see section 3.2.1 above), an entity needs to understand the types of decisions made by primary users and what it can do to meet those
- 31. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 30 information needs. IFRS S1 gives an overview of what is involved in the primary users’ decisions that relate to providing resources to the entity being decisions about: [IFRS S1.B14]. • Buying, selling or holding equity and debt instruments • Providing or selling loans and other forms of credit • Exercising rights to vote on, or otherwise influence, the actions of the entity’s management that affect the use of the entity’s economic resources These types of decisions depend on primary users’ expectations of their returns (e.g., dividends, principal and interest payments or market price increases). Such expectations depend on primary users’ assessment of the amount, timing and uncertainty of future net cash inflows to the entity. Also, those expectations depend on the primary users’ assessment of the stewardship that the entity’s management and its governing body(s) or individual(s) exercises on the entity’s economic resources. [IFRS S1.B15]. Having considered the types of decisions that primary users make and the expectations on which their decisions depend, an entity needs to consider the characteristics of primary users and its own circumstances to determine what could reasonably be expected to influence their decisions made for a specific entity. IFRS S1 describes primary users as those “who have reasonable knowledge of business and economic activities and who review and analyse information diligently. At times, even well-informed and diligent users may need to seek the aid of an adviser to understand sustainability-related financial information”. [IFRS S1.B16, IFRS S1.B17]. The information needs and desires of the primary users may differ among them, may be conflicting and could evolve over time. However, it is acknowledged that sustainability-related financial disclosures do not, and cannot, provide all the information that primary users need, such as specialised information needs that are unique to particular users. Instead, sustainability-related financial disclosures aim to meet the common information needs of an entity’s primary users. [IFRS S1.B18]. The Implementation Guidance to IFRS S1 goes on to explain the approach an entity follows to meet the common information needs of its primary users. In particular, an entity identifies the information needs of one of the three types of primary users e.g., investors (existing and potential), and then those of the two remaining types i.e., lenders and other creditors (existing and potential). The combination of those information needs forms the set of common information needs that the entity aims to meet. There may be information needs shared by all types of primary users or specific to only one or two types. However, using this approach, an entity identifies the common information needs of primary users, without having to identify the information needs that are shared by all types of primary users (i.e., the information needs that the primary users have in common), as this would exclude potential information that meets the needs of only one type of primary users. [IFRS S1.IG5, IFRS S1.IG6]. Apart from the general purpose financial reports, primary users also consider other sources to meet their information needs (e.g., the industry in which an entity operates, the entity’s competitors and the state of the economy, the entity’s press releases as well as other documents the entity has published). However, the fact that information needed by primary users is publicly available does not relieve an entity from disclosing material information about the sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects to comply with the ISSB standards. [IFRS S1.IG7]. Understanding the information needs of primary users, based on the types of decisions they make and the expectations on which their decisions depend, contributes to the identification of material sustainability-related financial information.
- 32. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 31 How we see it In some cases, significant judgement may be required in determining what meets the primary users’ information needs, especially because such needs may evolve over time. 3.2.2.B Sources applied in assessing materiality Materiality judgements are specific to an entity, therefore, IFRS S1 does not specify any thresholds for materiality or predetermine what would be material in a particular situation. The starting point for an entity in identifying material information about a sustainability-related risk or opportunity is to apply the requirements of the ISSB standard that specifically applies to that sustainability-related risk or opportunity (e.g., the requirements in IFRS S2 for climate-related disclosures as discussed in Part B – Introduction to IFRS S2 below). However, in the absence of such an ISSB standard, the entity applies the requirements specified in the section of IFRS S1 related to the sources of guidance, which is further discussed in section 5.1.2 below. In identifying such information (either by applying the requirements of a specific ISSB standard or other sources of guidance), an entity needs to assess whether this information, individually or in combination with other information, is material in the context of the entity’s sustainability-related financial disclosures taken as a whole. This assessment requires the consideration of both quantitative and qualitative factors (e.g., the magnitude and the nature of the effect of a sustainability-related risk or opportunity on the entity). [IFRS S1.B19, IFRS S1.B20, IFRS S1.B21]. 3.2.2.C Possible future events with uncertain outcomes A materiality assessment is also required for information about possible future events with uncertain outcomes and IFRS S1 includes specific considerations for this assessment. In particular, IFRS S1 states: [IFRS S1.B22]. Extract from IFRS S1 B22 In some cases, IFRS Sustainability Disclosure Standards require the disclosure of information about possible future events with uncertain outcomes. In judging whether information about such possible future events is material, an entity shall consider: (a) the potential effects of the events on the amount, timing and uncertainty of the entity’s future cash flows over the short, medium and long term (referred to as ‘the possible outcome’); and (b) the range of possible outcomes and the likelihood of the possible outcomes within that range. If the potential effects of a possible future event are significant and the event is likely to occur, the information about that event is more likely to
- 33. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 32 be material. However, information about low-probability and high-impact outcomes still needs to be considered as these may be material either individually or in combination with information about other low-probability and high-impact outcomes. For example, an entity is exposed to several sustainability-related risks that could individually cause the same type of disruption to the entity (e.g., disruption to its supply chain). Information about an individual source of risk is not material because disruption caused from that source is highly unlikely to occur. However, information about the aggregate risk (i.e., the risk of supply chain disruption from all sources) may be material. [IFRS S1.B23]. Moreover, if a possible future event is expected to affect an entity’s cash flows, but only many years in the future, information about that event is usually less likely to be considered material than information about a possible future event with similar effects that are expected to occur sooner. However, in some circumstances, primary users’ decisions could reasonably be expected to be influenced by information, regardless of the magnitude of the potential effects of the future event or the timing of that event (e.g., if information about a particular sustainability-related risk or opportunity is highly scrutinised by primary users of an entity’s general purpose financial reports). [IFRS S1.B24]. 3.2.3 Additional information disclosed by an entity 3.2.3.A Additional information provided when the requirements of the ISSB standards are not sufficient Under certain circumstances, an entity may need to provide information that is additional to the information provided to comply with the specifically applicable requirements in an ISSB standard. In particular, when compliance with the requirements of an ISSB standard that specifically applies to an entity’s circumstances is not sufficient for primary users to understand the effects of sustainability-related risks and opportunities on the entity’s cash flows, its access to finance and cost of capital over the short, medium and long term, the entity needs to disclose additional information. [IFRS S1.B26]. How we see it Sometimes compliance with the specific requirements of the ISSB standards is not sufficient and, therefore, additional information would be needed to support primary users in making their decisions about providing resources to an entity. Such additional information would constitute material information and be required by IFRS S1 (see discussion about the definition of materiality in section 3.2.1 above). 3.2.3.B Requirements for not obscuring material information Generally, if information is not material, there is no need to disclose such information that is otherwise required by an ISSB standard, even if the specific ISSB standard contains a list of specific requirements or describes them as minimum requirements. [IFRS S1.B25]. Moreover, sustainability-related financial information required by the ISSB standards needs to be clearly identified and distinguished from other information provided by the entity that is additional to what is required by the ISSB standards (see also relevant discussion about location of information in section 5.2 below). However, when such information is included, an entity needs to ensure that material information is not obscured. Because IFRS S1 uses a definition of material information that is consistent with IAS 1, the ISSB also decided to include guidance in IFRS S1 with respect to the concept of obscuring material information building on similar
- 34. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 33 requirements in IAS 1. That is, information may be obscured when it is communicated in a way that would have a similar effect for primary users to omitting or misstating that information. [IFRS S1.B27, IFRS S1.BC73]. IFRS S1 provides examples of circumstances that may result in material information being obscured: [IFRS S1.B27]. Extract from IFRS S1 B27 An entity shall identify its sustainability-related financial disclosures clearly and distinguish them from other information provided by the entity (see paragraph 62). An entity shall not obscure material information. Information is obscured if it is communicated in a way that would have a similar effect for primary users to omitting or misstating that information. Examples of circumstances that might result in material information being obscured include: (a) material information is not clearly distinguished from additional information that is not material; (b) material information is disclosed in the sustainability- related financial disclosures, but the language used is vague or unclear; (c) material information about a sustainability-related risk or opportunity is scattered throughout the sustainability- related financial disclosures; (d) items of information that are dissimilar are inappropriately aggregated; (e) items of information that are similar are inappropriately disaggregated; and (f) the understandability of the sustainability-related financial disclosures is reduced as a result of material information being hidden by immaterial information to the extent that a primary user is unable to determine what information is material. Material information required by the ISSB standards must be presented prominently and be distinguishable from immaterial information (e.g., provided to comply with law, regulation or other requirements), to avoid being obscuring. Potential ways for achieving this distinction could be,
- 35. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 34 for example, when the information required by the ISSB standards is: [IFRS S1.BC74]. • Extracted by primary users by using digital tagging • Presented together with immaterial information in a single report but is distinguished from it by using appropriate formatting (e.g., using boxes or shading to emphasise or make the distinction clear) • Presented separately so that it is clearly distinguished from immaterial information (e.g., splitting the report into parts) • Provided in two sets of information (one that includes the entire package of information without distinction, i.e., both the information required by the ISSB standards and immaterial information, and an accompanying report that only provides the information required by the ISSB standards). 3.2.3.C Interaction with law or regulation Frequently, entities may need to comply with law or regulation enforced in the jurisdictions they operate that specifies disclosure requirements on sustainability-related information. In such circumstances, the entity is permitted to include in its sustainability-related financial disclosures, information to meet legal or regulatory requirements, even if that information is not considered material under the ISSB standards. However, the entity needs to ensure that such information does not obscure material information, as discussed in section 3.2.3.B above. [IFRS S1.B31]. Material sustainability-related financial information is disclosed, even if law or regulation permits the entity not to disclose such information. However, an entity need not disclose information otherwise required by an ISSB standard if law or regulation prohibits the entity from disclosing that information. However, if such material information is omitted for that reason, an entity needs to identify the type of information not disclosed and explain the source of the restriction. [IFRS S1.B32, IFRS S1.B33]. 3.2.4 Other characteristics of material information 3.2.4.A Aggregation and disaggregation Building on the principles of aggregation and disaggregation in IAS 1, IFRS S1 requires an entity to consider all facts and circumstances to determine how to aggregate and disaggregate information in its sustainability-related financial disclosures. [IFRS S1.B29]. The ISSB considered that the concepts of aggregation and disaggregation embedded in IAS 1 in relation to the information provided in the financial statements are equally important for sustainability-related financial disclosures. This is to ensure that primary users are provided with information at appropriately aggregated and disaggregated levels. To avoid reducing the understandability of sustainability-related financial disclosures, an entity needs to ensure that material information is not obscured by immaterial information or material items of information that are dissimilar to each other are not aggregated. [IFRS S1.B29]. In general, information cannot be aggregated if doing so would obscure information that is material. Items of information that are eligible for being aggregated have shared characteristics, rather than those that do not have shared characteristics. For example, disaggregating information by geographical location or in consideration of the geopolitical environment may be necessary to ensure that material information is not obscured when reporting about the use of water drawn from abundant sources and water drawn from water- stressed areas. [IFRS S1.B30].
- 36. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 35 3.2.4.B Commercially sensitive information While IFRS S1 was being developed, stakeholders were concerned about disclosing information that could be considered commercially sensitive. The concerns related to the potential impact on an entity’s competitive advantage by revealing details about its strategy and planned actions through the disclosures required by the ISSB standards. The concerns were mainly focused on disclosing commercially sensitive information about opportunities, rather than risks, as these could affect an entity’s competitiveness in the market or otherwise be commercially harmful. [IFRS S1.BC76, IFRS S1.BC77]. Considering these concerns, the ISSB introduced in IFRS S1 a targeted exemption by permitting an entity, in limited circumstances, to omit from its sustainability-related financial disclosures information about a sustainability- related opportunity. Such an omission is permitted even if information is otherwise required by an ISSB standard, and the information is material. [IFRS S1.B34]. The exemption is intentionally narrow and applies only to the disclosure of information about opportunities, and it is not permitted to be applied for non- disclosure of information about risks. Also, the exemption is not intended to permit broad non-disclosure of information about opportunities. [IFRS S1.BC79, IFRS S1.B37]. Rather, an entity qualifies for the exemption if, and only if: [IFRS S1.B35, IFRS S1.BC80, IFRS S1.BC81, IFRS S1.BC83]. a) Information about the sustainability-related opportunity is not already publicly available. That is, the exemption does not apply to information that is already publicly available (e.g., continuous disclosure notices, investor presentations, briefings to analysts, or other publicly available documents) as it is unlikely that such disclosure will harm an entity’s advantage in pursuing the opportunity. b) Disclosure of the information could reasonably be expected to prejudice seriously the economic benefits the entity would otherwise be able to realise in pursuing the opportunity. c) The entity has determined that it is impossible to disclose that information in a manner that would enable the entity to meet the objectives of the disclosure requirements without seriously prejudicing the economic benefits the entity would otherwise be able to realise in pursuing the opportunity. For example, an entity needs to first consider whether it is possible to disclose the information about the opportunity at a sufficiently aggregated level to resolve its concerns about commercial sensitivity, before applying the exemption. However, if it does so, an entity needs to ensure that aggregation does not obscure material information (as discussed in section 3.2.4.A above). IFRS S1 requires additional disclosures when this exemption is applied. In particular, if an entity elects to use the exemption for each item of information omitted, the entity needs to: [IFRS S1.B36]. a) Disclose the fact that it has used the exemption to make users aware that information has been excluded for reasons of commercial sensitivity; and b) Reassess, at each reporting date, whether the information qualifies for the exemption and, if the entity is no longer eligible for the exemption, disclose that information at that reporting date. 3.2.5 Reassessment of material information The individual circumstances of an entity and/or the external environment may change and, therefore, the sustainability-related risks and opportunities that users reflect to make their decisions can also change over time. Accordingly, the material sustainability-related financial information disclosed by an entity may change from one reporting period to another The exemption of omitting commercially sensitive information from sustainability- related financial disclosures is intentionally narrow and is not intended to permit broad non-disclosure of information.
- 37. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 36 due to changes in circumstances and assumptions to reflect the evolving information needs of primary users (see section 3.2.2.A above). This means that some types of information included in an entity’s sustainability-related financial disclosures for prior periods may no longer be material. Conversely, some types of information not previously disclosed may become material. [IFRS S1.B28]. This dynamic nature of materiality led the ISSB to the decision of requiring entities to reassess their materiality judgements at each reporting date to take account of changes in circumstances and assumptions. 3.2.6 Interoperability considerations Overall, the ISSB’s intention is to establish a comprehensive global baseline of sustainability-related financial disclosures that meet the information needs of primary users in relation to sustainability-related risks and opportunities. This global baseline is intended to serve as a comprehensive foundation of disclosure requirements, for which jurisdictions will be able to add any necessary incremental disclosure requirements to this common baseline. To achieve this, interoperability with jurisdictional requirements is imperative. The more compatible the ISSB standards are with the law or regulation in the jurisdictions in which entities operate (including law or regulation that specifies the documents, formats and structures for disclosing information), the more likely it is to achieve comparable, cost-effective and decision-useful sustainability-related financial disclosures that are designed to meet the needs of primary users. [IFRS S1.BC27, IFRS S1.BC28]. However, not all sustainability-related frameworks share the same definition of materiality that is used in the ISSB standards (discussed in section 3.2.1 above). There are similarities in the language used when referring to assessing material information in the context of the short, medium and long- term effects of sustainability issues. However, in practice, determining what is ‘material’ depends on the issue, the context, the time frame and the stakeholder. For example, the key difference between the GRI standards, the European Sustainability Reporting Standards (ESRS) and the ISSB standards is the audience (i.e., ISSB standards focus on primary users, whereas GRI and ESRS have a broader set of ‘users’ of the information). Lack of interoperability could be costly for entities and risks undermining the provision of clear and consistent information to primary users. Also, primary users need to be able to clearly identify both information relevant to them and information relevant to a broader set of stakeholders, so that material information for primary users is not obscured. [IFRS S1.BC31]. In supporting the interoperability among the ISSB standards and the other frameworks, the ISSB included in IFRS S1 clarifications on concepts and terminologies (e.g., an extensive description of sustainability and its connection with the value of an entity as discussed in section 1.1.2 above), as well as specific definitions (e.g., materiality as discussed in section 3.2.1 above), to explain their use by the ISSB standards compared with other jurisdictional initiatives and sustainability reporting frameworks. Also, including a list of sources of guidance as part of the identification process of sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects and the identification of material information about those risks and opportunities (as discussed in section 3.2.2 above) contributes to the interoperability with other sustainability-related frameworks and the reduction of the burden for entities already using or are mandated to comply with those other frameworks. The ISSB also permits entities to include information disclosed to meet other requirements (e.g., specific jurisdictional requirements) as long as it does not obscure the material information provided in complying with the ISSB standards (as discussed in section 3.2.3.B above).
- 38. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 37 3.3 Reporting entity 3.3.1 Definition of a reporting entity IFRS S1 defines reporting entity as an entity that is required, or chooses, to prepare general purpose financial statements. [IFRS S1 Appendix A]. The entity that is required to disclose sustainability-related financial information is the same as the one that prepares the related financial statements. [IFRS S1.20]. For example, when the entity applies the IFRS accounting standards, the consolidated financial statements provide information about the parent and its subsidiaries as a single reporting entity. The reporting entity’s sustainability-related financial disclosures focus on the sustainability-related risks and opportunities that enable primary users to assess the effects of those risks and opportunities on the entity’s prospects (i.e., the effects on the prospects of the parent and its subsidiaries, in the case of information presented in consolidated financial statements). [IFRS S1.B38]. Requiring the same reporting entity for both financial statements and sustainability-related financial disclosures is one of the decisions the ISSB made for the purposes of enabling information disclosed in the financial statements to be connected with sustainability-related financial information (as discussed in section 3.4 below). [IFRS S1.BC85]. 3.3.2 Breadth of reporting The reporting entity is required to disclose information about sustainability- related risks and opportunities throughout its value chain (see section 1.2 above). This means that the reporting entity is required to identify the sustainability-related risks and opportunities that could reasonably be expected to affect its prospects and determine the scope of its value chain, including its breadth and composition, in relation to each of those sustainability-related risks and opportunities. The value chain is also mentioned in the section of IFRS S1 on the ‘core content’ of information under the strategy pillar; an entity is required to disclose the current and anticipated effects of sustainability-related risks and opportunities that could reasonably be expected to affect its prospects throughout its business model and value chain and describe where these risks and opportunities are concentrated (see section 4.3.4 below). IFRS S1 defines the value chain as follows: [IFRS S1 Appendix A]. Extract from IFRS S1 Appendix A Defined terms value chain The full range of interactions, resources and relationships related to a reporting entity’s business model and the external environment in which it operates. A value chain encompasses the interactions, resources and relationships an entity uses and depends on to create its products or services from conception to delivery, consumption and end-of-life, including interactions, resources and relationships in the entity’s operations, such as human resources; those along its supply, marketing and distribution channels, such as materials and service sourcing, and product and service sale and delivery; and the financing, geographical, geopolitical and regulatory environments in which the entity operates. Although the reporting entity that prepares sustainability-related financial disclosures and the related financial statements is the same, the sustainability-related financial disclosures are not constrained to what is recognised in the financial statements.
- 39. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 38 Resources and relationships can vary for a number of reasons. For example, they may take various forms (e.g., natural, manufactured, intellectual, human, social, financial), they can be internal (e.g., workforce, know-how, organisational processes) or external (e.g., accessing materials and services or relationships with suppliers, distributors and customers), they can be recognised as assets in the entity’s financial statements or not. Moreover, resources and relationships can be direct or extend throughout the entity’s value chain (e.g., the entity’s supply and distribution channels, the effects of the consumption and disposal of the entity’s products, the entity’s sources of finance and its investments, including investments in associates and joint ventures). That is, if the entity’s business partners throughout its value chain face sustainability-related risks and opportunities, the entity could be exposed to related consequences of its own. [IFRS S1.B4, IFRS S1.B5]. Therefore, even though the reporting entity that prepares sustainability- related financial disclosures is the same as the one that prepares the related financial statements, the breadth of reporting is not the same. That is, the sustainability-related financial disclosures are not constrained to what is recognised in the financial statements, but goes beyond that to capture information about the value chain. 3.3.3 Determining the scope of value chain Determining the scope of an entity’s value chain could be challenging due to the possible scope of the value chain, as well as potential complexities in obtaining information to prepare the required disclosures. This is because obtaining information about the value chain may require a reporting entity to collect information from parties that the entity does not control or in which it has no ownership interest. For example, the ultimate consumers of an entity’s products may be the most important contributors to the entity’s Scope 3 greenhouse gas emissions. Also, the employment practices of a supplier in an entity’s supply chain could have a reputational effect on the entity, even if the supplier has no direct relationship with the reporting entity. [IFRS S1.BC56, IFRS S1.BC57]. Joint ventures, associates and investments are not considered to be part of the reporting entity that is presenting consolidated financial statements. However, the reporting entity recognises these items in its financial statements and reports aspects of their performance. Likewise, sustainability-related financial information related to those investments is relevant to primary users in assessing the effects of sustainability-related risks and opportunities on the entity’s prospects. [IFRS S1.BC54]. Although assessing the scope of the value chain may be challenging, it is not new or unique to the field of sustainability reporting. As part of their general purpose financial reports, entities frequently produce management commentary that provides insights into factors that have affected the entity’s financial performance and financial position and factors that could affect its ability to create value and generate cash flows in the future. These factors also capture aspects of the value chain including the activities of diverse investments and dependencies. Therefore, since entities also assess activities within their value chain for general planning and risk management purposes, the requirements in IFRS S1 are effectively following this approach in the analysis of risk management or strategic business model. The ISSB noted that determining the value chain and clarifying the breadth of reporting is a process that is unique for each entity and is difficult to specifically prescribe through principles or standards, as it is unlikely to apply in the same way to all types of entities. The ISSB also referred to the existing market guidance and practice around reporting on a broad range of activities in the value chain and across subsidiaries (e.g., the SASB standards contain disclosure topics and metrics that demonstrate how an entity could report
- 40. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 39 on value chain activities, and which of those activities may be relevant for a given industry). In determining the scope of its value chain, an entity is required to use “all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort”, in relation to each sustainability-related risk and opportunity identified that could reasonably be expected to affect the entity’s prospects. This concept assists entities by establishing parameters for the type of information they consider when preparing disclosures regarding the value chain, and the effort required to obtain such information. For further information about this concept, see section 1.2.2 above. 3.4 Connected information Entities are required to provide information in a manner that enables primary users to understand connections between various disclosures in an entity’s general purpose financial reports, as well as insight into the connections between the items to which the information relates. [IFRS S1.B39]. The following Figure 3-3 illustrates the types of connections for which information needs to be provided according to IFRS S1: [IFRS S1.21]. Figure 3–3: Types of connections for which information is required 3.4.1 Connections between items to which the information relates IFRS S1 provides examples relating to information about connections between items to which the information relates: [IFRS S1.B40]. • An entity pursued a particular sustainability-related opportunity that resulted in revenue increase. The connected information will depict the relationship between the entity’s strategy and its financial performance. • An entity identified a trade-off between two sustainability-related risks it is exposed to and took action on the basis of its assessment of that trade-off. The connected information will depict the relationship between those risks and the entity’s strategy. • An entity committed to a particular sustainability-related target, but that commitment has not yet affected the entity’s financial position or financial performance because the applicable recognition criteria have not been met. The connected information will depict that relationship. 3.4.2 Connections between disclosures provided in general purpose financial reports With respect to the connections between various disclosures in an entity’s general purpose financial reports, IFRS S1 distinguishes two categories: a) connections between disclosures provided by an entity within its Information needs to be provided in a manner that enables primary users to understand the following types of connections: Between items to which the information relates (see section 3.4.1 below) Within its sustainability-related financial disclosures (see section 3.4.2.A) Across its sustainability-related financial disclosures and other general purpose financial reports published by the entity (see section 3.4.2.B) Between disclosures provided by the entity in its general purpose financial reports (see section 3.4.2)
- 41. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 40 sustainability-related financial disclosures; and b) connections between disclosures provided across an entity’s sustainability-related financial disclosures and other general purpose financial reports published by the entity. 3.4.2.A Connections between disclosures provided within an entity’s sustainability-related financial disclosures IFRS S1 explains the nature of information about connections between disclosures provided by an entity within its sustainability-related financial disclosures, as follows: [IFRS S1.B41]. • Information about a particular sustainability-related risk or opportunity explaining the connections between disclosures on governance, strategy and risk management (i.e., relating to the four content pillars as further discussed in section 4 below). • Information between disclosures about various sustainability-related risks and opportunities provided within an entity’s sustainability-related financial disclosures. For example, when an entity integrates its oversight of sustainability-related risks and opportunities and, therefore, needs to integrate the disclosures on governance instead of providing separate disclosures on governance for each sustainability-related risk and opportunity. 3.4.2.B Connections between disclosures provided across sustainability-related financial disclosures and other general purpose financial reports published by the entity Connected information also needs to be provided to explain the connections between disclosures provided across an entity’s sustainability-related financial disclosures and other general purpose financial reports published by the entity. For example, an entity needs to explain how information provided in its sustainability-related financial disclosures is connected with the information provided in its related financial statements. However, this type of connections is not restricted to connections with the related financial statements, but it also relates to all other reports that constitute the general purpose financial report (e.g., the management commentary). IFRS S1 requires information about the current and anticipated effects of sustainability-related risks and opportunities on an entity’s financial position, financial performance and cash flows (see relevant discussion on the core content information about the strategy pilar in section 4.3.4 below). This requirement represents a specific application of connected information between sustainability-related financial disclosures and the related financial statements of an entity. To promote this connectivity, IFRS S1 requires an entity to: [IFRS S1.22, IFRS S1.23, IFRS S1.24]. • Identify the financial statements to which the sustainability-related financial disclosures relate • Use consistent data and assumptions in preparing the sustainability- related financial disclosures with the related financial statements (to the extent possible considering the requirements of the IFRS accounting standards or other applicable GAAP) • Use the presentation currency of its related financial statements, when currency is specified as the unit of measure in the sustainability-related financial disclosures An entity is required to align data and assumptions to the extent possible by taking into consideration the requirements in the IFRS accounting standards (or other GAAP) instead of mandating full alignment. This is because there could be legitimate reasons for data and assumptions to vary between
- 42. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 41 an entity’s sustainability-related financial disclosures and its financial statements (e.g., financial statements may reflect specific recognition criteria included in the IFRS accounting standards or other GAAP, which are not possible to reflect in the sustainability-related financial disclosures). The following examples are based on the BC to IFRS S1: [IFRS S1.BC88]. Illustration 3–1: Examples of the types of connections Entity W, a pharmaceutical company, has been exposed to claims of unethical testing. Therefore, it may need to explain how its strategic response has, or has not, led to the recognition of provisions and associated operating costs in its financial statements. Entity X, an electronics manufacturer, has publicly announced a target of net zero for its corporate greenhouse gas emissions, which are primarily created during its manufacturing process. Entity X adopts a new strategy that involves shifting its procurement of energy to renewable sources and investing in more energy-efficient machinery. Therefore, Entity X may need to explain how this strategy to achieve the target led to an increase in capital expenditure and possibly an impairment review of non-energy-efficient machinery, as well as lower (and less volatile) energy prices, increased revenue due to a related increased demand from its customers, and an increase in margins on sales. Entity Y, a supplier, finds that demand for its goods has risen due to its treatment of workers and its record on respecting workers’ rights, especially because its approach in this area was better than many of its peers. Entity Y may need to explain how its strategy and performance in relation to the treatment of its workers has positioned it favourably and has led to increases in revenue. Entity Z has a net zero greenhouse gas emissions plan that relies on replacing its fleet of diesel-powered vehicles with electric vehicles. Shifting to electric vehicles will require much more capital investment than was necessary for diesel vehicles. The transition plan is that each vehicle will be replaced when it reaches the end of its useful economic life. Entity Z concludes that the vehicles are not impaired and no changes to depreciation rates or useful life estimates are required to be reflected in the financial statements. Entity Z may need to explain that the transition plan will have consequences for its future cash flows and that its accounting, as reflected in the financial statements, is consistent with its transition plan. 3.4.3 Characteristics of connections Drawing connections between disclosures involves, but is not limited to, disclosing necessary explanations and cross-references and using consistent data, assumptions, and units of measure. In doing so, IFRS S1 requires: [IFRS S1.B42]. • Explanation of the connections between disclosures in a clear and concise manner • Avoiding unnecessary duplication if an ISSB standard requires the disclosure of common items of information (see also discussion on the enhancing qualitative characteristic of understandability of information in section 3.1.1 above) • Disclosing information about significant differences between the data and assumptions used in preparing the entity’s sustainability-related financial disclosures and the data and assumptions used in preparing the related financial statements, as explained in section 3.4.2.B above. When disclosing sustainability-related financial information, there is a possibility that this information could result in duplication of information within the general purpose financial report. This is because other frameworks (such as the IFRS accounting standards or other GAAP) may require similar information. Therefore, in identifying and explaining the connections both In identifying and explaining the connections both between the items to which the information relates and between disclosures provided by the entity in its general purpose financial reports, an entity needs to avoid unnecessary duplication.
- 43. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 42 between the items to which the information relates and between disclosures provided by the entity in its general purpose financial reports (discussed in sections 3.4.1 and 3.4.2 above), an entity needs to avoid unnecessary duplication. To achieve this, one approach an entity may consider is to use cross references from sustainability-related financial disclosures to the other general purpose financial reports published by the entity, subject to the specified requirements being met. The requirements about information included in sustainability-related financial disclosures by cross-reference are further discussed in section 5.2.2 below. The following examples are included in IFRS S1 to describe the nature of disclosures that could explain the various types of connections. For example, in providing connected information, an entity may: [IFRS S1.B43, IFRS S1.B44]. • Explain the effect or likely effect of its strategy on its financial statements and financial planning, or explain how that strategy relates to the metrics the entity uses to measure progress against targets • Explain how its use of natural resources or changes within its supply chain could amplify or, alternatively, reduce its sustainability-related risks and opportunities. The information about the use of natural resources or changes within its supply chain may need to be linked to information about current or anticipated financial effects on the entity’s production costs, its strategic response to mitigate those risks and its related investment in new assets. Also, the narrative information about the related metrics and targets may need to be linked to information in the related financial statements. • Explain the combined effects of its sustainability-related risks and opportunities and its strategy on its financial position, financial performance and cash flows over the short, medium and long term. For example, when the entity faces decreasing demand for its products because of consumer preferences for lower-carbon alternatives, it may need to explain how its strategic response (e.g., closing a major factory) could affect its workforce and local communities, and the effect of that response on the related financial statements (e.g., the effect of closing a major factory on the useful lives of its assets and on impairment assessments). • Describe the alternatives it considered in setting its strategy in response to its sustainability-related risks and opportunities, including a description of the trade-offs between those risks and opportunities. For example, an entity may need to explain the potential effects of its decision to restructure its operations (e.g., developing new products) in response to a sustainability-related risk (e.g., how environmental risks affect its reputation or ability to operate) on the future size and composition of the entity’s workforce, or financial performance reported in the entity’s financial statements. 4 Core content 4.1 Overview of TCFD IFRS S1 requires an entity to disclose information about its governance, strategy, risk management and metrics and targets in relation to its sustainability-related risks and opportunities. These disclosure requirements represent the ‘core content’ that provides information about the way the entity manages those risks and opportunities. Information disclosed in relation to this ‘core content’ is necessary for primary users to assess the effects of sustainability-related risks and opportunities on an entity’s cash flows, its access to finance and cost of capital over the short, medium and long term.
- 44. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 43 The core content disclosure requirements are derived from, and build on, the four pillars of the TCFD Recommendations, as summarised in Figure 4-1 below.
- 45. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 44 Figure 4-1: Core content builds on the four TCFD pillars An entity may have overarching processes, controls and procedures that are used to monitor and manage various sustainability-related risks and opportunities in an integrated manner. IFRS S1 does not require an entity to repeat disclosures relating to the core content for each type of sustainability- related risk and opportunity. Instead, an entity discloses that its approach to monitoring and managing a specific sustainability-related risk and opportunity is integrated into its overall process, controls and procedures and, if material, explain any adaptations made to those processes to address any unique characteristics of that specific risk and opportunity. [IFRS S1.B41(b), IFRS S1.B42(b), IFRS S1.BC94]. How we see it The purpose of the core content disclosure requirements in IFRS S1 is to require an entity to explain its actual sustainability-related activities, instead of prescribing how it should govern, manage risks and opportunities, and set strategy in managing its business. If, for example, an entity has limited governance arrangements or strategies in place to monitor and manage its sustainability-related risks and opportunities, the entity is required to disclose that fact if that would be material information to primary users. Entities need to consider whether to introduce process improvements to strengthen their arrangements and processes for managing and monitoring sustainability-related risks and opportunities. 4.2 Governance In defining ‘governance’, the TCFD includes a reference to the G20/OECD Principles of Corporate Governance, which states “Governance involves a set of relationships between an organization’s management, its board, its shareholders, and other stakeholders. Governance provides the structure and processes through which the objectives of the organization are set, progress against performance is monitored, and results are evaluated.”8 The objective of the governance disclosures in IFRS S1 is to enable primary users to understand the governance processes, controls and procedures an entity uses to monitor, manage and oversee sustainability-related risks and opportunities. [IFRS S1.26]. To help primary users evaluate whether and how much attention is given to sustainability-related risks and opportunities, IFRS S1 requires disclosure of: [IFRS S1.27]. 8 TCFD, Appendix 5: Glossary and Abbreviations, page 62 The objective of the governance disclosures in IFRS S1 is to enable primary users to understand the governance processes, controls and procedures an entity uses to monitor, manage and oversee sustainability-related risks and opportunities.
- 46. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 45 • The governance body(s) or individual(s) with oversight of an entity’s sustainability-related risks and opportunities (see section 4.2.1 below); and • Management’s role in the governance processes, controls and procedures used to monitor, manage and oversee sustainability-related risks and opportunities (see section 4.2.2 below). 4.2.1 Information about the oversight role ‘Governance body(s)’ that may have oversight of sustainability-related risks and opportunities include boards, committees or equivalent bodies charged with governance. IFRS S1 acknowledges that, for some entities, the responsibility for the oversight of sustainability-related risks and opportunities may be held by an individual(s) rather than a governance body(s). An individual may be charged with the overall oversight of sustainability-related risks and opportunities because of their specific expertise and experience. [IFRS S1.BC96]. IFRS S1 requires an entity to disclose information about oversight arrangements, as set out in Figure 4-2 below: [IFRS S1.27(a)]. Figure 4-2: Disclosures about oversight role Theme Disclosure required Responsibility Identify the governance body(s) or individual(s) responsible for oversight of sustainability-related risks and opportunities. This requirement includes information about how responsibilities for sustainability-related risks and opportunities is reflected in the terms of reference, mandates, role descriptions and other related policies applicable to that body(s) or individual(s). [IFRS S1.27(a)(i)]. Competency Describe how the governance body(s) or individual(s) determines whether they have, or will need to develop, the appropriate skills and competencies to oversee strategies that respond to sustainability-related risks and opportunities. [IFRS S1.27(a)(ii)]. Inform Explain how, and how often, they are informed about sustainability-related risks and opportunities. [IFRS S1.27(a)(iii)]. Address Explain how they take sustainability-related risks and opportunities into account when overseeing strategy and risk management and assessing transactions. As part of this disclosure, explain whether the governance body(s) or individual(s) has considered trade-offs associated with those risks and opportunities. [IFRS S1.27(a)(iv)]. Monitor Describe their oversight of the setting of targets and tracking progress against those targets. As part of this disclosure, explain whether and how related performance metrics are included in remuneration policies. [IFRS S1.27(a)(v)]. 4.2.2 Information about management’s role The governance disclosure requirements distinguish between oversight by a governance body or individual and the responsibilities of management- level positions or committees to enable primary users to understand how responsibilities are delegated within the entity in relation to sustainability-
- 47. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 46 related matters. To illustrate this, the board of directors of an entity may provide oversight on broader sustainability-related matters, whereas executives within management may make operational decisions about how specific sustainability-related risks and opportunities are assessed and managed. IFRS S1 requires an entity to make disclosures about management’s role in the governance processes, controls and procedures used to monitor, manage and oversee sustainability-related risks and opportunities. These disclosures are summarised in Figure 4-3 below: [IFRS S1.27(b)]. Figure 4-3: Disclosures about management’s role Theme Disclosure required Delegation Information about whether the role is delegated to a specific management-level position or committee and how oversight over that position or committee is exercised. [IFRS S1.27(b)(i)]. Processes Information about whether management uses controls and procedures to support the oversight of sustainability-related risks and opportunities and, if so, how these controls and procedures are integrated with other internal functions. [IFRS S1.27(b)(ii)]. Given the nature of the disclosure requirements about the role of the governance body and the role of management, it is likely that entities will use narrative disclosures to meet those requirements. IFRS S1 notes that the usefulness of sustainability-related financial information is enhanced if, among other things, that information is understandable (see section 3.1.1 above). Depending on the nature of the information, clarity of the disclosure may be enhanced through the use of tables, graphs or diagrams in addition to narrative text. The Practical example 4-1 below shows how Flutter Entertainment plc, in applying the TCFD Recommendations, has identified and described the role and mandate of the governance bodies that have oversight of its sustainability-related risks and opportunities and management’s delegated roles in the governance. This Practical example provides a visual representation of the role of each body which is explained further in the accompanying narrative disclosure included in Flutter Entertainment plc’s annual report for 2022, which also details the processes, controls and procedures used to monitor, manage and oversee its sustainability-related risks and opportunities.
- 48. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 47 Practical example 4–1: Flutter Entertainment plc (2022) Ireland Annual Report & Accounts 2022 [extract] Strategic report [extract] Sustainability [extract] Environment [extract] Governance of environment and climate strategy [extract] page 71 4.3 Strategy The TCFD defines ‘strategy’ as referring to “an organization’s desired future state. An organization’s strategy establishes a foundation against which it can monitor and measure its progress in reaching that desired state. Strategy formulation generally involves establishing the purpose and scope of the organization’s activities and the nature of its businesses, taking into account the risks and opportunities it faces and the environment in which it operates”.9 The objective of the strategy disclosures in IFRS S1 is to enable primary users to understand an entity’s strategy for managing sustainability-related risks and opportunities. [IFRS S1.28]. These disclosures can be used to inform primary users’ expectations about the future performance of an entity. The foundation of the strategy disclosures is information about the sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects (see section 4.3.1 below). The other strategy disclosures build on that initial disclosure by providing information about: [IFRS S1.29]. • The current and anticipated effects of those sustainability-related risks and opportunities on the entity’s business model and value chain (see section 4.3.2 below) • The effects of those risks and opportunities on the entity’s strategy and decision-making (see section 4.3.3 below) • The current and anticipated effects of those risks and opportunities on the entity’s financial position, financial performance and cash flows (see section 4.3.4 below) 9 TCFD, Appendix 5: Glossary and Abbreviations, pages 63-64 The objective of the strategy disclosures in IFRS S1 is to enable users of general purpose financial reports to understand an entity’s strategy for managing sustainability-related risks and opportunities.
- 49. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 48 • The resilience of the entity’s strategy and its business model to those sustainability-related risks. (see section 4.3.5 below) These strategy disclosure sub-topics are summarised in Figure 4-4 below. Figure 4-4: Strategy disclosure sub-topics 4.3.1 Disclosures about sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects As discussed in section 1.2 above, an entity is required to identify the sustainability-related risks and opportunities that could reasonably be expected to affect its prospects. IFRS S1 requires an entity to disclose a description of each of those sustainability-related risks and opportunities. [IFRS S1.30]. To provide primary users with further context in relation to each of those sustainability-related risks and opportunities, IFRS S1 requires an entity to specify the time horizons over which the effects of each of those sustainability-related risks and opportunities could reasonably be expected to occur. IFRS S1 identifies the time horizons as being the short, medium or long term. [IFRS S1.30(b)]. The ISSB decided to not prescribe specific time frames that represent ‘short term’, ‘medium term’ and ‘long term’ because the ISSB considered that relevant information about an entity’s sustainability-related risks and opportunities is best understood in the context of entity-specific assessments of short, medium and long term. For that reason, IFRS S1 requires an entity to also disclose an explanation of how the entity defines the ‘short term’, ‘medium term’ and ‘long term’ time horizons and how those definitions are linked to the planning horizons used by the entity for strategic decision- making. [IFRS S1.23(c), IFRS S1.BC102]. In defining these time horizons, an entity needs to take into account a number of factors that can vary between entities and the industries in which they operate. Also, time horizons often become management processes, e.g., rolling forecast horizons, budget periods and strategic planning cycles. IFRS S1 includes the following examples as entity-specific or industry-specific factors: [IFRS S1.31, IFRS S1.BC102].
- 50. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 49 • Cash flow, investment and business cycles • Planning horizons typically used in an entity’s industry for strategic decision-making and capital allocation plans • The time horizons over which primary users conduct their assessments of entities in that industry. 4.3.2 Disclosures about the effects of sustainability-related risks and opportunities on the entity’s business model and value chain IFRS S1 requires an entity to describe the current and anticipated effects of sustainability-related risks and opportunities on the entity’s business model and value chain and where in that business model and value chain those sustainability-related risks and opportunities are concentrated. For example, the sustainability-related risks and opportunities may be concentrated across geographical areas, facilities or types of assets. [IFRS S1.32]. The examples below are based on the BC to IFRS S1 and illustrate the type of information an entity may provide to disclose where in its business model and value chain sustainability-related risks and opportunities are concentrated: [IFRS S1.BC52]. Illustration 4-1: Examples showing where in the entity’s business model and value chain sustainability-related risks and opportunities are concentrated Entity A operates in the beverage industry and has identified that it needs to disclose risks associated with water use, especially in areas where water is scarce. Entity A may describe how its use of water affects the supply available to meet its operational needs. It may explain how its water consumption affects communities close to the entity’s operations that rely on the same source of water. It may also explain how over-consumption of water in those locations could lead to risks of reputational damage and loss of customers, or to the imposition of taxes or limits on the use of the resource. It may also describe how these risks have been assessed throughout its supply chain. Entity B is a clothing brand and has identified that it needs to describe the opportunity associated with changing to use less resource-intensive materials in its products and packaging. The potential effects may be driven by Entity B’s commitments to sustainable business practices, or consumer preferences for more sustainable or recycled alternatives. Entity B may also disclose the areas of its value chain and operations that are potentially most affected by this opportunity, and the processes in place to assess and monitor the opportunity. Entity C is an electronics manufacturer and has identified that it needs to describe the risks of human rights issues in its supply chain, including reputational damage and supply chain disruptions. In doing so, Entity C may describe the effects on its policies, actions it has taken to assess and monitor the risks, and how it manages any identified abuses. 4.3.3 Disclosures about the effects of sustainability-related risks and opportunities on the entity’s strategy and decision-making To enable primary users to understand the effects of sustainability-related risks and opportunities on an entity’s strategy and decision-making, IFRS S1 requires an entity to disclose information about: [IFRS S1.33]. • How the entity has responded to, and plans to respond to, sustainability- related risks and opportunities in its strategy and decision-making • The entity’s progress in respect of plans it has disclosed in previous reporting periods, including quantitative and qualitative information
- 51. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 50 • Trade-offs between sustainability-related risks and opportunities that the entity considered. The example below illustrates disclosures about trade-off between sustainability-related risks and opportunities: Illustration 4-2: Example on trade-offs between sustainability- related risks and opportunities During the reporting period, Entity A decided where to locate its new manufacturing facility that would replace the existing facility that was approaching the end of its useful life. Entity A had considered two alternative sites for its new manufacturing facility: Site X is located in the same region as the existing facility. However, the site is prone to flash flooding during heavy rains due to the poor drainage systems at the site and its surrounding area. Site Y is located in a different region, which is not prone to flood risk. A consequence of relocating to Site Y is that Entity A is currently the main employer in the community that surrounds Site X. A decision by Entity A to relocate to Site Y is that it would have an adverse effect on its local workforce and indirectly on the economic prospects for the entire community. Entity A performed impact assessments to investigate the extent of flood risk of Site X and the social risk of moving to Site Y and identified options for mitigating those risks. Entity A decided, on cost/benefit grounds, to build its new manufacturing facility at Site X and as part of the development works, install new drainage systems that can divert flood waters away from the site and the community. In reaching this decision, Entity A also considered the benefit of continued access to the locally trained and engaged workforce to operate the facility. 4.3.4 Disclosures about current and anticipated financial effects of sustainability-related risks and opportunities IFRS S1 requires an entity to disclose quantitative and qualitative information about: [IFRS S1.34]. • The effects of the entity’s sustainability-related risks and opportunities on its financial position, financial performance and cash flows for the reporting period, which is referred to as ‘current financial effects’; and • The anticipated effects of those sustainability-related risks and opportunities on its financial position, financial performance and cash flows over the short, medium and long term, taking into consideration how the entity includes those sustainability-related risks and opportunities in its financial planning. These are referred to as ‘anticipated financial effects’. The timescales contemplated by the meaning of ‘current financial effects’ and ‘anticipated financial effects’ are illustrated in Figure 4-5 below. Figure 4-5: Timeline for current and anticipated financial effects Disclosures of current and anticipated financial effects are intended to supplement or expand upon information provided in the related financial Disclosures about current and anticipated financial effects are intended to supplement or expand upon information provided in the related financial statements.
- 52. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 51 statements. This includes identifying and explaining the connections between sustainability-related risks and opportunities and the information reported in the financial statements (see discussion on connected information in section 3.4.2.B above). Connections between items of information may be able to be explained without duplicating information by using cross-references. For example, a cross reference to information disclosed in the notes to the financial statements may satisfy the requirement in IFRS S1 to disclose how sustainability-related risks and opportunities have affected an entity’s current and anticipated financial position, financial performance and cash flows. The use of cross references is subject to the requirements in IFRS S1 (see further discussion in section 5.2.2 below). 4.3.4.A Disclosures about current financial effects IFRS S1 requires an entity to disclose quantitative and qualitative information about how sustainability-related risks and opportunities have affected its financial position, financial performance and cash flows for the reporting period. [IFRS S1.35(a)]. An entity may also be required to disclose these current financial effects in the notes to its financial statements when applying the IFRS accounting standards or other GAAP. As discussed in section 4.3.4 above, an entity should consider whether it can include a cross reference to this information to avoid unnecessary duplication of disclosures. 4.3.4.B Disclosures about anticipated financial effects – next annual reporting period Anticipated financial effects refer to those financial effects anticipated in the next annual reporting period and to those financial effects anticipated over the short, medium and long term. IFRS S1 requires disclosure of information that connects the current financial effects with the anticipated financial effects in the next annual reporting period. In accordance with this disclosure requirement in IFRS S1, an entity is required to disclose quantitative and qualitative information about those sustainability-related risks and opportunities that have both of the following characteristics: [IFRS S1.35(b)]. • The sustainability-related risks or opportunities were identified as having current financial effects (see also section 4.3.4.A above) • Within the next annual reporting period, there is a significant risk of a material adjustment to the carrying amounts of assets and liabilities reported in the related financial statements. Similar to the disclosure of current financial effects, the information required by this disclosure may also be disclosed in the notes to the entity’s financial statements due to requirements in IAS 1 for the disclosure of sources of estimation uncertainty. Therefore, an entity may need to consider whether to include a cross reference to this information to avoid unnecessary duplication of disclosures. 4.3.4.C Disclosures about anticipated financial effects – Short, medium and long term IFRS S1 requires an entity to disclose quantitative and qualitative information about how the entity expects its financial position to change over the short, medium and long term, given its strategy to manage sustainability-related risks and opportunities, taking into consideration the entity’s: [IFRS S1.35(c)]. • Investment and disposal plans, including plans for which the entity is not contractually committed • Planned sources of funding to implement its strategy
- 53. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 52 An entity’s investment and disposal plans may include plans for capital expenditure, major acquisitions and divestments, joint ventures, business transformation, innovation, new business areas, and asset retirements. Similarly, IFRS S1 also requires an entity to disclose quantitative and qualitative information about how the entity expects its financial performance and cash flows to change over the short, medium and long term, given its strategy to manage sustainability-related risks and opportunities. [IFRS S1.35(d)]. 4.3.4.D Measurement of current and anticipated financial effects IFRS S1 does not provide guidance on how to measure current and anticipated financial effects other than to indicate that quantitative information may be disclosed as a single amount or a range. The ISSB acknowledged that, in some cases, ranges of possible outcomes could be more useful than single estimates. [IFRS S1.36, IFRS S1.BC89]. How we see it Given the variety of factors that may need to be considered in quantifying the anticipated financial effects of a sustainability-related risk or opportunity, an entity may need to use judgement to determine how to measure those effects. Such judgement relates to selecting the method that an entity expects that it will best reflect the effect on its financial position, financial performance and cash flows. In exercising judgement to select a relevant measurement method to quantify the anticipated financial effects, an entity may consider the suitability of measurement methods used in the IFRS accounting standards or other GAAP. 4.3.4.E Preparing disclosures about anticipated financial effects Stakeholders raised concerns about the difficulties that some entities may face in disclosing information about anticipated financial effects. To address these concerns, specifically for the preparation of disclosures about the anticipated financial effects of a sustainability-related risk or opportunity, IFRS S1 allows an entity to: [IFRS S1.37, IFRS S1.BC106, IFRS S1.BC107]. • Use all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort (for further information see discussion in section 1.2.2 above). The ISSB further clarified this requirement in the context of anticipated effects as summarised in Figure 4-7 below. • Use an approach that is commensurate with the skills, capabilities and resources that are available to the entity for preparing those disclosures. However, the ISSB clarified that an entity cannot avoid providing quantitative information for anticipated financial effects because it does not have the skills or capabilities to do so if it has the resources available to obtain or develop those skills or capabilities.
- 54. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 53 Figure 4-7: The concept of reasonable and supportable information in the context of disclosures for anticipated effects Phrase Meaning “use all reasonable and supportable information” An entity is prohibited from overstating or understating the anticipated financial effects of opportunities or risks premised on information that is unsupportable or unreasonable. “use… information that is available to the entity at the reporting date” An entity is: • permitted to use only the information that is available to the entity at the reporting date (including information about past events, current conditions and forecasts of future conditions) • not required to use information that only becomes available after that date “use… information that is available to the entity… without undue cost or effort” An entity is not required to carry out an exhaustive search for information to determine or measure the anticipated financial effects of risks and opportunities. Instead, an entity is permitted to carry out an information search that is proportional to the cost and effort involved in obtaining that information 4.3.4.F Criteria and disclosures when quantitative information about current and anticipated financial effects is not required The ISSB has established criteria for when an entity is not required to disclose quantitative information about the financial effects of a sustainability-related risk or opportunity. In particular: [IFRS S1.38, IFRS S1.39, IFRS S1.BC109]. • For either current or anticipated financial effects of a sustainability- related risk or opportunity, IFRS S1 states that an entity is not required to provide quantitative information if: • Those current or anticipated financial effects are not separately identifiable. That is, the financial effects may arise from many risks or opportunities and affect many items in the financial statements. As such, it may be difficult to attribute financial effects to an individual sustainability-related risk or opportunity. Or • The level of measurement uncertainty involved in estimating those effects is so high that the resulting quantitative information would not be useful. See section 6.2 below for a further discussion on measurement uncertainty. • Specifically for anticipated financial effects of a sustainability-related risk or opportunity, IFRS S1 does not require an entity to provide quantitative information on those anticipated financial effects if the entity lacks the skills, capabilities or resources to do so. For current or anticipated financial effects of a particular sustainability- related risk or opportunity, the ISSB clarified that, even if an entity is not in a position to disclose quantitative information, it is still required to provide other quantitative and qualitative information that would be useful to primary users. For that reason, if an entity concludes that it is unable to provide quantitative information, IFRS S1 requires the entity to: [IFRS S1.40].
- 55. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 54 • Explain why it has not provided quantitative information • Provide qualitative information about those financial effects—this is to include identifying line items, totals and subtotals within the related financial statements that are likely to be affected, or have been affected, by that sustainability-related risk or opportunity • Provide quantitative information about the combined financial effects of that sustainability-related risk or opportunity with other sustainability- related risks or opportunities and other factors. However, disclosing quantitative information about the combined financial effects is not required if the entity determines that this information would not be useful. 4.3.5 Disclosures about the resilience of the entity’s strategy and business model to sustainability-related risks IFRS S1 requires a resilience assessment of an entity’s strategy and business model. The purpose of the resilience assessment is to inform primary users about the entity’s ability to cope with and withstand the effects of sustainability-related risks and related uncertainties in different scenarios. In particular, IFRS S1 requires an entity to disclose an assessment of the resilience of the entity’s strategy and business model in relation to its sustainability-related risks, including information about how the assessment was carried out and its time horizon. The assessment is to be a qualitative and, if applicable, quantitative assessment. When providing quantitative information, IFRS S1 permits an entity to disclose a single amount or a range. [IFRS S1.41]. IFRS S1 acknowledges that other ISSB standards may specify the type of information an entity is required to disclose about its resilience to specific sustainability-related risks and how to prepare those disclosures, including whether a scenario analysis is required. [IFRS S1.42]. For example, IFRS S2 includes specific requirements for resilience assessments for an entity’s climate-related risks (see further discussion in section 4.3 of Part B – Introduction to IFRS S2). The requirements to disclose information about the resilience of an entity’s strategy and business models and to disclose information about the current and anticipated financial effects of an entity’s sustainability-related risks and opportunities are designed to meet different information needs. The requirements for a resilience assessment relate to an entity’s capacity to adjust to the uncertainties arising from sustainability-related risks, whereas the requirements on the current and anticipated financial effects of sustainability-related risks and opportunities relate to the effects of risks and opportunities on an entity’s financial performance, financial position and cash flows. Therefore, these requirements can be applied independently. However, while an entity is not required to carry out a resilience assessment to determine the anticipated financial effects of sustainability-related risks and opportunities, the ISSB also acknowledged that an entity may find the resilience assessment useful and relevant in determining the anticipated financial effects of sustainability-related risks and opportunities. [IFRS S1.BC113].
- 56. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 55 4.4 Risk management The TCFD defines ‘risk management’ as referring to “a set of processes that are carried out by an organization’s board and management to support the achievement of the organization’s objectives by addressing its risks and managing the combined potential impact of those risks”.10 The objective of risk management disclosures in IFRS S1 is to enable primary users to: [IFRS S1.43]. • Understand an entity’s processes to identify, assess, prioritise and monitor sustainability-related risks and opportunities • Understand whether and how those processes are integrated into and inform the entity’s overall risk management process • Assess the entity’s overall risk profile • Assess the entity’s overall risk management process This objective is summarised in Figure 4-8 below: Figure 4-8: Risk management processes The TCFD noted that in assessing an entity’s financial and operating results, many investors want insight into the governance and risk management context in which such results are achieved.11 This focus helps to draw a distinction between the purpose of the risk management disclosures and the strategy disclosures. The ISSB explained that disclosures about risk management processes relate to the risk management framework that the entity has put in place. In contrast, disclosures about strategy are focused on providing information about an entity’s strategy for managing sustainability- related risks and opportunities. [IFRS S1.BC116]. 4.4.1 Processes for sustainability-related risks Consistent with this disclosure objective, IFRS S1 requires an entity to disclose information about the processes and related policies that it uses to identify, assess, prioritise and monitor sustainability-related risks. The information to be disclosed includes information about: [IFRS S1.44(a)]. 10 TCFD, Appendix 5: Glossary and Abbreviations, page 63 11 Final Report Recommendations of the Task Force on Climate-related Financial Disclosures, June 2017, page 17 Risk management processes refer to processes an entity uses to identify, assess, prioritise and monitor sustainability-related risks and opportunities.
- 57. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 56 • The inputs and parameters used by the entity in the processes and policies that identify, assess, prioritise and monitor sustainability-related risks (e.g., information about data sources and the scope of operations covered in those processes) • Whether and how scenario analysis is used to inform the entity’s identification of sustainability-related risks • How the nature, likelihood and magnitude of the effects of those risks is assessed by the entity (e.g., whether qualitative factors, quantitative thresholds or other criteria are considered) • Whether and how sustainability-related risks are prioritised by the entity relative to other types of risk • How sustainability-related risks are monitored by the entity • Whether and how the entity has changed the processes it uses compared with the previous reporting period. 4.4.2 Processes for sustainability-related opportunities IFRS S1 also requires an entity to disclose information about the processes that it uses to identify, assess, prioritise and monitor sustainability-related opportunities. [IFRS S1.44(b)]. Unlike the disclosures for risk management processes for sustainability- related risks, IFRS S1 does not detail specific information that needs to be disclosed about the entity’s risk management processes that apply to its opportunities. The ISSB explained that the disclosure requirements for sustainability-related risks are more detailed than those for opportunities, because of the relative maturity of risk management processes and to meet the primary users’ needs for information about an entity’s processes for identifying, assessing, prioritising and monitoring risks. [IFRS S1.BC119]. How we see it Disclosures relating to risk management may also enable primary users to understand an entity’s processes for managing its sustainability-related opportunities. Therefore, some of those disclosures could also inform the disclosures relating to sustainability-related opportunities. 4.4.3 Integrating disclosures IFRS S1 requires an entity to also disclose the extent to which, and how, an entity’s processes for identifying, assessing, prioritising and monitoring sustainability-related risks and opportunities are integrated into and inform the entity’s overall risk management process. [IFRS S1.44(c)]. This information assists primary users in evaluating the entity’s overall risk profile and risk management activities. When an entity uses the same risk management process to identify, assess, prioritise or monitor different sustainability-related risks and opportunities, the entity needs to integrate those disclosures instead of providing separate risk management disclosures for each sustainability-related risk and opportunity. To illustrate this, the ISSB provided an example of an entity disclosing that climate-related risks and opportunities are integrated into the entity’s overall process for managing risks and opportunities, such as general strategic or operational risks and opportunities. However, the identification, assessment, prioritisation and monitoring of other sustainability-related risks and opportunities occur separately because those specific risk management processes are not part of the entity’s overall risk management process. [IFRS S1.BC118].
- 58. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 57 4.5 Metrics and targets The objective of disclosures on metrics and targets is to enable primary users to understand an entity’s performance in relation to its sustainability-related risks and opportunities. [IFRS S1.45]. For each sustainability-related risk and opportunity that could reasonably be expected to affect the entity’s prospects, IFRS S1 requires an entity to disclose: [IFRS S1.46]. • The metrics required by the ISSB standards (even if the entity does not use these metrics); and • The metrics the entity uses to measure and monitor: • that sustainability-related risk and opportunity (even if those metrics are not required by the ISSB standards); and • the entity’s performance in relation to that risk and opportunity, including the entity’s progress towards any targets it has set and any targets it is required to meet by law or regulation. The metrics disclosed by an entity need to include those associated with particular business models, activities or other common features that characterise participation in an industry. [IFRS S1.48]. 4.5.1 Metrics required by an ISSB standard For metrics that apply to climate-related risks and opportunities, IFRS S1 requires an entity to apply the requirements of IFRS S2 (see further discussion in section 4.5 of Part B – Introduction to IFRS S2). However, for metrics and targets that apply to sustainability-related risks and opportunities other than climate, the ISSB is yet to issue other topic-based ISSB standards that may otherwise specifically apply to that sustainability- related risk or opportunity. Accordingly, in the absence of an ISSB standard that specifically applies to a sustainability-related risk or opportunity, IFRS S1 requires an entity to apply the sources of guidance requirements to identify applicable metrics. An entity is also required to identify the source and the metric when the metric is taken from a source other than an ISSB standard. [IFRS S1.47, IFRS S1.49]. For further discussion on sources of guidance, see section 5.1.2 below. 4.5.2 Metrics developed by the entity For metrics developed by an entity, IFRS S1 requires an entity to disclose the following information: [IFRS S1.50]. Figure 4-9: Disclosures for metrics developed by an entity Theme Disclosure required Definition How the metric is defined, including: • Whether the metric is derived by adjusting a metric taken from a source other than the ISSB standards • If so, which source and how the metric disclosed by the entity differs from the metric specified in that source Nature Whether the metric is an absolute measure, a measure expressed in relation to another metric or a qualitative measure. The ISSB gives an example of a qualitative measure as indicating status by using the red, amber, green ‘traffic light’ colours Validation Whether the metric is validated by a third party and, if so, which party Metrics disclosed by an entity need to include those associated with particular business models, activities or other common features that characterise participation in an industry.
- 59. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 58 Calculation The method used to calculate the metric and the inputs to the calculation, including: • the limitations of the method used • the significant assumptions made 4.5.3 Targets An entity’s targets will include any targets it has set to monitor progress towards achieving its strategic goals as well as any targets it is required to meet by law or regulation. [IFRS S1.51]. For each target, IFRS S1 requires an entity to disclose: [IFRS S1.51]. • The metric used to set the target and to monitor progress towards reaching the target • The specific quantitative or qualitative target the entity has set or is required to meet • The period over which the target applies • The base period from which progress is measured • Any milestones and interim targets • Performance against each target and an analysis of trends or changes in the entity’s performance • Any revisions to the target and an explanation for those revisions An entity is required to consistently define and calculate metrics for each reporting period, including those metrics used to set the entity’s targets and monitor progress towards reaching them. In the event a metric is redefined or replaced in a reporting period, an entity is required to: [IFRS S1.52, IFRS S1.B52]. • Disclose a revised comparative amount, unless it is impracticable to do so • Explain the changes to the metric • Explain the reasons for those changes, including why the metric that has been redefined or replaced provides more useful information The metrics and targets disclosed by entity have to be labelled and defined using names and descriptions that are meaningful, clear and precise. [IFRS S1.53]. 5 General requirements 5.1 Sources of guidance As discussed in sections 1.2 and 3.2.2 above, IFRS S1 requires an entity to identify sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects, as well as material information that apply to those risks and opportunities. Both identification processes are informed by the sources of guidance included in IFRS S1. In these identification processes, an entity is required to first apply the ISSB standards that specifically apply to that sustainability-related risk or opportunity. [IFRS S1.54, IFRS S1.56]. IFRS S1 also includes other sources of guidance which are intended to give direction to entities, especially in situations where there are no directly applicable requirements in the ISSB standards. Such guidance effectively provides entities with a roadmap for the appropriate use of other standards and frameworks to produce decision- useful disclosures for primary users about sustainability-related risks and opportunities. The sources of guidance included in IFRS S1 are those that, if selected, would likely result in the provision of information that would enable The use of other sources of guidance is expected during the period of development of the full range of the ISSB standards, but will continue to be relevant in circumstances where a particular event, transaction or other condition is not specifically addressed by any ISSB standard.
- 60. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 59 entities to meet the objective of IFRS S1. The ISSB believes that this can contribute to reducing diversity in practice and improving comparability between information provided by peer entities. [IFRS S1.BC128]. Up to the date of issuance of this publication, the ISSB has so far issued specific requirements for disclosing information about sustainability-related risks and opportunities in relation to climate (i.e., IFRS S2). The use of other sources of guidance is particularly useful in these early days of the ISSB’s standard setting activities, until more ISSB standards, beyond climate, are developed and issued. The ISSB believes that, as additional ISSB standards will be developed, the reliance of entities on those other sources of guidance will gradually decrease. This is because the range of the future ISSB standards will assist in identifying sustainability-related risks and opportunities, as well as in setting out disclosures designed to meet the needs of primary users and, therefore, there will be fewer gaps to fill. [IFRS S1.BC128]. Despite the importance of other sources of guidance during the period of development of the full range of the ISSB standards as described above, the ISSB expects that these other sources will continue to be useful to entities to meet the objective of IFRS S1 even after that period. [IFRS S1.BC128].The rationale behind the requirements of IFRS S1 in respect of other sources of guidance is similar to that of IAS 8 applied under the IFRS accounting standards. That is, there will be circumstances where a particular event, transaction or other condition is not specifically addressed by any ISSB standard. Also, the range of sustainability topics and the information needs of primary users are continuously evolving and it is likely that the ISSB standards may not provide specific guidance for all possible circumstances. Moreover, the ISSB considered that this guidance can be particularly useful for entities that have not previously reported sustainability-related financial disclosures that focus on meeting the needs of primary users. The ISSB decided to limit the list the sources of guidance that an entity is required to, or may refer to and consider the applicability of, instead of including a long list of sources (both in identifying sustainability-related risks and opportunities and in identifying material information to provide about those risks and opportunities) to make the requirements less burdensome to apply. The ISSB decided to distinguish the sources of guidance between those that an entity is required to refer to and consider their applicability and sources that it is permitted, but not required, to refer to and consider their applicability. The ISSB clarified that the use of “refer to and consider the applicability of” a source of guidance is intended to require or permit an entity to refer to that source of guidance and consider whether it is applicable. If it is, then an entity is required or permitted to apply that source of guidance. [IFRS S1.BC130, IFRS S1.BC131, IFRS S1.BC132]. 5.1.1 Use of sources of guidance when identifying sustainability-related risks and opportunities As discussed in section 5.1 above, in identifying the sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects, an entity needs to apply the ISSB standards. That is, an entity needs to consider the sustainability-related topics and the respective sustainability-related risks and opportunities associated with those topics included in the ISSB standards. [IFRS S1.54]. In addition to the ISSB standards, IFRS S1 provides a list of other sources of guidance to assist in the judgement involved in this identification process. More specifically, an entity is required to refer to and consider the applicability of the Sustainability Accounting Standards Board standards (the SASB standards). [IFRS S1.55(a)]. The ISSB considered that using the SASB standards could reduce application costs for entities and produce useful and
- 61. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 60 comparable disclosures for primary users. This is because the SASB standards were developed with a similar objective to IFRS S1 and their overall design with respect to disclosure topics and associated metrics generally follows the structure of the requirements in IFRS S1. In fact, the industry-based guidance provided by the SASB standards is complementary to the general requirements of IFRS S1, and includes disclosure topics that are focused on sustainability-related risks and opportunities that arise in an industry throughout the value chain. [IFRS S1.BC130, IFRS S1.BC134]. 5.1.1.A Considerations when referring to the SASB standards to identify sustainability-related risks and opportunities Each SASB standard contains: [IFRS S1.IG12]. • Industry descriptions: Intended to support entities in identifying applicable industry guidance by describing the business models, activities and other common features that characterise participation in the industry • Disclosure topics: Describe specific sustainability-related risks or opportunities associated with the activities conducted by entities within a particular industry • Metrics: Accompany disclosure topics and are designed to provide useful information regarding an entity’s performance for a specific disclosure topic (either individually or as part of a set) (see section 5.1.2 below) • Technical protocols: Provide guidance on definitions, scope, implementation and presentation of associated metrics (see section 5.1.2 below) • Activity metrics: Quantify the scale of specific activities or operations by an entity and are intended for use in conjunction with metrics accompanying the disclosure topics to normalise data and facilitate comparison (see section 5.1.2 below) In considering the applicability of SASB standards, an entity first needs to understand the activities that a particular SASB standard covers. The industry descriptions summarise the business that each SASB standard covers so that an entity understands the activities addressed and determines if a SASB standard is likely to be applicable to its business model and associated activities. The industry names and descriptions may not precisely align with the industry an entity considers itself to be a part of because industries can be classified and defined according to varying conventions. In performing that assessment, an entity may determine that: [IFRS S1.IG14, IFRS S1.IG15, IFRS S1.IG16]. • Its business model and activities closely align with the description of a single SASB standard, in which case, the entity may need to refer only to that particular applicable SASB standard • Its business model and activities closely align with the description of more than one SASB standard (e.g., when the entity constitutes a hybrid or complex business model with activities spanning a wider array of activities than those reflected in any single SASB standard) and, therefore, needs to refer to and consider the applicability of those SASB standards • Its industry does not precisely align with the industry name of the SASB standard to which it considers itself to be part of, or its activities may not be specifically addressed by a SASB standard(s) for a particular industry. However, other SASB standards are likely to address those activities or similar activities. The disclosure topics in the SASB standards are useful in helping entities understand the range of sustainability-related risks and opportunities that are within the scope of IFRS S1, which is particularly important in the
- 62. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 61 identification of the sustainability-related risks and opportunities. Furthermore, the metrics that accompany disclosure topics in the SASB standards are commonly tailored to the activities of entities within a particular industry. [IFRS S1.BC134]. Having identified the SASB standard(s) that closely align(s) with its activities, an entity needs to determine which disclosure topic(s) within that SASB standard(s) align(s) with its activities in order to identify the sustainability-related risks and opportunities based on its business model and activities. [IFRS S1.IG17]. Consider the following Illustration, based on an example provided in the Implementation Guidance to IFRS S1, about using disclosure topics of the SASB standards to enable entities to consistently identify sustainability- related risks and opportunities based on their business model and activities: [IFRS S1.IG18, IFRS S1.IG19]. Illustration 5–1: Identifying sustainability-related risks and opportunities by referring to and considering the applicability of SASB standards Entity B conducts meat, poultry and dairy operations and, therefore, refers to and considers the applicability of the Meat, Poultry & Dairy SASB standard. Entity B concludes that the disclosure topics in that SASB standard that are applicable in its circumstances include disclosure topics such as the food safety and the workforce health & safety. Effectively, Entity B’s process of identification of sustainability-related risks and opportunities is informed by the using the disclosure topics in this SASB standard. In applying those disclosure topics, Entity B explains that a failure to maintain the quality and safety of its product may result in costly recalls, harm the reputation of its brand, lead to fines, reduce its revenues and increase regulatory scrutiny, including the imposition of trade restrictions. Moreover, Entity B uses the disclosure topics to meet the requirements of IFRS S1 about how it manages the identified risks. In particular, Entity B provides information about its robust workforce safety practices to avoid reputational impairment, costly turnover, low worker morale and productivity, risks associated with potential liability for injuries, associated healthcare and workers’ compensation costs. The approach described in Illustration 5-1 can be repeated for each of the applicable disclosure topics of the entity. However, the disclosure topics of the SASB standards are meant to inform the identification of sustainability- related risks and opportunities of a typical entity within a given industry, rather than every entity within a given industry. That is, SASB standards may include disclosure topics that would not result in useful information for primary users for every entity within a given industry. For example, an entity operating in a particular industry may not engage in activities that are covered by a disclosure topic of that industry in the SASB standards. Therefore, information resulting from that disclosure topic would not be useful to its primary users. Also, the disclosure topics in SASB standards are not exhaustive and, as such, they are not meant to include every disclosure topic that would result in useful information and be applicable to all entities in a given industry. [IFRS S1.IG13, IFRS S1.IG20]. Therefore, when an entity considers the applicability of the disclosure topics of SASB standards, it may, for the reasons explained above, conclude that those disclosure topics are not sufficient to inform the identification of all sustainability-related risks and opportunities that could reasonably be expected to affect its prospects. The following examples from the Implementation Guidance to IFRS S1 illustrate the identification of sustainability-related risks and opportunities by referring to and considering the applicability of the SASB standards: [IFRS S1.IE Example 1, IFRS S1.IE3, IFRS S1.IE4, IFRS S1.IE Example 2, IFRS S1.IE9, IFRS S1.IE10, IFRS S1.IE11]
- 63. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 62 Extract from IFRS S1 Example 1—An entity with a single line of business Entity Y is a regional passenger airline company. In identifying sustainability-related risks and opportunities that could reasonably be expected to affect its prospects, Entity Y is required to apply IFRS Sustainability Disclosure Standards in accordance with paragraph 54 of IFRS S1. In addition to applying IFRS Sustainability Disclosure Standards, Entity Y is required to refer to and consider the applicability of the disclosure topics in the SASB Standards. Entity Y concludes that its business model and activities most closely align with the Airlines SASB Standard. Entity Y applies IFRS S2 Climate-related Disclosures and identifies climate- related risks or opportunities that could reasonably be expected to affect its prospects. In addition, Entity Y refers to and considers the applicability of the disclosure topics in the Airlines SASB Standard in accordance with paragraph 55(a) of IFRS S1. Entity Y concludes that all four disclosure topics in the Airlines SASB Standard are applicable to its activities and uses those disclosure topics to inform its identification of sustainability-related risks and opportunities that could reasonably be expected to affect its prospects. … Example 2—A large conglomerate with diverse activities Entity A is a large conglomerate with diverse activities. Entity A produces electrical and industrial equipment for use in a range of industries. In addition to IFRS Sustainability Disclosure Standards, Entity A is required to refer to and consider the applicability of the disclosure topics in the SASB Standards in identifying its sustainability-related risks and opportunities. Because of the wide-ranging nature of its activities, Entity A begins its consideration of the applicability of the SASB Standards by considering the various sectors into which the SASB Standards are grouped. Entity A conducts activities in industries in the Health Care, Resource Transformation and Infrastructure sectors, and in some cases owns particular parts of its production process rather than relying on suppliers. It also has some activities in the Transportation and Consumer Goods sectors. Entity A refers to and considers the applicability of the disclosure topics in the SASB Standards. Entity A concludes that eight SASB Standards are applicable to its business model and activities. Entity A considers the disclosure topics in the eight standards. Although Entity A observes that it engages in activities related to all of those disclosure topics, Entity A concludes that some of those disclosure topics are not applicable in the entity’s circumstances. For example, Entity A concludes that the sustainability-related risk or opportunity characterised by a particular disclosure topic could not reasonably be expected to affect its prospects over the short, medium or long term because the disclosure topic relates to activities that are insignificant for the entity. Entity A concludes that most of the disclosure topics in the SASB Standards it has considered are applicable to its significant activities. In some cases where it has less significant activities, it finds that only particular disclosure topics in those related industries are applicable. For example, Entity A concludes that most of the disclosure topics that it considered for its transportation and retail businesses are not applicable, due to the relatively small size of these businesses. However, Entity A concludes that incidents related to safety and labour practices in these businesses, although unlikely to have a large effect on its cash flows in the short term, could have a major effect on its reputation over the medium
- 64. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 63 and long term. This reputational risk could affect the performance of its larger businesses, including its ability to attract and retain talent, over a medium- and long-term time horizon, which could be reasonably expected to affect its medium- and long-term cash flows, access to finance and cost of capital. Thus, Entity A considers these topics in identifying sustainability-related risks and opportunities that could reasonably be expected to affect its prospects. 5.1.1.B Considerations when referring to other sources of guidance to identify sustainability-related risks and opportunities The entity may also need to consider additional sources of guidance specified in IFRS S1 to identify its sustainability-related risks or opportunities. [IFRS S1.IG13, IFRS S1.IG20]. In particular, an entity may refer to and consider the applicability of the CDSB Framework Application Guidance for Water-related Disclosures and the CDSB Framework Application Guidance for Biodiversity- related Disclosures (collectively referred to as ‘CDSB Framework Application Guidance’). In addition, an entity is permitted to refer to and consider the applicability of the most recent pronouncements of other standard-setting bodies whose requirements are designed to meet the needs of primary users, and to refer to the sustainability-related risks and opportunities identified by entities that operate in the same industries or geographical regions. [IFRS S1.55(b)]. For example, the CDSB Framework Application Guidance can support entities in identifying biodiversity-related risks (e.g., reduction in soil fertility, reduction in pollination for crop production, reduced availability of fish stocks) or water-related opportunities (e.g., improved water efficiency, development of new products and services, conservation and restoration of ecosystems through engagement and collaboration with stakeholders). However, that does not preclude an entity from having identified water- or biodiversity-related risks and opportunities in accordance with the SASB standards or other sources of guidance. [IFRS S1.IG26, IFRS S1.IG27]. Moreover, the CDSB Framework Application Guidance explains how water- and biodiversity-related risks may be connected to other sustainability- related risks and opportunities that could reasonably be expected to affect an entity’s prospects (e.g., water-related risks such as more frequent flooding are often inherently linked to climate-related risks). This information is necessary for an entity in meeting the requirements of IFRS S1 about connected information, as discussed in section 3.4 above). The main reasons that the ISSB decided to permit and not require entities to consider these sources were: a) to prevent entities from having to consider an extensive list of open-ended sources of guidance that would lead to an increased burden for entities; and b) to facilitate the transition to the ISSB standards by enabling entities to use sources that they may already be familiar with. The application of those sources of guidance is intended to support the application of the ISSB standards and, therefore, an entity is still required to comply with all the requirements in the ISSB standards to assert compliance with them. [IFRS S1.BC135].
- 65. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 64 Figure 5-1: Use of sources of guidance to identify sustainability- related risks and opportunities How we see it An entity applies the ISSB standards as a starting point and refers to and considers the applicability of the SASB standards to identify its sustainability-related risks and opportunities. However, an entity needs to use its judgement to determine whether these two sources are sufficient to identify all those sustainability-related risks and opportunities that could reasonably be expected to affect its prospects. If they do not, the entity needs to refer to and consider the applicability of the other sources of guidance discussed in this section.
- 66. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 65 5.1.2 Sources of guidance when identifying material sustainability-related financial information As discussed in section 5.1 above, in determining whether information about sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects is material, an entity needs to apply the requirements of the ISSB standard that specifically applies to that sustainability-related risk or opportunity. [IFRS S1.56]. For example, if an entity identifies climate-related risks and opportunities that could reasonably be expected to affect its prospects, the requirements in IFRS S2 (that are discussed in Part B – Introduction to IFRS S2) are those that the entity needs to apply since IFRS S2 is the ISSB standard that specifically applies to climate-related risk and opportunities. However, as mentioned in section 5.1 above, the ISSB has, thus far, only issued specific requirements for disclosing information about sustainability- related risks and opportunities in relation to climate (i.e., IFRS S2). Moreover, the information needs of primary users is continuously evolving and it is likely that the ISSB standards may not provide specific guidance for all circumstances. Therefore, in the absence of an ISSB standard that specifically applies to a sustainability-related risk or opportunity, an entity needs to apply the requirements to sources of guidance specified in IFRS S1. Those requirements emphasise the judgement that is expected to occur when identifying information to ensure that the sustainability-related risks and opportunities are presented fairly in an entity’s disclosures (see also discussion on fair presentation in section 3.1.1 above). That is, while developing disclosures in the absence of an ISSB standard, an entity is required to identify information from sources of guidance that: [IFRS S1.57, IFRS S1.C1]. • Is relevant to the decision-making needs of primary users • Faithfully represents the entity’s risks and opportunities in relation to the specific sustainability-related risk or opportunity The list of sources of guidance included in IFRS S1 is intended to assist in making this judgement by including metrics that may be relevant to a particular sustainability-related risk or opportunity for a particular industry or in specified circumstances. 5.1.2.A Considerations when referring to the SASB standards to identify material information about sustainability-related risks and opportunities As discussed in section 5.1.2 above, in the absence of an ISSB standard that specifically applies to a sustainability-related risk or opportunity, an entity needs to apply judgement to identify information that is relevant and faithfully represents that sustainability-related risk or opportunity. In making this judgement, IFRS S1 requires an entity to refer to and consider the applicability of the metrics associated with the disclosure topics included in the SASB standards. [IFRS S1.58(a)]. As explained in section 5.1.1 above, those metrics accompany the disclosure topics and are designed to, either individually or as part of a set, provide useful information regarding an entity’s performance for a specific disclosure topic. Each of these metrics is supported by technical protocols that provide guidance on definitions, scope, implementation and presentation. The technical protocols may also serve as criteria against which the disclosed information can be verified (which is one of the enhancing qualitative characteristics of the provided information as discussed in section 3.1.1 above). In conjunction to those metrics, there are activity metrics that quantify the scale of specific activities or operations by an entity and are used to normalise data and facilitate comparison. [IFRS S1.IG12, IFRS S1.IG23]. Judgement is expected to occur in order to ensure that fair presentation of sustainability-related risks and opportunities is achieved when identifying information by using other sources of guidance.
- 67. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 66 How we see it IFRS S1 requires an entity to provide information that fairly presents the sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects (see section 3.1 above). Therefore, when an entity needs to refer to and consider the applicability of other sources of guidance to identify material information, it needs to ensure that the disclosures developed are relevant to the decision-making of primary users, and faithfully represent the entity’s sustainability-related risks and opportunities. We believe that this is a fundamental threshold that the selected sources of guidance need to meet in order to ensure the appropriateness of material information included in sustainability-related financial disclosures. Consider the following Illustration, based on an example provided in the Implementation Guidance to IFRS S1, which is a continuation of the example provided in Illustration 5-1 in section 5.1.1 above. The example relates to requirement in IFRS S1 to refer to and consider the applicability of the metrics associated with the disclosure topics included in SASB standards: [IFRS S1.IG18, IFRS S1.IG22, IFRS S1.IG23, IFRS S1.IG24]. Illustration 5–2: Identifying material information about sustainability-related risks and opportunities by referring to and considering the applicability of SASB standards Entity B conducts meat, poultry and dairy operations and therefore, refers to and considers the applicability of the Meat, Poultry & Dairy SASB standard. Entity B concludes that the disclosure topics in that SASB standard that are applicable in its circumstances include disclosure topics such as the food safety and the workforce health & safety. In identifying material information about the sustainability-related risks and opportunities it has identified based on those disclosure topics, Entity B refers to and consider the applicability of the following metrics included in the Meat, Poultry & Dairy SASB Standard: (a food safety: (i) FB-MP-250a.1—Global Food Safety Initiative (GFSI) audit (1) non conformance rate and (2) associated corrective action rate for (a) major and (b) minor non-conformances; (ii) FB-MP-250a.2—Percentage of supplier facilities certified to a Global Food Safety Initiative (GFSI) food safety certification program; (iii) FB-MP-250a.3—(1) Number of recalls issued and (2) total weight of products recalled; and (iv) FB-MP-250a.4—Discussion of markets that ban imports of the entity’s products; and (b) workforce health & safety: (i) FB-MP-320a.1—(1) Total recordable incident rate (TRIR) and (2) fatality rate; and (ii) FB-MP-320a.2—Description of efforts to assess, monitor, and mitigate acute and chronic respiratory health conditions. In applying the accompanying technical protocols of the SASB standards, Entity B discloses information related to workforce health and safety for all of its workers, regardless of their location and type of employment (e.g., full- time, part-time, direct, contract, executive, labour, salary, hourly or seasonal). Entity B applies the accompanying technical protocols as a guide in supplementing its metrics with appropriate context (e.g., a discussion of notable recalls, including information related to the cause, amount, remediation cost, nature (voluntary or involuntary), associated corrective actions and other significant outcomes related to the recall, such as legal proceedings or consumer illness).
- 68. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 67 The importance of providing industry-specific disclosures to primary users is also explicit in the section of IFRS S1 that relates to the core content of disclosures about metrics (see discussion in section 4.5 above), which requires an entity to disclose industry-based metrics in relation to its sustainability-related risks and opportunities (i.e., metrics associated with particular business models, activities or other common features that characterise participation in an industry). The associated metrics are likely to be applicable in assessing the effects of sustainability-related risks and opportunities on the entity’s cash flows, its access to finance and cost of capital over the short, medium and long term. Entity-specific judgement is needed for the metrics chosen in the information about sustainability-related risks and opportunities to be material. [IFRS S1.BC125, IFRS S1.BC133]. The following examples are a continuation of the Illustrative Example 1 and Example 2 included in the Implementation Guidance to IFRS S1 provided in the respective extract in section 5.1.1 above and relate to the identification of information about sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects by referring to and considering the applicability of the SASB standards: [IFRS S1.IE Example 1, IFRS S1.IE Example 2, IFRS S1.IE5-9, IFRS S1.IE12-15]. Extract from IFRS S1 Example 1—An entity with a single line of business Entity Y is a regional passenger airline company. In identifying sustainability-related risks and opportunities that could reasonably be expected to affect its prospects, Entity Y is required to apply IFRS Sustainability Disclosure Standards in accordance with paragraph 54 of IFRS S1. In addition to applying IFRS Sustainability Disclosure Standards, Entity Y is required to refer to and consider the applicability of the disclosure topics in the SASB Standards. Entity Y concludes that its business model and activities most closely align with the Airlines SASB Standard. … In disclosing information about its sustainability-related risks and opportunities, Entity Y applies IFRS Sustainability Disclosure Standards that specifically apply to its identified sustainability-related risks and opportunities. For example, Entity Y applies IFRS S2 to disclose information about its greenhouse gas emissions. In the absence of an IFRS Sustainability Disclosure Standard that specifically applies to the sustainability-related risks and opportunities which Entity Y has identified, Entity Y refers to and considers the applicability of the metrics associated with the applicable disclosure topics in the Airlines SASB Standard. Entity Y concludes that applying these metrics will provide information that is relevant to the decision-making of users of general purpose financial reports and faithfully represents the sustainability-related risks and opportunities that it has identified. For example, the metrics associated with the ‘Accident & Safety Management’ disclosure topic include: (a) TR-AL-540a.1—Description of implementation and outcomes of a Safety Management System; (b) TR-AL-540a.2—Number of aviation accidents; and (c) TR-AL-540a.3—Number of governmental enforcement actions of aviation safety regulations. In identifying information to provide, Entity Y considers the applicability of the technical protocols accompanying the metrics. For example, while disclosing a description of the implementation and outcomes of a Safety Management System, Entity Y might describe any actions or measures it has implemented to mitigate any safety risks and hazardous situations that it has identified. These actions or measures include, for example, particular
- 69. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 68 changes in controls, operations, management, processes, products, business partners, training or technology. Entity Y is required to apply the requirements relating to ‘core content’ in IFRS S1. Entity Y considers the disclosure topics, metrics and associated technical protocols in the Airlines SASB Standard when providing information required by IFRS S1, including information relating to strategy and metrics and targets. Entity Y discloses that it applied the disclosure topics and metrics in the Airlines SASB Standard in preparing its sustainability-related financial disclosures, in accordance with paragraphs 49 and 59 of IFRS S1. Example 2 - A large conglomerate with diverse activities Entity A is a large conglomerate with diverse activities. Entity A produces electrical and industrial equipment for use in a range of industries. In addition to IFRS Sustainability Disclosure Standards, Entity A is required to refer to and consider the applicability of the disclosure topics in the SASB Standards in identifying its sustainability-related risks and opportunities. Because of the wide-ranging nature of its activities, Entity A begins its consideration of the applicability of the SASB Standards by considering the various sectors into which the SASB Standards are grouped. Entity A conducts activities in industries in the Health Care, Resource Transformation and Infrastructure sectors, and in some cases owns particular parts of its production process rather than relying on suppliers. It also has some activities in the Transportation and Consumer Goods sectors. … In the absence of an IFRS Sustainability Disclosure Standard that specifically applies to the sustainability-related risks and opportunities that Entity A has identified, Entity A refers to and considers the applicability of the metrics associated with applicable disclosure topics. In identifying applicable metrics, Entity A considers whether the metric will provide information that is relevant to the decision-making of users of general purpose financial reports and that faithfully represents the sustainability- related risks and opportunities that it has identified. In preparing its sustainability-related financial disclosures, Entity A concludes that some information should be aggregated to avoid obscuring material information with immaterial information. For example, it concludes that information about its strategy for sourcing critical materials for devices produced by its various activities should be aggregated because the entity manages the supplier relationships for those critical materials centrally. In contrast, for other types of information, Entity A concludes aggregation would result in obscuring material information. For example, it concludes that information about the number of recalls related to its equipment in the Health Care sector should not be aggregated with information about the number of recalls related to its equipment in the Consumer Goods sector because the technologies, production processes and markets for each sector differ. Therefore, there are also varied reasons for the occurrence of product recalls in these sectors. Entity A discloses information about the SASB Standards it has applied in preparing its sustainability-related financial disclosures, in accordance with paragraphs 49 and 59 of IFRS S1, including identifying the specific SASB Standards, disclosure topics and metrics it applied. Entity A also provides information to enable users of general purpose financial reports to understand the judgements that it has made in the process of preparing its sustainability- related financial disclosures and that have the most
- 70. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 69 significant effect on the information included in those disclosures in accordance with paragraph 74 of IFRS S1. The ISSB expects (as in the case of disclosure topics discussed in section 5.1.1 above) the associated metrics in the SASB standards to be typically applicable for an entity with the given business model and associated activities. Also, those metrics are not exhaustive. In situations where an entity concludes that metrics specified in the SASB standards are not applicable in its circumstances or are not sufficient to identify information that would fairly present all sustainability-related risks and opportunities that could reasonably be expected to affect its prospects (as discussed in 5.1.2 above), an entity needs to exercise judgement to refer to and consider other sources of guidance in accordance with IFRS S1 in this identification process. [IFRS S1.57, IFRS S1.C1, IFRS S1.IG13, IFRS S1.BC133]. 5.1.2.B Considerations when referring to other sources of guidance to identify material information about sustainability-related risks and opportunities To the extent that there is no conflict with the ISSB standards, an entity is permitted to refer to and consider the applicability of: a) the CDSB Framework Application Guidance; b) the most recent pronouncements of other standard-setting bodies whose requirements are designed to meet the needs of primary users; and c) the information, including metrics, disclosed by entities that operate in the same industry(s) or geographical region(s). [IFRS S1.58(b)]. For example, an entity refers to and considers the applicability of the CDSB Framework Application Guidance in identifying information, including metrics, about the water- or biodiversity-related risks or opportunities that could reasonably be expected to affect an entity’s prospects. An entity may consider the CDSB Framework Application Guidance in applying the core content requirements that are discussed in section 4 above). The Illustrative Example below is based on the Implementation Guidance to IFRS S1: [IFRS S1.IG27]. Illustration 5–3: Identifying material information to disclose about the sustainability-related risks and opportunities by referring to and considering the applicability of CDSB Framework Application Guidance (a) Governance—in providing disclosures on governance relating to water- related risks and opportunities, the CDSB Framework Application Guidance on Water-related Disclosures suggests an entity may provide information about how water policies, strategy and information are delegated to management. In relation to collaboration with stakeholders to achieve effective water management, the guidance also suggests an entity may provide information about whether there are specific bodies, individuals or mechanisms located in areas that are affected by significant water loss whose function is to ensure compliance with water-related regulation and engagement with stakeholders. (b) Strategy—in providing disclosures on strategy relating to biodiversity- related risks and opportunities, the CDSB Framework Application Guidance on Biodiversity-related Disclosures suggests an entity may provide, for example, information about the geographic-specificity of biodiversity-related risks and opportunities and how those risks and opportunities may vary over the short, medium and long term. The guidance also suggests the type of quantitative and qualitative information an entity may consider providing in accordance with paragraphs 34–40 of IFRS S1, for example, the operational expenses, cost savings and revenue associated with biodiversity management, such as information about remediation costs or provisions in the case
- 71. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 70 of accidents such as polluting spills, costs of staff training and revenue from biodiversity-efficient products and services. (c) Metrics and targets—the CDSB Framework Application Guidance on Biodiversity-related Disclosures provides examples of common biodiversity metrics such as concentrations of key pollutants in wastewater, the volume of timber and non-timber forest products harvested and areas of forest, grassland or wetland converted due to urbanisation. Due to changes in biodiversity over time, the guidance suggests an entity provides information about the time frames it has set for targets. The guidance also discusses targets tailored to specific locations due to geographical variation in biodiversity priorities, as well as differing legal and regulatory requirements. Moreover, an entity may refer to and consider the applicability of the sources specified in Appendix C to IFRS S1, namely the GRI standards and the European Sustainability Reporting Standards (ESRS). [IFRS S1.58(c), IFRS S1.C2]. Unlike the SASB standards and the CDSB Framework Application Guidance, the GRI standards and ESRS are intended to meet the information needs of a different audience than primary users. Therefore, IFRS S1 states that, if an entity refers to and considers the applicability of the GRI standards and ESRS, this is only allowed to the extent that these sources assist the entity in meeting the objective of IFRS S1 (see section 1.1 above) and do not conflict with the ISSB standards. Allowing an entity to refer to and consider the applicability of those sources in identifying material information about sustainability-related risks or opportunities, but not in identifying the sustainability-related risks or opportunities themselves, is intended to ensure that any information disclosed by entities relates to a topic that has been identified as being of interest to primary users. [IFRS S1.58(c), IFRS S1.C2, IFRS S1.BC137, IFRS S1.BC138]. Although a subset of disclosures provided in accordance with GRI standards or ESRS could produce information that is useful to primary users, an entity still needs to consider the requirements in the ISSB standards and not just repurpose a report prepared in accordance with those standards to automatically consider it as meeting the requirements in the ISSB standards. In addition, an entity needs to comply with the requirement of IFRS S1 not to obscure material information required by the ISSB standards (discussed in section 3.2.3.B above). Otherwise, if an entity applies these standards without applying the requirements in the ISSB standards, it will not be able to make an explicit and unreserved statement of compliance with the ISSB standards (see discussion about compliance also in section 7 below). [IFRS S1.58(c), IFRS S1.C3, IFRS S1.BC138, IFRS S1.BC139].
- 72. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 71 Figure 5-2: Use of sources of guidance to identify material information about sustainability-related risks and opportunities
- 73. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 72 5.1.3 Disclosure of information about sources of guidance To enable primary users to understand how sustainability-related financial disclosures have been prepared, an entity is required to identify and disclose: • The sources of guidance (e.g., specific standards, pronouncements, industry practice or other sources, including, if applicable, the disclosure topics in the SASB standards) it applied in preparing its sustainability- related financial disclosures. [IFRS S1.59(a)]. • The industry or industries specified in the ISSB standards, the SASB standards or other sources of guidance relating to a particular industry or industries that the entity has applied to the disclosures it has provided, including in identifying applicable metrics. This is intended to help primary users to understand the materiality judgements made by a entity in applying the industry-based disclosure requirements (e.g., if an SASB standards were used to prepare disclosures). By disclosing the industry as required above, primary users will be able to understand if a metric applicable for an entity in that industry has been omitted. [IFRS S1.59(b), IFRS S1.BC140]. • Information about the judgements an entity has made in the process of preparing its sustainability-related financial disclosures that have the most significant effect on the information included in those disclosures (see section 6.1. below) that include the sources of guidance applied. As part of this disclosure, it may be necessary for an entity to also disclose that it considered other sources of guidance but did not apply them. [IFRS S1.74, IFRS S1.75, IFRS S1.BC141]. 5.2 Location of disclosures The disclosures required by the ISSB standards need to be part of an entity’s general purpose financial reports. As explained in section 1.1 above, general purpose financial reports are those that provide financial information about a reporting entity that is useful to primary users in making decisions relating to providing resources to the entity. Therefore, requiring sustainability-related financial disclosures to be part of an entity’s general purpose financial report, is intended to ensure that the primary users of those reports are provided with a comprehensive and connected package of reports. [IFRS S1.60, IFRS S1.BC142]. 5.2.1 Flexibility in location of disclosures Apart from requiring the sustainability-related financial disclosures to be part of an entity’s general purpose financial report, IFRS S1 does not prescribe the exact location of those disclosures within general purpose financial reports. There are various possible locations in which the sustainability- related financial information can be disclosed, but this may be subject to regulations or other requirements that apply in the jurisdiction in which an entity operates. That is, there may be regulations or other requirements that specify the exact location in which an entity is required to provide its sustainability-related financial disclosures. For example, in some jurisdictions, entities prepare management commentary (also known as the ‘management report’, ‘management’s discussion and analysis’, ‘operating and financial review’, ‘integrated report’ or ‘strategic report’) or a similar report. When such a report forms part of an entity’s general purpose financial reports, this can be considered a possible location for sustainability-related financial disclosures. [IFRS S1.61, IFRS S1.BC143]. Moreover, the information required by the ISSB standards can be included in the same location as the information disclosed to meet other requirements, such as information required by regulators (as discussed in section 3.2.3.C above). However, in such cases, the entity needs to ensure that the
- 74. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 73 sustainability-related financial disclosures are clearly identifiable and not obscured by the additional information provided to meet those other requirements. [IFRS S1.62]. See also section 3.2.3.B above for the requirements for not obscuring material information. 5.2.2 Information included by cross-reference There are cases where information required by the ISSB standards may be available in another report published by the entity. For example, the required information could be disclosed in the related financial statements. As discussed in section 3.4.3 above, IFRS S1 specifies that when the ISSB standards require the disclosure of common items of information, an entity is required to avoid unnecessary duplication. In such cases, IFRS S1 permits an entity to include cross-references in the reports to provide sustainability- related financial disclosures. [IFRS S1.63, IFRS S1.B45]. Despite the benefit of cost-effectiveness when including information by cross- reference, IFRS S1 includes specific conditions in which cross-referencing is permitted. In particular, if material information is included in an entity’s sustainability-related financial disclosures by cross-reference (cross- referenced information), that information is required to be available whenever an entity’s sustainability-related financial disclosures are available. That is, the cross-referenced information needs to be available on the same terms and at the same time as all other sustainability-related financial disclosures. [IFRS S1.B45, IFRS S1.BC144]. When the cross-referenced information is not part of the same report as the entity’s sustainability-related financial disclosures, an entity needs to explain how primary users can access that information. In doing so, an entity needs to clearly identify in its sustainability-related financial disclosures, the report within which the cross-referenced information is located, and explain how to access that report. Also, the cross-reference needs to indicate a precisely specified part of that report. [IFRS S1.B47, IFRS S1.BC144]. The cross-referenced information, effectively, becomes part of the complete set of sustainability-related financial disclosures and, therefore, it needs to comply with the requirements of the ISSB standards (e.g., it needs to meet the qualitative characteristics discussed in section 3.1.1 above). An entity needs to ensure that this complete set of sustainability-related financial disclosures is not made less understandable because of including information by cross-reference. Moreover, the responsibility of the governance body(ies) or individual(s) authorising general purpose financial reports is the same for information included by cross-reference as for the information included directly. [IFRS S1.B45, IFRS S1.B46]. 5.3 Timing of reporting 5.3.1 Simultaneous reporting of sustainability-related financial disclosures and financial statements IFRS S1 requires an entity to provide its sustainability-related financial disclosures at the same time as it issues its related financial statements. This is also a natural consequence of the requirement in IFRS S1 that information included in an entity’s sustainability-related financial disclosures by cross- reference needs to be available on the same terms and at the same time as all other sustainability-related financial disclosures. This simultaneous issuance is intended to provide primary users with a coherent, holistic and connected picture of an entity’s financial position and performance, and to provide users with a comprehensive set of sustainability- related financial disclosures to enable more informed decisions. [IFRS S1.64, IFRS S1.BC142, IFRS S1.BC145]. Sustainability-related financial disclosures need to be provided at the same time as an entity issues its related financial statements. IFRS S1 allows for cross- references to avoid unnecessary duplication where disclosure of common items of information is required. The cross-referenced information becomes part of the complete set of sustainability-related financial disclosures.
- 75. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 74 5.3.2 Reporting period of sustainability-related financial disclosures An entity normally prepares sustainability-related financial disclosures for a 12-month period (unless, for practical reasons, an entity prefers to report, for example, a 52-week period which is not precluded by IFRS S1). Regardless of this determination, an entity’s sustainability-related financial disclosures need to cover the same reporting period as the related financial statements. [IFRS S1.64, IFRS S1.65]. IFRS S1 requires an entity to provide specific disclosures when it changes the end of its reporting period and provides sustainability-related financial disclosures for a period longer or shorter than 12 months. In particular, it needs to disclose the period covered by the sustainability-related financial disclosures, the reason for using a longer or shorter period, and the fact that the amounts disclosed in the sustainability-related financial disclosures are not entirely comparable. [IFRS S1.64, IFRS S1.66]. Sometimes entities receive information after the end of the reporting period about conditions that existed at the end of that reporting period. If such information is received before the date on which the sustainability-related financial disclosures are authorised for issue, the entity needs to update disclosures that relate to those conditions in the light of the new information. [IFRS S1.67]. Moreover, there may be transactions, other events and conditions that occur after the end of the reporting period, but before the date on which the sustainability-related financial disclosures are authorised for issue. In such cases, an entity needs to disclose information about those transactions, other events and conditions if non-disclosure of that information could reasonably be expected to influence decisions that primary users make on the basis of those reports. [IFRS S1.68]. 5.3.3 Interim reporting IFRS S1 does not mandate which entities are required to provide interim sustainability-related financial disclosures, or the frequency, or timing of such disclosures after the end of an interim period. However, entities may be required to publish interim general purpose financial reports by governments, securities regulators, stock exchanges and accountancy bodies, when their debt or equity securities are publicly traded. Unlike the IFRS accounting standards, the ISSB standards do not include a standard that is specific to interim reporting. Instead, there are requirements within IFRS S1 that relate to interim reporting. In particular, entities that are required, or elect, to publish interim sustainability-related financial disclosures may be required, or choose, to provide less information than is provided in that of their annual sustainability-related financial disclosures. This is due to timeliness and cost considerations, and to avoid repetition of information previously reported. In general, interim sustainability-related financial disclosures are intended to provide an update on the latest complete set of the respective annual disclosures and therefore, focus on new information, events and circumstances without duplicating information previously reported. However, although more condensed sustainability- related financial disclosures may be provided, IFRS S1 does not prohibit or discourage an entity from publishing a complete set of sustainability-related financial disclosures (according to the requirements in IFRS S1) as part of its interim general purpose financial report. [IFRS S1.69, IFRS S1.B48]. 5.4 Comparative information IFRS S1 requires an entity to disclose comparative information in respect of the preceding period for all amounts disclosed in the reporting period, unless
- 76. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 75 another ISSB standard permits or requires otherwise. Moreover, IFRS S1 requires an entity to disclose comparative information for narrative and descriptive sustainability-related financial disclosures if that information is useful to primary users to understand the reporting period’s disclosures. [IFRS S1.70, IFRS S1.B49]. The IASB decided to not limit this requirement to metrics, but to expand it to ‘all amounts’ as this would be more useful to primary users. Amounts reported in sustainability-related financial disclosures may relate, e.g., to the current and anticipated financial effects of sustainability-related risks and opportunities or to metrics and targets. [IFRS S1.71, IFRS S1.BC147]. For specific disclosure requirements about comparative information when changes occur in amounts that are estimates, see discussion in section 6.2.3 below. 6 Judgements, uncertainties and errors 6.1 Judgements In preparing and presenting sustainability-related financial disclosures, an entity will need to apply various judgements. IFRS S1 requires an entity to disclose information about the judgements (apart from those involving estimations of amounts discussed in section 6.2 below) an entity has made in the process of preparing its sustainability-related financial disclosures. This requirement specifically relates to judgments that have the most significant effect on the information included in the sustainability-related financial disclosures. Providing such information to primary users enables them to understand how sustainability-related financial disclosures have been prepared. [IFRS S1.74, IFRS S1.BC158]. IFRS S1 provides some examples where judgement is required by an entity in preparing its sustainability-related financial disclosures. These are when an entity is: [IFRS S1.75]. • Identifying sustainability-related risks and opportunities that could be reasonably expected to affect the entity’s prospects (see section 1.2 above) • Determining which sources of guidance to apply (see section 5 above) • Identifying material information to include in the sustainability- related financial disclosures (see section 3.2.2 above) • Assessing whether an event or change in circumstances is significant and requires reassessment of the scope of all affected sustainability-related risks and opportunities throughout the entity’s value chain (see section 1.2.3 above) This requirement builds on the principle of IAS 1 relating to judgements made by an entity in applying its accounting policies that have the most significant effects on the amounts recognised in an entity’s financial statements. The ISSB decided to include this overarching requirement for judgements made by an entity in the absence of a specifically applicable disclosure requirement about judgements in other ISSB standards. Other ISSB standards may require disclosure of judgements and estimates. In such cases, the requirements in IFRS S1 would complement those more specific requirements. However, other ISSB standards may also require disclosure of some of the information that an entity would otherwise be required to disclose in accordance with this overarching requirement in IFRS S1. [IFRS S1.76, IFRS S1.BC159, IFRS S1.BC160, IFRS S1.BC162]. Comparative information is required in respect of the preceding period for all amounts disclosed in the reporting period, unless another ISSB standard permits or requires otherwise.
- 77. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 76 6.2 Measurement uncertainty 6.2.1 Estimated amounts give rise to measurement uncertainty Measurement uncertainty arises when amounts included in sustainability- related financial disclosures cannot be measured directly and can only be estimated. Such measurement uncertainty not only arises when estimating metrics, but also in other cases, such as when providing information about the effects of sustainability-related risks and opportunities on an entity’s financial position, financial performance and cash flows for the reporting period, and the anticipated financial effects over the short, medium and long term (see further discussion in section 4.3.4 above). [IFRS S1.BC163]. The following example is based on the BC to IFRS S1: [IFRS S1.BC163]. Illustration 6–1: Example of measurement uncertainty Entity N’s assets are increasingly at risk from climate-related forest fire events. This risk is considered as part of the impairment analysis and measurement of those assets. The frequency and severity of these fires are highly uncertain. Therefore, primary users need information about this uncertainty, including the fact that there is a significant risk of a material adjustment within the next annual reporting period to the carrying amounts of these assets. 6.2.2 IFRS S1 requirements for measurement uncertainties IFRS S1 requires an entity to disclose information to enable primary users to understand the most significant uncertainties affecting the amounts reported in the sustainability-related financial disclosures. In doing so, an entity identifies the amounts it has disclosed that are subject to a high level of measurement uncertainty and, for each of those amounts, it needs to disclose: (i) the sources of measurement uncertainty (e.g., the dependence of the amount on the outcome of a future event, on a measurement technique or on the availability and quality of data from the entity’s value chain), and (ii) the assumptions, approximations and judgements the entity has made in measuring the amount. [ IFRS S1.78, IFRS S1.82, IFRS S1.BC163]. These disclosure requirements relate to estimates used in preparing sustainability-related financial disclosures and are the entity’s most difficult, subjective or complex judgements. In some cases, estimates involve assumptions about possible future events with uncertain outcomes. The greater the number of variables and assumptions, the more subjective and complex those judgements become. Accordingly, the uncertainty affecting the amounts reported in the sustainability-related financial disclosures increases. [IFRS S1.79, IFRS S1.80]. The use of reasonable estimates is essential in preparing sustainability- related financial disclosures. However, estimates need to be accurately described and explained to avoid undermining the usefulness of the information that includes those estimates. IFRS S1 is explicit that even a high level of measurement uncertainty would not necessarily prevent such an estimate from providing useful information. [IFRS S1.79]. The type and extent of the information an entity may need to disclose will vary according to the nature of the amount reported in the sustainability- related financial disclosures, i.e., the sources of and the factors contributing to the uncertainty and other circumstances. IFRS S1 provides examples of the type of information an entity may need to disclose: [IFRS S1.81].
- 78. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 77 Extract from IFRS S1 81 The type and extent of the information an entity might need to disclose vary according to the nature of the amount reported in the sustainability-related financial disclosures—the sources of and the factors contributing to the uncertainty and other circumstances. Examples of the type of information an entity might need to disclose are: (a) the nature of the assumption or other source of measurement uncertainty; (b) the sensitivity of the disclosed amount to the methods, assumptions and estimates underlying its calculation, including the reasons for the sensitivity; (c) the expected resolution of an uncertainty and the range of reasonably possible outcomes for the disclosed amount; and (d) an explanation of changes made to past assumptions concerning the disclosed amount, if the uncertainty remains unresolved. 6.2.3 Revised comparative information for estimated metrics 6.2.3.A New information for estimated metrics disclosed in the preceding period As explained in section 5.4.1 above, an entity is required to provide comparative information in respect of the preceding period for all amounts disclosed in the reporting period (unless another ISSB standard permits or requires otherwise). Sometimes, the amount disclosed for a metric is an estimate (as discussed in section 6.2.1 above), and there may be cases where an entity identifies new information in relation to the estimated metric that was disclosed in the preceding period. If this new information provides evidence of circumstances that existed in that preceding period, IFRS S1 requires an entity to: [IFRS S1.B50] • Disclose a revised comparative amount that reflects that new information • Disclose the difference between the amount disclosed in the preceding period and the revised comparative amount • Explain the reasons for revising the comparative amount Although the feedback that the ISSB received for the principle of providing comparative information was widely accepted, there were concerns over its application specifically to comparative information of amounts that are estimates. One of the main concerns related to the fact that the requirement to revise comparative information differs from the approach to changes in estimates in financial statements prepared under the IFRS accounting standards. That is, according to the requirements in the IFRS accounting standards, changes in estimates are recognised in the current and future periods affected by the change and, therefore, the comparative information is not changed. Instead, the change in estimate is reflected in the profit or loss of the reporting period that the change occurs and in equity because they are part of a double-entry model. However, in sustainability-related financial disclosures, estimates cannot affect equity (e.g., a change in a Scope 3 greenhouse gas emissions estimate affects only the estimate itself). Therefore, revised comparatives that reflect updated estimates are useful information for primary users to understand trends. Consequently, the ISSB decided that an entity would provide more useful information if the entity New information may be identified in relation to an estimated metric disclosed in the preceding period which could provide evidence of circumstances that existed in that preceding period. In such case, a revised comparative amount needs to be disclosed.
- 79. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 78 revised comparatives to reflect changes in estimates that relate to the preceding period rather than changing reporting period information. [IFRS S1.BC149, IFRS S1.BC150, IFRS S1.BC151]. IFRS S1 acknowledges that sometimes it may be impracticable to revise a comparative amount to achieve comparability with the reporting period (e.g., data may not have been collected in the preceding period in a way that allows retrospective application of a new definition of a metric which may make it impracticable to recreate the data). Therefore, a revised comparative amount for the preceding period does not need to be disclosed if it is impracticable to do so, but an entity needs to disclose that fact. [IFRS S1.B51, IFRS S1.B54]. However, if a metric is forward-looking and relates to possible future transactions, events and other conditions, the entity is permitted, but not required, to revise a comparative amount for that forward-looking metric (e.g., when disclosing expected expenditure on new equipment for a future year and the price of that equipment subsequently increases). If the entity chooses to provide comparative information for a forward-looking metric, it needs to ensure that this does not involve the use of hindsight. [IFRS S1.B51]. How we see it As more reliable information becomes available in the current reporting period that supports sustainability-related metrics that are based on estimates, it may be appropriate to revise previously reported estimates to improve comparability of the information provided to primary users. For example, in the case of assessing progress towards net zero targets, improved or more granular greenhouse gas emissions data may become available in future periods. Therefore, an entity needs to set up appropriate processes and controls to collect the necessary data to provide revised estimates retrospectively and disclose what has changed compared to the preceding period. 6.2.3.B Revised comparatives for redefined, replaced and new metrics If an entity redefines, replaces or introduces a new metric in the reporting period, it needs to disclose a revised comparative amount for that metric, unless it is impracticable to do so. IFRS S1 includes a definition for the term ‘impracticable’ in Appendix A, clarifying that “applying a requirement is impracticable when an entity cannot apply it after making every reasonable effort to do so”. This definition is based on IAS 1 for consistent use with the IFRS accounting standards. Accordingly, IFRS S1 also sets a high threshold for how an entity determines whether it is impracticable to meet the requirements and this threshold is higher than a cost-benefit threshold. In addition, an entity needs to explain the changes in the metric and the reasons for those changes, including why the redefined or replacement metric provides more useful information than the previous metric. [IFRS S1.B52, IFRS S1.B53, IFRS S1.BC152, IFRS S1.BC155]. 6.3 Errors IFRS S1 describes prior period errors as omissions from and misstatements in the entity’s sustainability-related financial disclosures for one or more prior periods. These errors can be the effects of mathematical mistakes, mistakes in applying the definitions for metrics or targets, oversights or misinterpretations of facts, or fraud. Such errors arise from a failure to use, or the misuse of, reliable information that was available when the sustainability-related financial disclosures for that period(s) were authorised for issue. Also, errors arise when such reliable information is not used or
- 80. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 79 misused, while it could reasonably be expected to have been obtained and considered in the preparation of those disclosures. [IFRS S1.84, IFRS S1.B56]. Potential reporting period errors are corrected before the sustainability- related financial disclosures are authorised for issue, if these are discovered in the reporting period to which they relate. However, material errors are sometimes not discovered until a subsequent period. If an entity identifies a material error in its prior period sustainability-related financial disclosures, this needs to be corrected by restating the comparative amounts for the prior period(s) disclosed, unless it is impracticable to do so. [IFRS S1.83, IFRS S1.86, IFRS S1.B57]. Moreover, if a material error is identified in the sustainability-related financial disclosures for its prior periods, an entity needs to disclose the nature of that error, and the correction (to the extent practicable) for each prior period disclosed. Also, if correction of that error is impracticable, an entity needs to disclose the circumstances that led to the existence of that condition and a description of how and from when the error has been corrected. When it is impracticable to determine the effect of an error on all prior periods presented, the comparative information is restated to correct the error from the earliest date practicable. [IFRS S1.B58, IFRS S1.B59] Corrections of errors are distinguished from changes in estimates. This is because estimates are approximations that an entity may need to revise due to additional information that becomes known (see also discussion in section 6.2 above), rather than omissions or misstatements. Therefore, IFRS S1 distinguishes the requirements for an entity that revises a comparative amount (e.g., to update an estimate for a metric or redefine a metric), as discussed in section 6.2.3 above, and the requirements for restating an amount due to an error. [IFRS S1.85, IFRS S1.BC165]. 7 Statement of compliance An explicit and unreserved statement of compliance can be included only if an entity’s sustainability-related financial disclosures comply with all the requirements of the ISSB standards. Qualified statements of compliance with the ISSB standards are not allowed. Including a statement of compliance is important information to communicate to primary users about the entity having applied all the requirements of the ISSB standards, rather than having been selective in its approach to reporting sustainability-related financial information. [IFRS S1.72, IFRS S1.BC156]. However, there are situations where IFRS S1 relieves an entity from disclosing information that is specifically required by an ISSB standard, without preventing that entity from asserting compliance with them. These situations relate to where: [IFRS S1.73]. • Law or regulation may prohibit an entity from disclosing information that is specifically required by an ISSB standard (see discussion on interaction with law or regulation in section 3.2.3.C above) • The information about a sustainability-related opportunity is commercially sensitive (see discussion on commercially sensitive information in section 3.2.4.B above) To assert compliance with the ISSB standards, an entity does not necessarily need to implement strategic goals. For example, an entity does not need to follow a particular transition plan to a lower-carbon economy, but it is required to disclose information about the targets it has set or is required to set by law or regulation. That is, an entity that does not manage some of its sustainability-related risks and opportunities, or that has not established its own metrics and targets for them, could still assert compliance with the ISSB standards by disclosing that fact, as this is often material for primary users to know. Similarly, an entity may not have governance processes, controls or An explicit and unreserved statement of compliance can be included only if an entity’s sustainability- related financial disclosures comply with all the requirements of the ISSB standards.
- 81. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 80 procedures in place to monitor and manage specific sustainability-related risks and opportunities, but that fact, in itself, is often material for primary users to know through a disclosure. [IFRS S1.BC157]. 8 Effective date Several stakeholders stressed the fact that, due to the urgency of creating a global baseline of sustainability-related financial disclosures, the effective dates for IFRS S1 and IFRS S2 should not be more than 12 months after their issuance. The ISSB decided that setting an effective date for annual reporting periods beginning on or after 1 January 2024 is consistent with its current pace in meeting primary users’ urgent need for sustainability-related and climate-related financial disclosures. [IFRS S1.BC167, IFRS S1.BC171]. In particular, an entity needs to apply IFRS S1 for annual reporting periods beginning on or after 1 January 2024. Earlier application is permitted, however, if doing so, an entity needs to disclose that fact and apply IFRS S2 at the same time. [IFRS S1.E1]. The actual effective date for entities will depend on when the ISSB standards become mandatory in the jurisdictions in which they operate, unless those entities voluntarily apply the ISSB standards before they become mandatory in their jurisdictions. 9 Transition reliefs to IFRS S1 requirements How well prepared an entity is to apply the ISSB standards will depend on various factors such as an entity’s current reporting approach for sustainability-related risks and opportunities, its size and the jurisdiction in which it operates, etc. Taking into consideration the level of preparedness, the ISSB acknowledged that entities may need time to create or adjust internal systems, processes and controls to prepare the disclosures required by the ISSB standards. Therefore, the ISSB decided to introduce transition reliefs. [IFRS S1.BC170]. IFRS S1 includes transition reliefs available in the first annual reporting period in which an entity applies IFRS S1 that are discussed in section 9.1, 9.2 and 9.3 below. [IFRS S1.E3]. 9.1 Transition relief for simultaneous reporting The ISSB considered the feedback received from stakeholders expressing a number of concerns about data availability and preparer readiness to meet the requirement of simultaneous reporting of sustainability-related financial disclosures and financial statements, especially in the first year of application of the ISSB standards. For example, challenges due to the potential reporting burden and higher costs, time-consuming collection and aggregation of data due to underdeveloped systems, delayed calculation of metrics due to later finalisation of financial statements. In response to these concerns, the ISSB decided to provide transition relief to give entities more time to prepare and align reporting of sustainability- related financial disclosures and financial statements. The transition relief is available in the first annual reporting period in which an entity applies IFRS S1 and allows an entity to not report its sustainability-related financial disclosures at the same time as its related financial statements. [IFRS S1.BC145, IFRS S1.BC146, IFRS S1.BC172]. In particular, Appendix E states: [IFRS S1.E4]. Extract from IFRS S1 E4 In the first annual reporting period in which an entity applies this Standard, the entity is permitted to report its sustainability- related financial disclosures after it publishes its related financial IFRS S1 includes the transition reliefs available in the first annual reporting period in which an entity applies the ISSB standards.
- 82. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 81 statements. In applying this transition relief, an entity shall report its sustainability-related financial disclosures: (a) at the same time as its next second-quarter or half-year interim general purpose financial report, if the entity is required to provide such an interim report; (b) at the same time as its next second-quarter or half-year interim general purpose financial report, but within nine months of the end of the annual reporting period in which the entity first applies this Standard, if the entity voluntarily provides such an interim report; or (c) within nine months of the end of the annual reporting period in which the entity first applies this Standard, if the entity is not required to and does not voluntarily provide an interim general purpose financial report. As indicated above, the relief permits the annual sustainability-related financial disclosures to be provided with the following second-quarter or half- year interim general purpose financial report. The ISSB decided to specify the timing of delay to enable primary users to know when the information would be provided. However, this relief is not suggesting that an entity is required to provide quarterly or half-yearly reporting (see also discussion about interim reporting in section 5.3.4 above). [IFRS S1.BC172, IFRS S1.BC173]. 9.2 Transition relief for comparative information Considering that entities may be able to apply the requirements in IFRS S1 sooner if comparative information is not required in the first annual reporting period in which they apply IFRS S1, the ISSB decided to provide a relief from the requirement to disclose comparative information. This relief allows an entity to report on only that first annual reporting period without being required to provide disclosures specified in IFRS S1 for any period before the date of initial application. That is, an entity is not required to disclose comparative information in the first annual reporting period in which it applies IFRS S1. [IFRS S1.E3, IFRS S1.BC174]. 9.3 ‘Climate-first’ transition relief Limiting an entity’s disclosures to information that relates only to climate- related risks in the first annual reporting period in which an entity applies IFRS S1, is another relief that the ISSB decided to provide to entities. Therefore, the entity would apply the requirements in IFRS S1 only to the extent that they relate to the disclosure of information about climate-related risks and opportunities. [IFRS S1.E5, IFRS S1.BC175]. In particular, if an entity applies this relief: [IFRS S1.E5, IFRS S1.E6, IFRS S1.BC176]. • It applies IFRS S2 (that is discussed in Part B – Introduction to IFRS S2) to identify climate-related risks and opportunities and discloses information about them. • It is required to disclose that fact. • The relief from providing comparative information would be extended. Specifically, in the first annual reporting period in which it applies IFRS S1, the entity is not required to disclose comparative information about its climate-related risks and opportunities. Also, in the second annual reporting period in which the entity applies IFRS S1, the entity is not required to disclose comparative information about its sustainability- related risks and opportunities, other than its climate-related risks and opportunities. Therefore, comparative information in relation to climate- related risks and opportunities is required in the second annual reporting period. In taking advantage of the ‘climate-first’ transition relief, an entity would apply the requirements in IFRS S1 only to the extent that they relate to the disclosure of information about climate-related risks and opportunities.
- 83. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 82 Some entities that decide to take advantage of this relief in the first year of application of IFRS S1, may also wish to disclose information about sustainability-related risks and opportunities, beyond those relating to climate. The ISSB clarified that this relief is not intended to restrict an entity from providing incremental information to primary users. Instead, the relief is still available to entities that want to also provide information for sustainability-related risks and opportunities, in addition to those relating to climate, to the extent that this additional information does not reflect information about all sustainability-related risks and opportunities that could be reasonably expected to affect the entity’s prospects. Therefore, the ISSB emphasised the importance of ensuring in those cases where the relief is used, that the information about climate-related risks and opportunities provided in accordance with IFRS S1 and IFRS S2 is not obscured by the incremental information. [IFRS S1.BC177]. How we see it Entities may already have been disclosing information about sustainability- related topics, other than climate, in their general purpose financial reports. In the first annual reporting period that these entities apply the ISSB standards, they may continue providing information in their sustainability-related financial disclosures about the other sustainability- related topics for consistency and comparability purposes with their prior year reporting. However, they need to be explicit that the ‘climate-first’ transition relief is applied and that the additional information is not provided for the purposes of complying with the full requirements of the ISSB standards had the ‘climate-first’ relief not been applied. They also need to ensure that material information provided in accordance with the ISSB standards is not obscured by this additional information.
- 84. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 83 Part B – Introduction to IFRS S2
- 85. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 84 1 Introduction to IFRS S2 1.1 The objective and scope of IFRS S2 IFRS S2 requires an entity “to disclose information about its climate-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.” [IFRS S2.1]. To meet this objective, an entity is required to disclose information about the climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects. Consistent with the requirements in IFRS S1, risks and opportunities that could reasonably be expected to affect the entity’s prospects are those that could reasonably be expected to affect its cash flows, its access to finance or cost of capital over the short, medium, and long term. [IFRS S2.2]. Those climate-related risks and opportunities that are not reasonably expected to affect an entity’s prospects are outside the scope of IFRS S2. [IFRS S2.4]. An entity’s climate-related risks and opportunities are a subset of its sustainability-related risks and opportunities that are required to be disclosed in accordance with IFRS S1. For further information on the identification of sustainability-related risks and opportunities, refer to section 1.2 of Part A - Introduction to IFRS S1. In developing IFRS S2, the ISSB acknowledged that climate change is likely to present risks for nearly all entities and economic sectors. The ISSB also acknowledged that climate change opportunities might be available to entities, such as opportunities arising from an entity’s actions to mitigate climate change or adapt to the effects of climate change. [IFRS S2.BC2]. An entity’s exposure to climate-related risks and opportunities might be direct (i.e., the impact is on the entity’s own resources) or indirect through its value chain and relationships with, for example, suppliers and customers. [IFRS S2.BC2]. The concept of a ‘value chain’ is explained in section 3.3.2 of Part A - Introduction to IFRS S1. Furthermore, the extent of an entity’s exposure to climate-related risks and opportunities will depend on factors such as the sector, industry, location (geographical and geopolitical) in which the entity operates and other specific circumstances including its business model. The nature and extent of an entity’s exposure to climate-related risks and opportunities will affect how users of general purpose financial reports assess an entity’s overall risk profile and, therefore, influence users’ decisions about whether they will provide resources to the entity. When an entity prepares the climate-related financial disclosures required by IFRS S2 (such as the cross-industry metric disclosures about the amount and percentage of assets or business activities vulnerable to climate-related transition risks and physical risks – see section 4.5.1), the entity needs to consider the linkages between the amounts disclosed in its climate-related financial disclosures and the amounts recognised and disclosed in its corresponding financial statements. Connections between these disclosures may be able to be explained by cross referring to information already reflected in the entity’s financial statements. [IFRS S2.BC133]. To assist an entity in assessing and disclosing the extent to which climate change affects its financial statements prepared in accordance with IFRS accounting standards, refer to Applying IFRS: Accounting for Climate Change (Updated August 2023).12 12 Applying IFRS Accounting for Climate Change August 2023
- 86. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 85 2 Climate-related risks and opportunities IFRS S2 applies to the climate-related risks to which an entity is exposed and the climate-related opportunities that are available to the entity. [IFRS S2.3]. Consistent with the TCFD Recommendations, climate-related risks to which IFRS S2 applies are either: [IFRS S2.BC18]. • Physical risks from climate change (‘climate-related physical risks’) Or • Transition risks associated with the transition to a lower-carbon economy (‘climate-related transition risks’) IFRS S2 defines the ‘climate-related physical risks’ and ‘climate-related transition risks’, as follows: [IFRS S2 Appendix A]. Extract from IFRS S2 Appendix A Defined terms climate-related physical risks Risks resulting from climate change that can be event-driven (acute physical risk) or from longer- term shifts in climatic patterns (chronic physical risk). Acute physical risks arise from weather- related events such as storms, floods, drought or heatwaves, which are increasing in severity and frequency. Chronic physical risks arise from longer-term shifts in climatic patterns including changes in precipitation and temperature which could lead to sea level rise, reduced water availability, biodiversity loss and changes in soil productivity. These risks could carry financial implications for an entity, such as costs resulting from direct damage to assets or indirect effects of supply-chain disruption. The entity's financial performance could also be affected by changes in water availability, sourcing and quality; and extreme temperature changes affecting the entity's premises, operations, supply chains, transportation needs and employee health and safety. climate-related transition risks Risks that arise from efforts to transition to a lower-carbon economy. Transition risks include policy, legal, technological, market and reputational risks. These risks could carry financial implications for an entity, such as increased operating costs or asset impairment due to new or amended climate-related regulations. The entity's financial performance could also be affected by shifting consumer demands and the development and deployment of new technology. IFRS S2 does not define the scope of the term ‘climate-related’. The ISSB explained that this is because climate change impacts are wide ranging and interrelated and their effects on an entity will vary depending on the region, market and industry in which an entity operates, which means it is not possible to precisely define the full scope of climate-related risks and opportunities that might affect an entity. [IFRS S2.BC24]. IFRS S2 does not define the scope of the term ‘climate-related’ in the context of climate- related risks and opportunities.
- 87. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 86 Extract from the BC to IFRS S2 BC25 Although the requirements in IFRS S2 do not explicitly reference some climate-related matters such as reduced access to fresh water, biodiversity loss, deforestation and climate-related social impacts, disclosures about these and other such matters are required if an entity determines that the information is material for users of general purpose financial reports. For example, if a beverage manufacturer determines it is exposed to short-, medium- or long-term effects of climate change on water availability—especially in water-stressed regions—the entity might determine that information about the implications of reduced water availability for its strategy, operations, capital planning and asset values is material. Therefore, this information would be required by IFRS S2. An entity may seek to manage the physical and transition risks related to climate change by developing mitigation and adaptation responses: [IFRS S2.BC21]. • Mitigation efforts relate primarily to an entity’s responses to transition risks (e.g., adopting new technologies or changing business models to reduce greenhouse gas (GHG) emissions). • Adaptation responses primarily involve an entity preparing for both the current and anticipated effects of physical risks (e.g., infrastructure investments to improve resilience to physical risks). The ISSB explained that an entity’s climate-related risks and opportunities will not necessarily be mutually exclusive. This is because, for example, a customer preference for low-carbon products might simultaneously represent both a risk to the demand for an entity’s existing product line and an opportunity for the entity to produce an alternative low-carbon product or gain market share. [IFRS S2.BC23].
- 88. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 87 3 Identifying climate-related risks and opportunities Similar to sustainability-related risks and opportunities (as discussed in section 1.2 of Part A - Introduction to IFRS S1), climate-related risks and opportunities arise from an entity’s impacts and dependencies on natural resources and its relationships with stakeholders and society, the economy and its interaction with the natural environment. [IFRS S2.BC26]. The importance of understanding the role of impacts and dependencies in the identification of climate-related risks and opportunities is explained further in Figure 3-1 below. Figure 3-1: Impacts and dependencies Topic Explanation Example Dependencies A climate-related risk may arise from changes in the availability, quality or cost-stability of essential inputs that an entity depends on. A sports drink company depends on the availability and quality of water to manufacture its products. Supplies of fresh water become limited during times of drought, which could result in water supply disruptions and higher water costs. This could affect production volumes and costs and, therefore, affect the amount of future cash flows that the sports drink company can expect to generate from its operations. [IFRS S2.BC27]. Impacts A climate-related risk or opportunity may arise if an entity’s impacts on climate change affect the resources and relationships on which the entity depends. A manufacturing company expects a carbon tax to be introduced in a key jurisdiction in which it has emissions- intensive operations. The introduction of a carbon tax will increase the company’s costs of production which it will pass onto consumers through higher product prices. Higher prices will affect the demand of the company’s products and thus the amount of its future cash flows and the useful life of its manufacturing plant. [IFRS S2.BC28]. The TCFD provided categories for climate-related risks and opportunities, which may help an entity to identify its climate-related risks and opportunities under IFRS S2. A list of these categories is provided in Figure 3-2 below. Furthermore, the ISSB noted that the Industry-based Guidance on Implementing IFRS S2, which is based on the SASB standards but is not intended to be comprehensive or interpreted as such, provides some parameters for identifying climate-related risks and opportunities. This is discussed further in section 4.3.1.B below. [IFRS S2.BC24].
- 89. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 88 Figure 3-2: Categories of climate-related risks and opportunities Physical risks Transition risks Opportunities • Acute risk • Chronic risk • Policy and legal risks • Market risk • Technology risk • Reputation risk • Resource efficiency • Energy source • Products and services • Markets • Resilience 4 Core content 4.1 Overview The core content disclosures in IFRS S2 are structured around four thematic areas that address how an entity oversees and manages its climate-related risks and opportunities. The core content areas require an entity to disclose information about its governance, strategy, risk management, and metrics and targets. This disclosure is intended to provide users of general purpose financial reports with a complete set of information that enables them to understand the entity’s exposure to and management of its climate-related risks and opportunities. [IFRS S2.BC30]. These disclosure requirements in IFRS S2 for climate-related risks and opportunities are structured around the same core content disclosure requirements in IFRS S1 for general sustainability-related risks and opportunities. The purpose of the core content disclosures and guidance on avoiding duplication in disclosures are discussed in section 4.1 of Part A - Introduction to IFRS S1. 4.1.1 Comparison with TCFD Recommendations In July 2023, the ISSB published Comparison IFRS S2 Climate-related Disclosures with the TCFD Recommendations, which notes that the requirements of IFRS S2 integrate and are consistent with the 11 recommended disclosures of the TCFD.13 In analysing the core content requirements in IFRS S2 and the associated core recommendations, recommended disclosures and guidance in the TCFD, the ISSB categorised the differences between IFRS S2 and TCFD Recommendations into three types, which are summarised in Figure 4-1 below: Figure 4-1: Comparing TCFD Recommendations and IFRS S2 Type of difference What IFRS S2 requires Different wording In some cases, IFRS S2 uses different wording to capture the same information as the TCFD Recommendations. In those cases, the requirements in IFRS S2 are considered to be broadly consistent with the TCFD Recommendations. More detailed information In some cases, IFRS S2 requires the disclosure of more detailed information, noting that the IFRS S2 disclosure requirements remain in line with the corresponding TCFD Recommendations. 13 Further guidance provided by the ISSB on the TCFD can be found at IFRS - Making the transition from TCFD to ISSB
- 90. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 89 Different guidance In some cases, IFRS S2 requirements differ from the TCFD Recommendations, but mainly as a result of providing additional requirements and guidance. However, there is no intended difference between IFRS S2 and the TCFD’s overall recommendations. The specific differences between the IFRS S2 requirements and the TCFD Recommendations for each of the core content areas are identified and explained in the sections below. How we see it Entities that are currently preparing climate-related disclosures in accordance with the TCFD Recommendations cannot assume that their existing disclosures will be sufficient to comply with ISSB standards. As noted in the table above, IFRS S2 includes additional requirements and guidance. IFRS S1 also specifies additional disclosure considerations. All of these requirements need to be met in order to provide a complete set of sustainability-related financial disclosures in accordance with ISSB standards. 4.2 Governance The governance disclosure requirements in IFRS S2 for climate-related risks and opportunities correspond with the governance disclosure requirements for sustainability-related risks and opportunities in IFRS S1. As such, the commentary in Section 4.2 of Part A - Introduction to IFRS S1 on governance disclosure requirements in IFRS S1 is also applicable to the preparation of governance disclosures relating to climate-related risks and opportunities. An entity is not required to provide separate governance disclosures for each sustainability-related risk and opportunity if oversight of the entity’s sustainability-related risks and opportunities is managed on an integrated basis. In such cases, an entity needs to avoid unnecessary duplication by providing an integrated governance disclosure that meets the requirements set out in both IFRS S2 and IFRS S1. [IFRS S2.7]. TCFD comparison The ISSB indicates that IFRS S2 disclosure requirements for an entity’s governance on climate-related risks and opportunities is broadly consistent with the TCFD recommended disclosures. However, in its TCFD comparison document, the ISSB noted that IFRS S2 requires disclosure of more detailed information about the description of the board’s oversight of climate-related risks and opportunities. For example, how responsibilities for climate-related risks and opportunities are reflected in the terms of reference, mandates, role descriptions and other related policies applicable to the governance body(ies) or individual(s) who have oversight of those risks and opportunities. 4.3 Strategy The strategy requirements in IFRS S2 for climate-related risks and opportunities correspond with the strategy disclosure requirements for sustainability-related risks and opportunities in IFRS S1, except that IFRS S2 has additional requirements and provides additional guidance in relation to:
- 91. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 90 • Identifying and classifying climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects • The effects of an entity’s climate-related risks and opportunities on its strategy and decision-making, including information about its climate- related transition plan (if it exists) • The resilience of the entity’s strategy and business model to climate- related changes, developments and uncertainties The following sections discuss each of these additional requirements and guidance. For the remainder of the strategy disclosure requirements in IFRS S2, the commentary in section 4.3 of Part A - Introduction to IFRS S1 on strategy disclosure requirements in IFRS S1 is also applicable to the preparation of strategy disclosures relating to climate-related risks and opportunities. 4.3.1 Disclosures about climate-related risks and opportunities 4.3.1.A Classifying climate-related risks IFRS S2 requires an entity to classify each climate-related risk identified as either a climate-related physical risk or climate-related transition risk. [IFRS S2.10(b), IFRS S2.B5]. The differences between physical risks and transition risks are discussed in sections 2 and 3 above. 4.3.1.B Using industry-based guidance to identify climate- related risks and opportunities In identifying the climate-related risks and opportunities that could reasonably be expected to affect an entity’s prospects, IFRS S2 requires an entity to refer to and consider the applicability of the industry-based disclosure topics defined in the Industry-based Guidance on Implementing IFRS S2, which was issued by the ISSB at the same time as IFRS S1 and IFRS S2. [IFRS S2.12]. In the Exposure Draft of IFRS S2, the ISSB proposed industry-based requirements that were derived from SASB standards (with enhancements made to the international applicability of some requirements) to enable comparable disclosures among industry peer entities. Feedback on the proposed industry-based requirements was mixed, in part because of concerns about the ability and relevance of applying some of the proposals internationally given the SASB standards were primarily developed for the US market. In response to that feedback, the ISSB decided to retain the industry- based guidance but issued it as non-authoritative guidance that “suggests possible ways to apply some of the disclosure requirements in IFRS S2 but does not create additional requirements”.14 The disclosure topics identified and defined in the industry-based guidance list climate-related risks and opportunities that are typically associated with particular business models, activities or other common features that characterise participation in an industry. For example, in the real estate industry, the industry-based guidance identifies energy management, water management, management of tenant sustainability impacts and climate change adaption as disclosure topics. [IFRS S2.BC135, IFRS S2.BC136]. The industry-based guidance also suggests possible ways to measure and disclose information about climate-related risks and opportunities. This is discussed further in relation to metrics and targets in section 4.5 below. 14 Industry-based Guidance on implementing Climate-related Disclosures, IFRS Foundation, 2023, page 4 IFRS S2 requires an entity to classify each climate-related risk identified as either a climate-related physical risk or climate-related transition risk.
- 92. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 91 IFRS S2 requires an entity to “refer to and consider the applicability of” the disclosure topics defined in the Industry-based Guidance on Implementing IFRS S2. [IFRS S2.12]. The same requirements are included in IFRS S1 in relation to the sources of guidance. As discussed in section 5.1 of Part A - Introduction to IFRS S1, this requirement means that, after referring to the industry-based guidance, an entity is not required to apply that guidance if the entity considers that it is not applicable. The ISSB included this requirement to refer to the industry-based guidance because it considers the guidance to be a helpful starting point for identifying climate-related risks and opportunities about which an entity might need to prepare disclosures. The ISSB also noted that the disclosure topics and associated metrics set out in the guidance are not intended to be exhaustive. Consequently, an entity will also need to disclose climate-related financial information about topics that are not included in the industry-based guidance if those topics relate to climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects. [IFRS S2.BC137]. 4.3.1.C Using reasonable and supportable information to identify climate-related risks and opportunities In identifying the climate-related risks and opportunities that could reasonably be expected to affect an entity’s prospects, IFRS S2 requires an entity to use all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort. This information includes information about past events, current conditions and forecasts of future conditions. [IFRS S2.11]. The requirement that an entity “use all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort” is a concept that is employed in both IFRS S1 and IFRS S2 so that the ISSB could clarify its expectations about the level of effort needed to comply with a specific disclosure requirement. More information about the application of the “use all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort” concept is provided in section 1.2.2.B of Part A - Introduction to IFRS S1. 4.3.2 Disclosures about the effects of climate-related risks and opportunities on the entity’s strategy and decision-making Consistent with IFRS S1, IFRS S2 requires an entity to disclose information to enable users of general purpose financial reports to understand the effects of climate-related risks and opportunities, including how it has responded, and plans to respond, to such risks and opportunities in its strategy and decision- making. However, IFRS S2 is more prescriptive by also requiring the disclosure of: [IFRS S2.14(a)]. • How the entity plans to achieve any climate-related targets it has set, and • Any targets it is required to meet by law or regulation Figure 4-2 below outlines the specific disclosures that IFRS S2 requires an entity to provide about its responses or planned responses to climate-related risks and opportunities.
- 93. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 92 Figure 4-2: An entity’s responses to climate-related risks and opportunities Required disclosure Remarks Information about current and anticipated changes to the entity’s business model, including its resource allocation, to address climate-related risks and opportunities. [IFRS S2.14(a)(i)]. Examples include: • Plans to manage or decommission operations that are carbon, energy or water-intensive • Reallocation of resources due to demand or supply-chain changes • Reallocation of resources due to new business development resulting in capital expenditure or additional expenditure on research and development • Acquisitions or divestments Information about current and anticipated direct mitigation and adaptation efforts. [IFRS S2.14(a)(ii)]. Examples include: • Changes in production processes • Equipment changes • Relocation of facilities • Workforce adjustments • Product specification changes Information about current and anticipated indirect mitigation and adaptation efforts. [IFRS S2.14(a)(iii)]. Examples include: • Working with customers • Working with supply chains Information about an entity’s climate-related transition plan (if it has one). [IFRS S2.14(a)(iv)]. Information to be disclosed about an entity’s transition plan includes: • Key assumptions used in developing the transition plan • Dependencies on which the transition plan relies upon Information about how the entity plans to achieve any climate-related targets, including any GHG emission targets. [IFRS S2.14(a)(v)]. This includes targets that the entity has set and targets that the entity is required to meet by law or regulation. The targets are discussed further in section 4.5 below. With respect to the entity’s plans, IFRS S2 also requires an entity to disclose: • Information about how the entity is resourcing, and intends to resource, those plans [IFRS S2.14(b)]. • Information (both quantitative and qualitative) about the progress of those plans compared to previous reporting periods [IFRS S2.14(c)]. 4.3.2.A Climate-related transition plans IFRS S2 defines the ‘climate-related transition plan’ as follows: [IFRS S2 Appendix A].
- 94. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 93 Extract from IFRS S2 Appendix A Defined terms climate-related transition plan An aspect of an entity’s overall strategy that lays out the entity’s targets, actions or resources for its transition towards a lower-carbon economy, including actions such as reducing its greenhouse gas emissions. The ISSB considers that disclosure of an entity’s transition plan, or set of plans, to respond to the expected transition to a lower-carbon economy (if it has such plans) will help users of general purpose financial reports assess the effects of climate-related risks and opportunities on the entity’s cash flows, its access to finance and cost of capital. [IFRS S2.BC46]. IFRS S2 does not specify what is included in a transition plan. The ISSB notes that a transition plan will reflect an entity’s individual circumstances, therefore, its focus is to enhance the comparability and consistency of disclosures about transition plans. [IFRS S2.BC52]. Transition plans can vary; for some entities, their transition plans form part of their overall business strategy as the plan is being used to adjust the entity’s business model in response to its climate-related risks and opportunities. Whereas for some other entities, the plan does not form part of the overall business strategy and instead applies only to a particular product line, business unit or set of activities. [IFRS S2.BC47]. To assess the credibility of an entity’s transition plan and to be able to make comparisons between entities’ transition plans, users of general purpose financial reports need to understand the assumptions and dependencies that underpin an entity’s transition plan. For that reason, IFRS S2 requires an entity to disclose: • The assumptions it made in developing its climate-related transition plan • The dependencies on which the plan’s achievement relies The ISSB explains the difference between assumptions and dependencies in the context of transition plans in Figure 4.3 below [IFRS S2.BC52]. Figure 4-3: Differences between assumptions and dependencies in transition plans Meaning Examples Assumption A belief, expectation, hypothesis or premise that the entity expects will occur and, therefore, builds into its climate- related transition plan. Assumptions are uncertain. • Expectations about regulatory requirements • Expectations about the ability of an entity to implement planned changes within its value chain Dependencies Critical factors and conditions that are required for an entity’s transition plan to be realised. • An emission removal technology that an entity will rely upon to meet its GHG emission targets • The minimum level of resource availability needed so that the entity can implement its transition plan
- 95. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 94 In preparing its climate-related financial disclosures, an entity needs to consider how to make connections between information disclosed in its transition plan and the disclosure of other information such as its GHG emissions, its emission targets and climate resilience. [IFRS S2.BC49]. How we see it IFRS S2 does not require an entity to develop a transition plan. The standard only requires the disclosure of particular information about transition plans if an entity has such a plan. In our view, given the importance that users of general purpose financial reports place on information about an entity’s transition plan, an entity that does not have a transition plan needs to consider disclosing that fact. Some organisations that are external to the ISSB have also been working on guidance on the preparation of transition plans. One such initiative is the Transition Plan Taskforce (TPT) which was launched by the UK Government with the intention to set out good practices for robust and credible transition plan disclosures as part of an entity’s annual reporting on forward business strategy. The TPT published its Disclosure Framework in October 2023, which sets out five key elements of a good practice transition plan, which are expanded upon through 19 sub-elements and a series of disclosure recommendations for each sub-element. TPT’s five key elements of a good practice transition plan are summarised in Figure 4.4 below. Figure 4-4: Key elements of a transition plan Key element Details Foundations “An entity shall disclose the Strategic Ambition of its plan. This shall comprise the entity's objectives and priorities for responding and contributing to the transition towards a low GHG emissions, climate- resilient economy, and set out whether and how the entity is pursuing these objectives and priorities in a manner that captures opportunities, avoids adverse impacts for stakeholders and society, and safeguards the natural environment. Under this element, an entity should also disclose the high-level implications that this transition plan will have on its business model and value chain, as well as the key assumptions and external factors on which the plan depends”. Implementation Strategy “An entity shall disclose the actions it is taking within its business operations, products and services, and policies and conditions to achieve its Strategic Ambition, as well as the resulting implications for its financial position, financial performance, and cash flows”. Engagement Strategy “An entity shall disclose how it is engaging with its value chain, industry peers, government, public sector, communities, and civil society in order to achieve its Strategic Ambition”. Metrics & Targets “An entity shall disclose the metrics and targets that it is using to drive and monitor progress towards its Strategic Ambition”. Governance “An entity shall disclose how it is embedding its transition plan within its governance structures and organisational arrangements in order to achieve the Strategic Ambition of its transition plan”.
- 96. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 95 The ISSB’s Vice-Chair, Sue Lloyd, stated in a foreword to the TPT Disclosure Framework that the TPT Disclosure Framework, “provides a practical and useful complement to [the ISSB] Standards. It will be a useful tool for companies in developing transition plans and informing the disclosure requirements in IFRS S2”.15 How we see it External initiatives such as the TPT Disclosure Framework may provide a useful source of insight and guidance that entities may choose to refer to when preparing their transition plan disclosures in accordance with IFRS S2. In our view, these initiatives may help to improve good disclosure practices and, as such, an entity may wish to consider the relevance of those initiatives to its own disclosures. However, entities need to be mindful that ISSB standards do not require an entity to comply with the guidance or recommendations in the TPT Disclosure Framework or other external initiatives and that, similarly, compliance with the TPT Disclosure Framework or other external initiatives will not necessarily mean that the entity’s disclosures comply with ISSB standards. All requirements in IFRS S1 and IFRS S2 need to be met in order to provide a complete set of sustainability-related financial disclosures in accordance with ISSB standards. 4.3.3 Disclosures about the resilience of the entity’s strategy and business model Because the likelihood, magnitude and timing of climate-related risks and opportunities affecting an entity are uncertain and often complex, users of general purpose financial reports have indicated that they need to understand the resilience of the entity’s strategy and business model to climate change. [IFRS S2.BC57]. IFRS S2 defines ‘climate resilience’ as follows: [IFRS S2 Appendix A]. Extract from IFRS S2 Appendix A Defined terms climate resilience The capacity of an entity to adjust to climate- related changes, developments or uncertainties. Climate resilience involves the capacity to manage climate-related risks and benefit from climate-related opportunities, including the ability to respond and adapt to climate-related transition risks and climate-related physical risks. An entity’s climate resilience includes both its strategic resilience and its operational resilience to climate-related changes, developments and uncertainties. Compared to IFRS S1, the climate resilience disclosure requirements in IFRS S2 are more extensive and prescriptive and require a scenario analysis to be completed. In providing quantitative information, IFRS S2 permits an entity to disclose a single amount or a range. [IFRS S2.22]. IFRS S2 requires disclosure of: 15 TPT Disclosure Framework, October 2023, page 3 An entity is not required to disclose the specific results of its scenario analysis. Instead, an entity is required to disclose information about its interpretation of those results.
- 97. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 96 • An entity’s assessment of its climate resilience as at the reporting date. [IFRS S2.22(a)]. • How and when the entity carried out climate-related scenario analysis, which is used to inform the resilience assessment. [IFRS S2.22(b)]. The relationship between a resilience assessment and scenario analysis is explained in Figure 4.5 below. Figure 4-5: Difference between a resilience assessment and scenario analysis Topic Explanation Resilience assessment Using a range of plausible but uncertain climate outcomes (i.e., scenarios), management assesses the implications for the entity’s business model and strategy and its capacity to adapt or respond. [IFRS S2.BC59]. Information about an entity’s assessment of its climate resilience has to be disclosed as at each reporting date. [IFRS S2.BC68]. Scenario analysis An analytical exercise used to inform that resilience assessment. An entity is not required to disclose the specific results of its scenario analysis. Instead, an entity is required to disclose information about its interpretation of those results. [IFRS S2.BC59]. A scenario analysis does not need to be performed every year. [IFRS S2.BC68]. 4.3.3.A Resilience assessment Within the context of an entity’s identified climate-related risks and opportunities, paragraph 22(a) requires disclosure of information about the resilience of the entity’s strategy and business model to the following factors described in Figure 4.6 below, [IFRS S2.BC58]. Figure 4-6: Assessing resilience Factor Explanation Example Climate-related changes Such as events or changes resulting from climate change • Pervasive wildfires • Rising sea levels Climate-related developments Such as evolving macroeconomic factors, e.g., regulatory responses and demographic shifts • Regulatory limits on the use of particular fossil fuels Climate-related uncertainties Such as different confidence intervals associated with climate-related changes and climate-related developments • Assumptions about the pervasiveness of wildfires • Assumptions about the stringency of regulation A resilience assessment involves interpreting the results of the scenario analysis. [IFRS S2.BC59]. In particular, IFRS S2 requires that an entity’s disclosure of the assessment of its climate resilience as at the reporting date
- 98. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 97 enables users of general purpose financial reports to understand: [IFRS S2.22(a)]. • The implications (if any) for its strategy and business model, including how the entity would need to respond to the effects identified in the scenario analysis • The significant areas of uncertainty considered in the entity’s assessment of its climate resilience • The entity’s capacity to adjust or adapt its strategy and business model to climate change over the short, medium and long term, including: • The availability of, and flexibility in, the entity’s existing financial resources to respond to the effects identified in the climate-related scenario analysis, including to address climate-related risks and to take advantage of climate-related opportunities • The entity’s ability to redeploy, repurpose, upgrade or decommission existing assets • The effect of the entity’s current and planned investments in climate-related mitigation, adaptation and opportunities for climate resilience The following illustration is based on the example used in the BC to IFRS S2 to explain the type of information that an entity might disclose about the significant areas of uncertainty considered in its climate resilience assessment: [IFRS S2.BC60]. Illustration 4-1: Example showing disclosure of significant areas of uncertainty In performing scenario analysis, Entity A identifies that future climate-driven migration could have implications in the long term for some of the assets and operations of Entity A and its major suppliers that are located near Region X which might become uninhabitable due to rising sea levels. Depending upon where those affected local communities relocate, the ability for Entity A and its suppliers to continue to run their operations at full capacity could be adversely impacted. It is not known whether, where or when the local communities may relocate and the consequential impact on Entity A’s operations and its supply chain is also uncertain. In accordance with paragraph 22(a)(ii) of IFRS S2, Entity A discloses that its resilience assessment is subject to significant uncertainty arising from the effects of future climate-driven migration from Region X, which, in turn, has implications for the stability of Entity A’s supply chain and the resilience of its own assets and operations that are located near Region X. Given the time horizon that applies to this risk in the long term, Entity A also discloses that the degree of judgement required to interpret the results of this scenario analysis also increases. 4.3.3.B Scenario analysis As noted above, IFRS S2 does not require an entity to disclose the results of its scenario analysis. Instead, IFRS S2 requires disclosure of information about the approach the entity used to carry out its scenario analysis. In relation to how the scenario analysis was carried out, IFRS S2 requires disclosure of: [IFRS S2.22(b)]. • Information about the inputs used in the analysis • Key assumptions made in the analysis Disclosures about inputs and assumptions used in the analysis are discussed in Figure 4.7 below (noting these lists are not exhaustive).
- 99. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 98 Figure 4-7: Scenario analysis inputs and assumptions Disclosures about inputs Disclosures about assumptions • Which climate-related scenarios were used for the analysis and the sources of those scenarios • Whether the analysis included a diverse range of climate-related scenarios • Whether the scenarios used are associated with climate-related transition risks or climate- related physical risks • Whether a climate-related scenario aligned with the ‘latest international agreement on climate change’ was used • Why the entity decided that its chosen scenarios are relevant to assessing its resilience to climate-related changes, developments or uncertainties • The time horizons used in the analysis • What scope of operations (e.g., the operating locations and business units) was used in the analysis • Climate-related policies in the jurisdictions in which the entity operates • Macroeconomic trends • National- or regional-level variables (e.g., local weather patterns, demographics, land use, infrastructure and availability of natural resources) • Energy usage and mix • Developments in technology The ‘latest international agreement on climate change’ is defined by IFRS S2 to mean “An agreement by states, as members of the United Nations Framework Convention on Climate Change, to combat climate change. The agreements set norms and targets for a reduction in greenhouse gases.” [IFRS S2 Appendix A]. When the ISSB issued IFRS S2, the Paris Agreement of April 2016 was the latest international agreement on climate change. Signatories to the Paris Agreement agreed to: [IFRS S2.BC145]. • Limit the increase in the global average temperature to well below 2 degrees Celsius above pre-industrial levels • Pursue efforts to limit the temperature increase to 1.5 degrees Celsius above pre-industrial levels However, the ISSB decided against requiring the use of scenarios consistent with the latest international agreement on climate change or particular science-based scenarios for the following reasons: [IFRS S2.BC67]. • It would not be practical to specify which scenarios an entity should be required to use. • Any scenarios specified in the standards might quickly become out of date and could lead to an entity disclosing information that does not reflect its circumstances or the views of management on what might be plausible. IFRS S2 requires disclosure of the reporting period in which the climate- related scenario analysis was carried out. This is because the ISSB decided that, for the purposes of IFRS S2, an entity could carry out scenario analysis as part of its multi-year strategic planning cycle (e.g., every 3-5 years) rather than be required to update its scenario analysis at each reporting date.
- 100. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 99 Although an entity is not required to update its scenario analysis at each reporting date, IFRS S2 requires the entity to: [IFRS S2.B18, IFRS S2.BC68]. • At a minimum, update its climate-related scenario analysis in line with its strategic planning cycle • Assess its climate resilience on an annual basis to reflect updated insight into the implications of climate uncertainty for the entity’s business model • Disclose the information required in section 4.3.3 at each reporting date, including the information about how and when the scenario analysis was carried out, even if the scenario analysis had not been updated during the reporting period IFRS S2 only requires scenario analysis to be used in assessing an entity’s climate resilience. However, an entity may choose to use scenario analysis to inform a variety of other disclosures that are required by IFRS S2, including: [IFRS S2.BC69]. • Identifying and assessing climate-related risks and opportunities (see section 3) • Assessing the anticipated financial effects associated with those risks and opportunities (see section 4.3.3.C) • Developing transition plans (see section 4.3.2.A) 4.3.3.C Application guidance on preparing climate-related scenario analysis During the development of IFRS S2, the ISSB received feedback that scenario analysis might be challenging, and especially so for entities that lack the skills, capabilities and resources to carry out that analysis. As a consequence of that feedback, the ISSB: [IFRS S2.BC62, IFRS S2.BC63]. • Included application guidance in IFRS S2 for preparing climate-related scenario analysis, noting that scenario analysis encompasses a range of practices, from qualitative scenario narratives to sophisticated quantitative modelling. • Clarified that the approach an entity uses for scenario analysis needs to be ‘commensurate with its circumstances’. The application guidance in IFRS S2 was developed to support an entity to select an approach to scenario analysis that is commensurate with its circumstances. This application guidance is based on the range of practices outlined in documents published by the TCFD, including, Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-related Risks and Opportunities (2017)16 and Guidance on Scenario Analysis for Non- Financial Companies (2020).17 [IFRS S2.BC64]. This application guidance requires an entity to use an approach to scenario analysis that enables it to consider all reasonable and supportable information available to the entity at the reporting date without undue cost or effort. In making judgements on the selection of an approach to scenario analysis, the application guidance specifies: [IFRS S2.B1]. • The factors to consider when assessing an entity’s circumstances (see (i) in this section below) • The factors to consider when determining an entity’s appropriate approach to climate-related scenario analysis (see (ii) in this section below) • Additional factors to consider when determining an entity’s approach to climate-related scenario analysis over time (see (iii) in this section below) 16 TCFD Technical Supplement 17 TCFD Guidance on Scenario Analysis for Non-Financial Companies
- 101. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 100 (i) Assessing an entity’s circumstances Assessing an entity’s circumstances requires consideration of: [IFRS S2.B2]. • The entity’s exposure to climate-related risks and opportunities • The skills, capabilities and resources available to the entity for the climate-related scenario analysis An entity’s approach to climate-related scenario analysis needs to be commensurate with the entity’s circumstances at the time the climate-related scenario analysis is carried out. For example, an entity with a relatively low climate risk exposure and limited resources might develop a scenario narrative that is focused on a key product, business unit or operating location. In contrast, a large entity that is highly exposed to climate risks and has strong analytical expertise might perform sophisticated quantitative modelling that uses a range of scenarios to capture multiple risk transmission channels across the entity’s own operations and value chain. [IFRS S2.BC65]. Figure 4-8: Assessing an entity’s circumstances Factors to consider Explanation Exposure to climate- related risks and opportunities An entity’s exposure to climate-related risks and opportunities will inform the entity’s assessment of: • Its circumstances • The approach to use for its climate-related scenario analysis Generally speaking, the greater the entity’s exposure to climate-related risks or opportunities, the more likely it is the entity would determine that a more technically sophisticated form of climate- related scenario analysis is required. [IFRS S2.B4]. Skills, capabilities and resources available An entity considers both internal and external skills, capabilities and resources when determining an appropriate approach to use for its climate-related scenario analysis. Context is necessary when assessing an entity’s skills and capabilities, noting also that the ISSB expects entities to develop their skills and capabilities and strengthen their disclosures over time through a process of learning and iteration. For instance, an entity that is only just starting to explore scenario analysis in assessing climate resilience or that participates in an industry where scenario analysis is not commonly used might need more time to develop its skills and capabilities. Consequently, such entities might be unable to use a quantitative or technically sophisticated approach to scenario analysis without undue cost or effort. In contrast, an entity that participates in an industry whereby scenario analysis is an established practice (such as the extractive industries) would be expected to have had experience to develop its skills and capabilities. However, if an entity’s climate-related risk exposure warrants a sophisticated approach to scenario analysis, IFRS S2 states that the entity cannot use a lack of skills or capabilities to justify using a less sophisticated approach if it has the resources available to invest in obtaining or
- 102. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 101 developing the necessary skills and capabilities. [IFRS S2.B6, IFRS S2.B7, IFRS S2.BC65]. Each time an entity carries out scenario analysis, it is required to assess its circumstances. The following illustration is based on the example used in IFRS S2 to explain when an entity reassesses its circumstances: [IFRS S2.B3]. Illustration 4-2: Reassessing an entity’s circumstances Entity A carries out its climate-related scenario analysis every three years to align with its strategic planning cycle. In accordance with paragraph B3 of IFRS S2, Entity A would be required to assess its circumstances every three years when it carries out its scenario analysis. Each time Entity A assesses its circumstances, it needs to reconsider its exposure to climate-related risks and opportunities and the skills, capabilities and resources available at that time. (ii) Determining the appropriate approach to climate-related scenario analysis Determining an approach to climate-related scenario analysis that considers all reasonable and supportable information available to the entity at the reporting date without undue cost or effort involves: [IFRS S2.B8]. • Selecting inputs to the climate-related scenario analysis • Making analytical choices about how to carry out the climate-related scenario analysis According to IFRS S2, reasonable and supportable information includes information that is obtained from an external source or owned or developed internally and is about: [IFRS S2.B9]. • Past events • Current conditions • Forecasts of future conditions • Quantitative or qualitative information Judgement is needed to determine the mix of inputs and analytical choices that enables an entity to consider all reasonable and supportable information that is available to it at the reporting date without undue cost or effort. The degree of judgement required depends on the availability of detailed information and the time horizon (i.e., the degree of judgement required increases as the time horizon increases and the availability of detailed information decreases). [IFRS S2.B10]. Selecting inputs An entity also needs to consider all reasonable and supportable information available to it at the reporting date without undue cost or effort when selecting the scenarios, variable and other inputs to use in its climate-related scenario analysis. [IFRS S2.B11] The ISSB clarified that publicly available climate-related scenarios from authoritative sources that describe future trends and a range of pathways to plausible outcomes are inputs that are available to the entity without undue cost or effort. [IFRS S2.B11]. Having a reasonable and supportable basis for selecting a particular scenario or set of scenarios means that the inputs to an entity’s climate-related scenario analysis need to be relevant to the entity’s circumstances. Therefore, when selecting a scenario or set of scenarios, the entity considers factors such as: [IFRS S2.B12, IFRS S2.13, IFRS S2.BC66]. • The type and nature of activities undertaken by the entity • The geographical location of those activities • The physical and transition risks to which it is exposed
- 103. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 102 IFRS S2 does not specify the scenarios that an entity is required to use because the ISSB decided that it would not be practical, the scenarios specified might become outdated and it could lead to information being disclosed that fails to reflect the entity’s specific circumstances and management’s view of what is plausible. [IFRS S2.BC67]. The below illustration is based on an example used in IFRS S2: [IFRS S2.B12]. Illustration 4-3: Selecting relevant scenarios Entity A’s assets and operations are concentrated in Jurisdiction X where emissions are likely to be regulated in the near future. To carry out scenario analysis, Entity A selects a scenario that is consistent with Jurisdiction X’s commitments to the latest international agreement on climate change. IFRS S2 also requires an entity to disclose information such as the number of scenarios used and whether the scenarios cover different outcomes or pathways (such as, orderly and disorderly transition scenarios). This forms part of the requirement to disclose whether the analysis included a diverse range of scenarios. [IFRS S2.22(b)(i)(2), IFRS S2.BC66]. Making analytical choices Analytical choices include whether an entity uses qualitative analysis or quantitative modelling in carrying out climate-related scenario analysis. IFRS S2 requires an entity to prioritise the analytical choices that will enable it to consider all reasonable and supportable information that is available to it at the reporting date without undue cost or effort. For example, an entity’s resilience assessment needs to incorporate multiple carbon price pathways associated with a given outcome (e.g., a 1.5 degree Celsius outcome) if information about those pathways is available without undue cost or effort and this approach is warranted by the entity’s risk exposure. [IFRS S2.B14]. In making those analytical choices, the ISSB noted that: [IFRS S2.B15]. • The use of quantitative information will often enable a more robust assessment of an entity’s climate resilience. • The use of qualitative information including scenario narratives, which might or might not be combined with quantitative data, can also provide a reasonable and supportable basis for an entity’s resilience assessment. (iii) Additional considerations when determining an entity’s approach to climate-related scenario analysis over time IFRS S2 states that an entity’s approach to climate-related scenario analysis may not be the same from one reporting period or strategic planning cycle to the next. [IFRS S2.B16]. This is because: • Climate-related scenario analysis is an evolving practice. • The approach to scenario analysis that an entity uses is based on its particular circumstances (i.e., its exposure to climate-related risks and opportunities and the skills, capabilities and resources available to the entity). Therefore, as those circumstances change over time, the entity’s approach to climate-related scenario analysis will change too. For example, an entity that is highly exposed to climate-related risks might initially carry out scenario analysis by using qualitative scenario narratives because it does not currently have the skills, capabilities or resources to carry out quantitative climate-related scenario analysis. However, as the entity builds its capabilities through experience over time, the entity would begin to apply a more advanced quantitative approach to climate-related scenario analysis. In contrast, an entity that is highly exposed to climate- related risks which does have access to the necessary skills, capabilities or resources, is required to apply a more advanced quantitative approach to climate-related scenario analysis. [IFRS S2.B17].
- 104. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 103 TCFD comparison The ISSB indicates that IFRS S2 disclosure requirements for an entity’s strategy for managing climate-related risks and opportunities is broadly consistent with the TCFD recommended disclosures. However, in its TCFD comparison document, the ISSB noted that there are some differences, including those outlined below. For disclosures related to an entity’s climate-related risks and opportunities, IFRS S2: • Includes an additional requirement for an entity to refer to and consider the applicability of industry-based disclosure topics in the Industry-based Guidance on Implementing IFRS S2, when identifying climate-related risks and opportunities • Requires more detailed information to be disclosed about where climate-related risks and opportunities are concentrated within an entity’s business model and value chain For disclosures related to the impact of an entity’s climate-related risks and opportunities on its business strategy and financial planning, IFRS S2: • Requires more detailed information about the entity’s response to the identified risks and opportunities, including any transition plans that the entity has and how the entity plans to achieve its climate-related targets • Sets out criteria for when quantitative and qualitative information is required when disclosing the current and anticipated effects of the risks and opportunities on an entity’s financial position, financial performance and cash flows • Sets out the parameters for the information and approach to be used in disclosing the anticipated financial effects (i.e., to use all reasonable and supportable information that is available at the reporting date without undue cost or effort and to use an approach that is commensurate with the entity’s circumstances) For disclosures related to the resilience of the entity’s strategy, IFRS S2: • Does not specify specific scenarios that an entity must use in its climate-related scenario analysis • Requires more detailed information to be disclosed about the resilience assessment, including significant areas of uncertainty in the assessment, the entity’s capacity to adjust and adapt its strategy and business model, and how and when the scenario analysis was carried out • Sets out the parameters for the information and approach to be used in climate-related scenario analysis (i.e., to consider all reasonable and supportable information that is available at the reporting date without undue cost or effort and to use an approach that is commensurate with the entity’s circumstances) 4.4 Risk management The risk management requirements in IFRS S2 for climate-related risks and opportunities correspond with the risk management disclosure requirements for sustainability-related risks and opportunities in IFRS S1, except that IFRS S2 requires an entity to provide information about the use of climate- related scenario analysis in its risk management processes. Specifically, IFRS S2 requires an entity to explain whether and how the entity uses climate-related scenario analysis to inform its identification of climate- related opportunities when disclosing information about the processes it uses
- 105. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 104 to identify, assess, prioritise and monitor climate-related opportunities. [IFRS S2.25(b)]. In respect of the remainder of the risk management disclosure requirements in IFRS S2, the commentary in section 4.4 of Part A - Introduction to IFRS S1 on risk management disclosure requirements also applies to the preparation of risk management disclosures relating to climate-related risks and opportunities. An entity is not required to provide separate risk management disclosures for each sustainability-related risk and opportunity if oversight of the entity’s sustainability-related risks and opportunities is managed on an integrated basis. In such cases, an entity is required to avoid unnecessary duplication by providing an integrated risk management disclosure that meets the requirements set out in IFRS S2 and IFRS S1. [IFRS S2.26]. TCFD comparison The ISSB indicates that IFRS S2 disclosure requirements about risk management for climate-related risks and opportunities is broadly consistent with the TCFD recommended disclosures, which focus more on risks. For disclosures that describe an entity’s processes for identifying, assessing, and managing climate-related risks, the ISSB noted in its TCFD comparison document that IFRS S2: • Requires more detailed information about: the input parameters that an entity uses to identify risks; if and how the entity uses scenario analysis to identify risks; and whether the entity’s processes for identifying, assessing, prioritising and monitoring risks have changed since the last reporting period • Includes additional disclosures of the entity’s processes for identifying, assessing, prioritising and monitoring opportunities For disclosures related to describing how an entity’s processes for identifying, assessing, and managing climate-related risks are integrated into the entity’s overall risk management, the ISSB noted that IFRS S2 includes additional disclosures on the extent to which, and how, the processes used to identify, assess, prioritise and monitor opportunities are integrated into and inform the entity’s overall risk management process. 4.5 Metrics and targets The disclosure requirements in IFRS S2 for metrics and targets are much more detailed than the general disclosure requirements for metrics and targets in IFRS S1 because IFRS S2 specifically addresses the metrics and targets that are relevant to climate-related risks and opportunities. To enable users of general purpose financial reports to understand an entity’s performance in relation to its climate-related risks and opportunities, including progress towards any of the climate-related targets it has set, and any targets it is required to meet by law or regulation, IFRS S2 requires an entity to disclose: • Information related to seven cross-industry metric categories (i.e., metrics that are industry agnostic) (see section 4.5.1 below) • Industry-based metrics associated with the entity’s business model and economic activities (i.e., metrics that are relevant to the industry that the entity participates in) (see section 4.5.2 below) • Climate-related targets, which may be set either by the entity or required by laws or regulations that apply to the entity, to mitigate or adapt to climate-related risks or take advantage of climate-related opportunities, including metrics used by the government body or management to
- 106. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 105 measure progress towards these targets (see section 4.5.3 below) [IFRS S2.27, IFRS S2.28]. IFRS S2 requires an entity to disclose information about metrics even if the entity does not have governance arrangements, strategies or risk management processes that address climate-related risks and opportunities. The ISSB clarified that the objective of the disclosures on metrics is to require an entity to disclose information about its performance against: [IFRS S2.BC73]. • The metrics it uses for measuring and monitoring climate-related risks and opportunities (which may include metrics that are not specified by IFRS S2) • The metrics specified by IFRS S2 (even in cases where the entity does not use those metrics to measure and monitor its climate-related risks and opportunities) 4.5.1 Cross-industry metrics IFRS S2 requires entities to disclose information about seven cross-industry metric categories that the ISSB derived from the TCFD’s Guidance on Metrics, Targets and Transition Plans18 , which was published in October 2021. The seven cross-industry metric categories are summarised in Figure 4.9 below. [IFRS S2.29]. Figure 4-9: Cross-industry metrics # Category Information to be disclosed 1 GHG emissions Absolute gross GHG emissions generated during the reporting period (in metric tonnes of CO2 equivalent), classified as: • Scope 1 GHG emissions • Scope 2 GHG emissions • Scope 3 GHG emissions This disclosure and other GHG-related disclosures are discussed further in sections 4.5.1.A and 5 below. 2 Climate-related transition risks The amount and percentage of assets or business activities vulnerable to climate- related transition risks (see section 4.5.1.B below) 3 Climate-related physical risks The amount and percentage of assets or business activities vulnerable to climate- related physical risks (see section 4.5.1.B below). 4 Climate-related opportunities The amount and percentage of assets or business activities aligned with climate- related opportunities (see section 4.5.1.B below) 5 Capital deployment The amount of capital expenditure, financing or investment deployed towards climate-related risks and opportunities (see section 4.5.1.C below) 6 Internal carbon pricing • An explanation of whether and how the entity is applying a carbon price in decision-making 18 TCFD Guidance on Metrics, Targets and Transition Plans
- 107. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 106 • The price of GHG emissions (per metric tonne) that the entity uses to assess the costs of its GHG emissions See section 4.5.1.D below. 7 Remuneration • A description of whether and how climate-related considerations are factored into executive remuneration • The percentage of executive management remuneration recognised in the current reporting period that is linked to climate-related considerations See section 4.5.1.E below. By requiring entities to provide common information to users of general purpose financial reports regardless of the industries to which they belong, the cross-industry metrics are intended to allow users to: [IFRS S2.BC75]. • Assess an entity’s exposure to, and management of, its climate-related risks and opportunities • Gain an understanding of key aspects and drivers of climate-related risks and opportunities • Gain insight into the potential effects of climate change on the entity 4.5.1.A GHG emissions disclosures An entity is required to disclose its absolute gross GHG emissions generated during the reporting period. An entity’s gross GHG emissions are classified as: [IFRS S2.29(a)(i)]. • Scope 1 GHG emissions • Scope 2 GHG emissions • Scope 3 GHG emissions An entity’s disclosure of its GHG emissions is expressed as metric tonnes of CO2 equivalent. This means that the entity needs to aggregate the seven constituent GHG gases into CO2 equivalent value. Refer to section 5.3.2 for further discussion.. IFRS S2 requires the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004) to be used to measure an entity’s GHG emissions unless a jurisdictional authority or a securities exchange on which the entity is listed requires a different method to be used to measure the entity’s GHG emissions. [IFRS S2.29(a)(ii)]. The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004) is one of the publications that are collectively referred to as the GHG Protocol. Refer to section 5 for more details on the GHG Protocol and the use of other methods. An entity is required to disclose the approach that it uses to measure GHG emissions, including: [IFRS S2.29(a)(iii)]. • The measurement approach, inputs and assumptions used to measure its GHG emissions • The reason why the entity has chosen the measurement approach, inputs and assumptions used to measure its GHG emissions • Any changes the entity made to the measurement approach, inputs and assumptions during the reporting period and the reasons for those changes( see section 5.3.1 below for further discussion) Additional disclosure requirements relating to an entity’s absolute gross Scope 1, Scope 2 and Scope 3 GHG emissions are outlined in Figure 4.10 below. [IFRS S2.29(a)(iv)]. IFRS S2 requires the GHG Protocol to be used to measure an entity’s GHG emissions unless a jurisdictional authority or securities exchange requires a different method to be used.
- 108. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 107 Figure 4-10: GHG emissions disclosures GHG emissions Specific disclosures Scope 1 and Scope 2 An entity is required to disaggregate Scope 1 and Scope 2 GHG emissions between: • The consolidated accounting group (e.g., the parent and its consolidated subsidiaries); and • Other investees excluded from the consolidated accounting group (e.g., investees include associates, joint ventures and unconsolidated subsidiaries) An illustration of this disaggregation is provided in Illustration 4-4 below. Scope 2 For Scope 2 GHG emissions, an entity discloses: • Its location-based Scope 2 GHG emissions • Information about any contractual instruments that will inform users’ understanding of the entity’s Scope 2 GHG emissions (i.e., IFRS S2 does not require an entity to also disclose its market-based Scope 2 GHG emissions) The meaning of ‘location-based’ and ‘market- based’ Scope 2 GHG emissions is discussed further in section 5.2.3 below. Scope 3 For Scope 3 GHG emissions, an entity is required to disclose the categories included within the entity’s measure of Scope 3 GHG emissions, in accordance with the Scope 3 categories described in the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011). These categories are: • Category 1. Purchased goods and services • Category 2. Capital goods • Category 3. Fuel- and energy-related activities (not included in Scope 1 or Scope 2) • Category 4. Upstream transportation and distribution • Category 5. Waste generated in operations • Category 6. Business travel • Category 7. Employee commuting • Category 8. Upstream leased assets • Category 9. Downstream transportation and distribution • Category 10. Processing of sold products • Category 11. Use of sold products • Category 12. End-of-life treatment of sold products • Category 13. Downstream leased assets • Category 14. Franchises • Category 15. Investments Additional disclosures are required for Scope 3 ‘financed emissions’ if an entity is engaged in
- 109. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 108 asset management, commercial banking or insurance activities. Financed emissions are discussed further in section 5.7 below. The following illustration is based on Illustrative Example 1 in Accompanying Guidance on Climate-related Disclosures: [IFRS S2.IE3-IE5] Illustration 4-4: Disaggregating Scope 1 and Scope 2 GHG emissions Entity A has an 80% interest in SubCo and a 40% interest in an incorporated joint venture, JVCo. Entity A and the other parties to the joint venture jointly control JVCo. Entity A has been appointed as the operator of JVCo, which means that Entity A is responsible for managing and conducting the activities and operations approved by the joint venturers. Entity A prepares financial statements in accordance with IFRS accounting standards. In accordance with IFRS accounting standards, Entity A prepares consolidated financial statements which present the assets, liabilities, equity, income, expenses and cash flows of Entity A and the entities it controls as single economic entity. Entity A determines that it controls SubCo. The reporting entity of Entity A’s consolidated financial statements, therefore, consists of Entity A and SubCo. The assets, liabilities, equity, income, expenses and cash flows of JVCo are not included in the Entity A consolidated group because Entity A does not control JVCo. Instead, Entity A recognises its interest in JVCo as an equity accounted investment. Entity A’s consolidated group is also the reporting entity for the preparation of Entity A’s sustainability-related financial disclosures, including its disclosure of GHG emissions. Entity A has selected the operational control approach19 to measure its GHG emissions. Because Entity A has operational control over JVCo, all of JVCo’s GHG emissions are included in Entity A’s GHG emissions (as the reporting entity). The Scope 1 and Scope 2 GHG emissions for each individual entity is: GHG emissions (metric tonnes CO2e) Scope 1 Scope 2 Total Entity A (parent) 1,000 350 1,350 SubCo 3,000 800 3,800 JVCo 6,000 1,400 7,400 The Scope 1 and Scope 2 GHG emissions for the Entity A reporting entity in accordance with operational control is measured as follows (noting that by having operational control, Entity A would include 100% of the GHG emissions into the measurement of its GHG emissions): GHG emissions (metric tonnes CO2e) Scope 1 Scope 2 Total Entity A (parent) 1,000 350 1,350 SubCo 3,000 800 3,800 JVCo 6,000 1,400 7,400 Total 10,000 2,550 12,550 In accordance with paragraph 29(a)(iii) of IFRS S2, Entity A discloses the disaggregation of its Scope 1 and Scope 2 GHG emissions between the consolidated group and its other investee as follows: 19 The operational control approach is discussed is section 5.2.2.B (ii)
- 110. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 109 GHG emissions (metric tonnes CO2e) Scope 1 Scope 2 Total Entity A consolidated group 4,000 1,150 5,150 Investment in JVCo 6,000 1,400 7,400 Total Scope 1 and Scope 2 GHG emissions (operational control basis) 10,000 2,550 12,550 4.5.1.B Assets or business activities vulnerable to climate- related risks or aligned to climate-related opportunities An entity is required to disclose the amount and percentage of assets or business activities that are: • Vulnerable to climate-related transition risks • Vulnerable to climate-related physical risks • Aligned with climate-related opportunities These disclosures are required separately for transition risks, physical risks and opportunities. In preparing these disclosures, IFRS S2 states that an entity must use all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort. [IFRS S2.30]. The application of this requirement is discussed further in sections 4.3.1.C and 1.2.2.B of Part A - Introduction to IFRS S1. 4.5.1.C Capital deployment An entity is required to disclose the amount of capital expenditure, financing or investment deployed towards climate-related risks and opportunities. [IFRS S2.29(e)]. IFRS S2 does not provide application guidance that is specific to this disclosure requirement, but it does provide some general guidance, which is outlined in section 4.5.1.F below. 4.5.1.D Internal carbon prices An entity is required to disclose: [IFRS S2.29(f), IFRS S2.BC130]. • An explanation of whether and how the entity is applying a carbon price in decision-making (e.g., investment decisions, transfer pricing and scenario analysis)—this is referred to as an ‘internal carbon price’ • The price of GHG emissions (per metric tonne) that the entity uses, if any, to assess the costs of its GHG emissions Extract from IFRS S2 Appendix A Defined terms Internal carbon price Price used by an entity to assess the financial implications of changes to investment, production and consumption patterns, and of potential technological progress and future emissions-abatement costs. An entity can use internal carbon prices for a range of business applications. Two types of internal carbon prices that an entity commonly uses are:
- 111. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 110 (a) a shadow price, which is a theoretical cost or notional amount that the entity does not charge but that can be used to understand the economic implications or trade-offs for such things as risk impacts, new investments, the net present value of projects, and the cost and benefit of various initiatives; and (b) an internal tax or fee, which is a carbon price charged to a business activity, product line, or other business unit based on its greenhouse gas emissions (these internal taxes or fees are similar to intracompany transfer pricing). In explaining how the internal carbon price is used in decision-making, an entity is expected to explain whether it is using a current price, shadow price or another price to represent the price for each metric tonne of carbon. However, if the entity does not have an internal carbon price, the entity needs to consider disclosing that fact. [IFRS S2.BC130]. 4.5.1.E Executive remuneration An entity is required to disclose: [IFRS S2.29(g)]. • A description of whether and how climate-related considerations are factored into executive remuneration • The percentage of executive management remuneration recognised in the current period that is linked to climate-related considerations How we see it IFRS S2 does not define ‘executive management’. As such, entities will need to exercise judgement in determining which management roles will represent ‘executive management’ and are, therefore, within the scope of this disclosure requirement. In our view, this disclosure would allow users of general purpose financial reports to understand whether, and to what extent, the managers of an entity that have the authority and responsibility for managing the activities of the entity are incentivised through remuneration for their performance in managing the entity’s climate-related risks and opportunities. In that context, to identify the management roles that represent ‘executive management’, an entity could consider the definition of ‘key management personnel’ in IAS 24 Related Party Disclosures, which states that “Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity”. IFRS S2 also does not define ‘remuneration’. In our view, the ordinary meaning of ‘remuneration’ would be sufficient to apply this disclosure requirement. In determining what constitutes ‘remuneration’, an entity could also consider referring to the definition of ‘compensation’ in IAS 24, which includes short-term employee benefits (e.g., wages), post- employment benefits (e.g., pensions), other long-term employee benefits (e.g., long-service leave), termination benefits and share-based payment.
- 112. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 111 4.5.1.F Preparation guidance In preparing the cross-industry metric disclosures other than GHG emissions mentioned above, IFRS S2 states that an entity is required to consider: [IFRS S2.B65]. • The time horizons over which the effects of climate-related risks and opportunities could reasonably be expected to occur (refer to section 4.3.1 of Part A – Introduction to IFRS S1) • Where in the entity’s business model and value chain climate-related risks and opportunities are concentrated (e.g., geographical areas, facilities or types of assets) (refer to section 4.3.2 of Part A – Introduction to IFRS S1) • The information disclosed in relation to the effects of climate-related risks and opportunities on the entity’s financial position, financial performance and cash flows for the reporting period (refer to section 4.3.4 of Part A – Introduction to IFRS S1) • Whether industry-based metrics partially or completely provide the information required by the cross-industry metric disclosures • Connectivity between the cross-industry metric disclosures and the amounts recognised and disclosed in the related financial statements. Connectivity also includes consistency in the data and assumptions used (to the extent possible) in the disclosures and in the preparation of the financial statements 4.5.2 Industry based metrics In addition to cross-industry metrics, IFRS S2 requires an entity to disclose industry-based metrics that are associated with one or more particular business models, activities or other common features that characterise participation in an industry. IFRS S2 requires an entity to refer to the Industry-based Guidance on Implementing IFRS S2 and consider the applicability of the industry-based metrics corresponding to the disclosure topics identified for the relevant industry. [IFRS S2.32]. 4.5.3 Climate-related targets IFRS S2 requires an entity to disclose: • Its climate-related targets (see section 4.5.3.A below) • Information about its approach to setting, reviewing and monitoring progress against each target (see section 4.5.3.B below) • Information about its performance against each target (see section 4.5.3.C below) • Specific information for each GHG emission target the entity has (if any) (see section 4.5.3.D below) 4.5.3.A Disclosures about an entity’s climate-related targets IFRS S2 requires an entity to disclose its quantitative and qualitative climate- related targets. These may be either: [IFRS S2.33]. • Targets that the entity has set to monitor progress towards achieving its strategic goals Or • Targets that the entity is required to meet by law or regulation (if any) These targets include any GHG emissions targets.
- 113. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 112 For each target, IFRS S2 requires an entity to disclose the following: Figure 4-11: Climate-related target disclosures Information to disclose Further information The metric used to set the target [IFRS S2.33(a)] IFRS S2 also requires an entity to consider cross-industry metrics and industry-based metrics when identifying and disclosing metrics used to set climate-related targets and to measure progress. [IFRS S2.B67]. For metrics that were developed by an entity to measure progress towards a target, IFRS S1 specifies additional disclosures that the entity is required to make (see section 4.5.2 of Part A - Introduction to IFRS S1). The objective of the target [IFRS S2.33(b)] An entity might refer to, for example, mitigation, adaptation or conformance with science-based initiatives. The part of the entity to which the target applies [IFRS S2.33(c)] An entity might refer to, for example, whether the target applies to the entity in its entirety or only a part of the entity (e.g., a specific business unit or specific geographical region). Target measurement considerations Specifically, an entity is required to disclose: • The period over which the target applies [IFRS S2.33(d)] • The base period from which progress is measured [IFRS S2.33(e)] • Any milestones and interim targets. [IFRS S2.33(f)]. If the target is quantitative, whether it is an absolute target or an intensity target [IFRS S2.33(g)] IFRS S2 describes: • An absolute target as “a total amount of a measure or a change in the total amount of a measure” • An intensity target as “a ratio of a measure, or a change in the ratio of a measure, to a business metric” [IFRS S2.B66] How the latest international agreement on climate change has informed the target [IFRS S2.33(h)] This disclosure includes any jurisdictional commitments that arise from the latest international agreement. 4.5.3.B Approach to set, review and monitor progress against targets An entity is required to disclose information about the entity’s approach to: [IFRS S2.34]. • Setting and reviewing each target • Monitoring its progress against each target The information to be disclosed includes: [IFRS S2.34]. • Whether a third party has validated the target and the methodology for setting the target • The entity’s processes for reviewing the target
- 114. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 113 • The metrics used by the entity to monitor its progress towards reaching the target • Any revisions that have been made to the target and an explanation for those revisions 4.5.3.C Reporting performance against each target An entity is required to disclose information about its performance against each climate-related target. The information disclosed also needs to include an analysis of trends or changes in the entity’s performance. [IFRS S2.35]. In identifying and disclosing the metrics used to set and monitor progress towards reaching a target, IFRS S2 requires that an entity refers to and considers the applicability of cross-industry metrics and industry-based metrics. The metrics include those described in an applicable ISSB standard and metrics that otherwise satisfy the IFRS S1 requirements. [IFRS S2.37]. 4.5.3.D GHG emission targets In addition to the requirements outlined above, IFRS S2 also requires information to be disclosed in relation to any GHG emissions target(s) that an entity has set (or is required to meet by law or regulation) which is summarised in Figure 4-12 below. [IFRS S2.36]. Figure 4-12: GHG emission target disclosures Information to disclose Further information The scope of the GHG emissions target Specifically, an entity is required to disclose: • Which GHG emissions are covered by the target (noting that the various constituent gases are described in section 5.2 below) [IFRS S2.36(a)] • Whether the target covers Scope 1, Scope 2 or Scope 3 GHG emissions [IFRS S2.36(b)] Whether the target is a gross GHG emissions target or net GHG emissions target [IFRS S2.36(c)]. IFRS S2 describes: • Gross GHG emissions targets as “reflect[ing] the total changes in greenhouse gas emissions planned within the entity’s value chain”. • Net GHG emissions targets as “the entity’s targeted gross greenhouse gas emissions minus any planned offsetting efforts (for example, the entity’s planned use of carbon credits to offset its greenhouse gas emissions)”. For net GHG emissions targets, the entity is also required to separately disclose its associated gross GHG emissions target. IFRS S2 also clarifies that the net GHG emissions target disclosure cannot obscure information about the entity’s gross GHG emissions target. [IFRS S2.B68, IFRS S2.B69]. Whether the target was derived using a sectoral decarbonisation approach [IFRS S2.36(d)]. In the BC to IFRS S2 the ISSB explains that a sectoral decarbonisation approach sets GHG emissions targets on a sector-by-sector basis by translating GHG gas emissions targets made at the international level (e.g., established through the latest international agreement on
- 115. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 114 climate change) into sector-based benchmarks, against which the performance of individual entities can be compared. A sectoral decarbonisation approach acknowledges that entities operating in different sectors will have specific challenges associated with the transition to a lower-carbon economy (because, for example, the location of where in an entity’s value chain that GHG emissions are concentrated will vary by sector). The Science Based Targets Initiative (SBTi) uses a sectoral decarbonisation approach. [IFRS S2.BC150]. The entity’s planned use of carbon credits to offset GHG emissions to achieve any net GHG emissions target [IFRS S2.36(e)]. IFRS S2 defines a carbon credit as “An emissions unit that is issued by a carbon crediting programme and represents an emission reduction or removal of greenhouse gases. Carbon credits are uniquely serialised, issued, tracked and cancelled by means of an electronic registry”. [IFRS S2 Appendix A]. Information to be disclosed about an entity’s planned use of carbon credits includes: [IFRS S2.36(e)]. • The extent of the entity’s use of carbon credits to achieve its net GHG emissions targets (if any) • The identity of the third-party scheme(s) that will verify or certify the carbon credits • The type of carbon credit — this includes whether the underlying offset will be nature-based or based on technological carbon removals (see further discussion below) • Any other factors that users of general purpose financial reports might need to understand the credibility and integrity of the scheme from which the entity obtains carbon credits (e.g., assumptions regarding the permanence of the carbon offset) An entity might also disclose information about carbon credits it has already acquired and which the entity is planning to use to meet its GHG emissions targets. [IFRS S2.B71]. Carbon credits Carbon credits may be nature-based (i.e., aim to enhance natural carbon sinks, such as through afforestation, soil-based carbon sequestration and the use of other biomass stores) or based on technological carbon removals. The ISSB noted that disclosure about the type of carbon credit helps users of general purpose financial reports to assess an entity’s risk profile. For example, if an entity plans to use carbon credits based on technological carbon removals, a user will want to understand whether the technological solution is currently economical at commercial scales or whether it will likely require substantial investment to be economically viable in the future. In contrast, nature-based approaches are often more cost-effective than Disclosure about the type of carbon credit helps users of general purpose financial reports to assess an entity’s risk profile.
- 116. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 115 technological solutions. However, nature-based approaches may be subject to concerns about: • Quality of the carbon offset scheme based on ‘permanence’ (i.e., how long the GHG emissions will be safely removed from the atmosphere) and ‘additionality’ (i.e., whether any new climate benefits have been brought about by a particular investment that would not have occurred anyway) And • Their secondary effects on other social and environmental issues, such as food production Consequently, disclosures about an entity’s reliance on carbon credits, how credits are generated, and the credibility and integrity of the scheme from which the entity obtains the credits provide important information to users because additional climate-related risks and opportunities may arise from uncertainty about the suitability of some schemes, the available technology and future prices of carbon credits. The ISSB notes that this may happen because, for example: [IFRS S2.BC154, IFRS S2.BC155, IFRS S2.BC156]. • Carbon capture and storage technology solutions might prove to be ineffective. Or • Regulations might be introduced or revised to discourage or ban the use of specified carbon credit schemes due to climate activism efforts, policy changes or concerns about food shortage issues that might arise as a consequence of decisions made. TCFD comparison The ISSB indicates that some of the IFRS S2 disclosure requirements for metrics and targets relating to climate-related risks and opportunities are broadly consistent with the TCFD recommended disclosures. For disclosures related to the metrics used by an entity to manage and assess its climate-related risks, the ISSB noted in its TCFD comparison document that IFRS S2 requires the disclosure of industry-based metrics in addition to the categories of cross-industry metrics which are also included in TCFD guidance. For disclosures related to GHG emissions, the ISSB noted that IFRS S2 includes additional requirements to: • Separately disclose Scope 1 and Scope 2 GHG emissions for the consolidated group and for investees that are not part of the consolidated group (e.g., equity accounted investments) • Disclose Scope 2 GHG emissions according to the location-based approach and to disclose information about any contractual instruments relating to Scope 2 GHG emissions • Disclose ‘financed emissions’ if the entity has activities in asset management, commercial banking or insurance • Disclose the measurement approach, inputs and assumptions used to measure Scope 3 GHG emissions IFRS S2 also specifies a Scope 3 measurement framework for preparing disclosures on Scope 3 GHG emissions. The general 'disaggregation’ principle in IFRS S1 would also require an entity to disaggregate its GHG emissions disclosure by constituent gases if that disaggregation provides material information to users of the entity’s general purpose financial reports. For disclosures related to targets used by the entity to manage its climate- related risks and opportunities and its performance against those targets, the ISSB noted that IFRS S2:
- 117. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 116 • Differs from the TCFD Recommendations by requiring an entity to disclose how the latest international agreement on climate change has informed its target and whether the target has been validated by . a third party • Requires more detailed information to be disclosed about the entity’s GHG emissions targets and additional requirements about the planned use of carbon credits to achieve the entity’s net GHG emissions targets • Includes additional requirements to disclose information about the entity’s approach to setting and reviewing targets, monitoring progress against those targets, including whether a sectoral decarbonisation approach was used in setting the targets 5 Greenhouse gas emissions 5.1 Measurement of GHG emissions IFRS S2 requires an entity’s disclosure of its GHG emissions to be measured in accordance with the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004). The ISSB clarified that an entity applies the requirements in the GHG Protocol only to the extent that those requirements do not conflict with IFRS S2. Therefore, as an example, an entity is required to disclose its Scope 3 emissions because that it is a requirement in IFRS S2 even though the GHG Protocol does not require the disclosure of Scope 3 GHG emissions. [IFRS S2.29(a)(ii), IFRS S2.B23]. An exception to the general requirement in IFRS S2 to use the GHG Protocol to measure GHG emissions applies if an entity is required by a jurisdictional authority, or a securities exchange on which it is listed, to use a different method for measuring its GHG emissions. This exception applies for as long as the jurisdiction’s, or securities exchange’s, requirement to use a different method applies to the entity. Furthermore, in some cases, the jurisdiction’s, or securities exchange’s, specific requirements might apply only to one part of the reporting entity (e.g., its operations in a specific jurisdiction) or for only some categories of GHG emissions (e.g., Scope 1 and Scope 2 GHG emissions). In such cases, the exception that IFRS S2 allows does not exempt the entity from being required to disclose its Scope 1, Scope 2 and Scope 3 GHG emissions for the whole of the entity. [IFRS S2.B24, IFRS S2.B25]. 5.2 Overview of GHG Protocol The GHG Protocol provides standards and guidance for accounting for, measuring and reporting emissions of the following seven GHGs identified by the United Nations Framework Convention on Climate Change (UNFCCC): • Carbon dioxide (CO2) • Methane (CH4) • Nitrous oxide (N2O) • Hydrofluorocarbons (HFCs) • Perfluorocarbons (PFCs) • Sulphur hexafluoride (SF6) • Nitrogen trifluoride (NF3) These gases are classified as GHGs because they trap heat in the atmosphere. The following publications are collectively known as the GHG Protocol:
- 118. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 117 • Corporate Accounting and Reporting Standard (Corporate Standard)20 • Scope 2 Guidance21 • Corporate Value Chain (Scope 3) Accounting and Reporting Standard (Scope 3 Standard)22 • Technical Guidance for Calculating Scope 3 Emissions (Scope 3 Guidance)23 The following sections provide a brief introduction to some of the key concepts in the GHG Protocol that may be relevant for measuring an entity’s GHG emissions. Detailed guidance on the application of the GHG Protocol can be found in the EY publication, Sustainability reporting developments - A comprehensive guide - Greenhouse Gas Protocol Interpretative guidance.24 5.2.1 Accounting for, measuring and reporting GHG emissions Accounting for, measuring and reporting GHG emissions in accordance with the GHG Protocol is based on the following process: Figure 5-1: Process under the GHG Protocol A reporting entity defines its organisational boundary The organisational boundary, which determines the entities (or portions of entities) that are included by the reporting entity for purposes of GHG emissions reporting. A reporting entity identifies its organisational boundary using either the equity share or control approach. This is discussed further in section 5.2.2 below. The reporting entity establishes its operational boundary Determining a reporting entity’s operational boundaries is the process of: • Identifying the emissions that relate to the reporting entity (which is established by the organisational boundary) • Determining if these emissions are direct (Scope 1) or indirect (Scope 2 or Scope 3) • Determining the extent of accounting for and reporting indirect emissions (i.e., which Scope 3 emissions, if any, are included in the GHG inventory and reported). In accordance with IFRS S2, a reporting entity will be required to include Scope 3 emissions in its GHG inventory The reporting entity calculates GHG emissions Once the boundaries are set, the reporting entity calculates GHG emissions for each reported scope (i.e., Scope 1, Scope 2 and Scope 3). These emissions are typically measured in metric tonnes of individual GHGs and metric tonnes of carbon dioxide equivalent (CO2e) units, a standard metric used to compare the impact of GHGs on the environment. 20 Refer Corporate Standard | GHG Protocol 21 Refer Scope 2 Guidance | GHG Protocol 22 Refer Corporate Value Chain (Scope 3) Standard | GHG Protocol 23 Refer Scope 3 Calculation Guidance | GHG Protocol 24 Sustainability reporting developments: Greenhouse Gas Protocol
- 119. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 118 The GHG Protocol is designed to enable reporting entities to track and report consistent and comparable GHG emissions data over time. Therefore, it requires a reporting entity to establish a base year (a specific year or an average of multiple years) against which subsequent emissions can be compared. The GHG Protocol requires the base year emissions to be retrospectively recalculated in certain circumstances to maintain comparability over time. 5.2.2 Organisational boundary A reporting entity may have many different entities in its legal and organisational structure, which may include wholly owned subsidiaries, partially owned subsidiaries and equity method investments. The GHG Protocol provides guidance on whether a reporting entity must include emissions from these various entities when measuring its GHG emissions. The GHG Protocol refers to the process of identifying which entities to include as “setting organisational boundaries.” The GHG Protocol allows a reporting entity to select one of two methods of setting organisational boundaries: • The equity share approach Or • The control approach The GHG Protocol calls these methods consolidation approaches. For entities that wholly own and control all their operations, either approach will result in the same organisational boundary. However, for entities that have partially owned operations (or for entities that only have an economic interest in the operations without control), the organisational boundary identified, and therefore, the GHG emissions included in their inventory, can differ depending on the consolidation approach used. Because control can be defined from an operational or financial perspective, the GHG Protocol further divides the control approach into the operational control approach and financial control approach. The decision tree below shows the options available to a reporting entity for determining its organisational boundary: Figure 5-2: Determining the organisational boundary 5.2.2.A Equity share approach Under the equity share approach, a reporting entity sets its organisational boundary based on its share of the equity of an owned, or partially owned, entity (i.e., the reporting entity includes the same proportionate share of emissions of the owned entity as its share of equity of the entity). The equity share percentage used by the reporting entity should reflect the extent of the rights the reporting entity has to both the risks and rewards generated by an owned entity. This percentage is often the same as the legal ownership share of the owned entity, but it may not be in all cases. For example, the equity share and ownership share will differ when the ownership share does not faithfully represent the economic interest in the owned entity. Control approach Financial control Organisational boundary policy Operational control Equity share approach
- 120. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 119 5.2.2.B Control approach Under the control approach, a reporting entity includes within its organisational boundaries 100% of the emissions of operations over which it has control, regardless of the equity share or legal ownership share held by the reporting entity. For example, a reporting entity that has an equity share of 65% and control over a subsidiary would account for and report 100% of the subsidiary’s emissions using the control approach. Conversely, if the reporting entity has an equity share of 35% in an entity that it does not control, none of the emissions of the uncontrolled entity would be included in the reporting entity’s GHG inventory. The GHG Protocol provides two methods of determining control: • Financial control (see (i) of this section below) • Operational control (see (ii) of this section below) The selected control approach must be used consistently throughout the entire organisation and over time. (i) Financial control A reporting entity has financial control over another entity if it can control the entity to gain economic benefits from the entity’s activities. Financial control is often obtained if the reporting entity has the right to the majority of the economic benefits of the operation. Similar to the concept of equity share above, the determination of financial control depends on the economic substance of the relationship rather than the legal ownership. That is, financial control is not determined by legal ownership but by whether the reporting entity holds the rights to the majority of the economic benefits of the operation (e.g., the risks and rewards of ownership of the entity’s assets). For example, a reporting entity may have financial control over another entity that is a variable interest entity, even though it owns less than 50% of the other entity. When financial control is shared jointly by two or more parties (e.g., a joint venture under IFRS 11 Joint Arrangements), emissions are accounted for using the equity share approach even when the financial control approach is applied throughout the remainder of the reporting entity. How we see it We believe that the determination of financial control will often be consistent with the determination of control for financial reporting purposes under IFRS accounting standards (i.e., if an entity is consolidated for financial reporting purposes, it will likely be included in the organisational boundaries under the financial control approach). However, the financial accounting guidance on the assessment of control under IFRS accounting standards has changed since the Corporate Standard was first issued. Therefore, there may be differences between the consolidation conclusion under the GHG Protocol’s financial control approach and the conclusion for financial accounting. (ii) Operational control The GHG Protocol specifies that a reporting entity that applies the operational control approach needs to include any facility over which it has operational control in the organisational boundary, even if it is not the owner of the facility. This is particularly relevant for leased assets and other assets that are operated under a contractual arrangement. Determining the organisational boundary for these assets and contractual arrangements is outside the scope of this publication. A reporting entity that elects to use the operational control approach determines control by whether it has the authority to introduce and
- 121. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 120 implement operating policies at an operation or facility. Operational control does not mean that the reporting entity can make all decisions concerning the operation or facility. For example, operational control may include decisions about how the day-to-day functions are performed but may not include certain other significant decisions (e.g., financing decisions, buying/selling significant assets) otherwise relevant to the financial control conclusions. Certain facilities or operations may be under joint control (e.g., joint ventures). Under the operational control approach, a reporting entity needs to determine whether it can introduce and implement operating policies for each facility or operation to determine whether the facilities or operations under joint control are included in its reporting boundary. A reporting entity that has operational control over an operation will include 100% of the operation’s emissions in its reporting boundary even though it only owns 50% of the investee. 5.2.3 Scope 2 GHG emissions calculation methods Scope 2 GHG emissions measurement methods are: • Location-based method (see section 5.2.3.A below) • Market-based method (see section 5.2.3.B below) 5.2.3.A Location-based method The location-based method reflects the average emissions factors of the electricity grids on which a reporting entity consumes electricity. The location-based method is required to be used by all reporting entities. A reporting entity’s electricity procurement decisions (e.g., a decision to purchase electricity generated from renewable sources) are not factored into the location-based method calculation of Scope 2 emissions. Therefore, this method can be applied in all locations and provides information on emissions from the overall mix of generation sources used in the grid. The location-based method results in Scope 2 emissions from a reporting entity’s activities in the respective regions that are consistent with the Scope 2 emissions from other entities’ activities in the same region. This provides better comparability of entities based on the location of their activities. Under the location-based method, a reporting entity uses an emissions factor that represents the average emissions from energy generation within a defined geographical area (e.g., local, subnational or national level) during a defined time period, which is often 12 months (i.e., the grid average emissions factor). Supplier-specific emissions factors should not be used under this method. Additionally, these emissions factors do not reflect the impact of contractual instruments. 5.2.3.B Market-based method The market-based method represents the emissions associated with the choices a reporting entity makes when acquiring electricity. Scope 2 emissions under the market-based method are derived from a reporting entity’s contractual relationships or instruments. For example, if a reporting entity chooses a specific energy generation supplier or enters into a supply agreement for electricity from a regional wind farm, it would use the emissions factors resulting from these contracts in its Scope 2 emissions calculation under the market-based method. Unlike the location-based method, the market-based method provides information about the decisions a reporting entity has made to reduce emissions from its consumption of electricity. Contractual instruments include direct contracts with a supplier (e.g., power purchase arrangements, virtual power purchase arrangements) and bundled
- 122. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 121 or unbundled attribute claims (e.g., renewable energy certificates, energy attribute certificates, guarantees of origin, supplier-specific emission rates, residual mix factors). While the GHG Protocol requires the disclosure of Scope 2 GHG emissions on both location-based as well as the market-based method, IFRS S2 only requires the disclosure of the location-based method. In addition to this, entities are required to provide information about any contractual instruments that is necessary to inform users’ understanding of the entity’s Scope 2 GHG emissions. [IFRS S2.29(a)(v)]. Even though the information about any contractual instruments may seem comparable to the market-based method, IFRS S2 does not mention the market-based method itself. 5.3 Categories of GHG emissions Appendix A to IFRS S2 includes definitions of: • Direct GHG emissions, specifically Scope 1 GHG emissions • Indirect GHG emissions, which refer to Scope 2 and Scope 3 GHG emissions These definitions from IFRS S2 are reproduced below: Extract from IFRS S2 Appendix A Defined terms indirect greenhouse gas emissions Emissions that are a consequence of the activities of an entity, but occur at sources owned or controlled by another entity. Scope 1 greenhouse gas emissions Direct greenhouse gas emissions that occur from sources that are owned or controlled by an entity. Scope 2 greenhouse gas emissions Indirect greenhouse gas emissions from the generation of purchased or acquired electricity, steam, heating or cooling consumed by an entity. Purchased and acquired electricity is electricity that is purchased or otherwise brought into an entity’s boundary. Scope 2 greenhouse gas emissions physically occur at the facility where electricity is generated. Scope 3 greenhouse gas emissions Indirect greenhouse gas emissions (not included in Scope 2 greenhouse gas emissions) that occur in the value chain of an entity, including both upstream and downstream emissions. Scope 3 greenhouse gas emissions include the Scope 3 categories in the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011): … 5.3.1 Measurement approach, inputs and assumptions As noted in section 4.5.1.A above, IFRS S2 requires an entity to disclose the measurement approach, inputs and assumptions used to measure its GHG emissions. This disclosure required includes information about: [IFRS S2.B26].
- 123. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 122 • The measurement approach the entity uses in accordance with the GHG Protocol (see section 5.3.1.A below) • The applicable method if the entity is not using the GHG Protocol and the measurement approach the entity uses (see section 5.3.1.B below) • The emission factors the entity uses (see section 5.3.1.C below) 5.3.1.A GHG Protocol measurement approaches Because the GHG Protocol includes different measurement approaches for measuring its GHG emissions, IFRS S2 requires an entity to disclose: [IFRS S2.B27]. • The approach it uses to determine its GHG emissions (e.g., the equity share or control approach) • The reason(s) for the entity’s choice of measurement approach and how that approach enables users of the entity’s general purpose financial reports to understand the entity’s performance in relation to its climate- related risks and opportunities, including progress towards its climate- related targets (if any) 5.3.1.B Other methods and measurement approaches If an entity discloses its GHG emissions measured in accordance with another method (as outlined in section 5.1), IFRS S2 requires the entity to disclose: [IFRS S2.B28]. • The applicable method and measurement approach the entity uses to determine its GHG emissions • The reason(s) for the entity’s choice of method and measurement approach and how that approach enables users of the entity’s general purpose financial reports to understand the entity’s performance in relation to its climate-related risks and opportunities, including progress towards its climate-related targets (if any) 5.3.1.C Emissions factors If an entity estimates the GHGs emitted using activity data and emissions factors as its basis for measuring its GHG emissions, IFRS S2 requires the entity to use the emissions factors that best represent the entity’s activity. IFRS S2 does not specify the emissions factors that an entity is required to use. [IFRS S2.B29]. These estimates require: • ‘Activity data’, which refers to the number of times that a specific activity occurs for which an emissions factor is available and can be applied. For Scope 1 emissions, activity data is often denominated in fuel consumed (e.g., litres of petrol, cubic feet of natural gas) or units of product produced • An ‘emissions factor’, which refers to a value that represents the quantity of a specific GHG (or CO2e) emitted for a specific unit of activity. For example, CO2e emissions by fuel type for specific vehicles are common emissions factors used for calculating Scope 1 mobile emissions Consequently, IFRS S2 requires an entity to disclose information so that users of general purpose financial reports can understand the emission factors that the entity has used to measure its GHG emissions. [IFRS S2.B29]. 5.3.2 Aggregation of GHGs into CO2 equivalents Although there are seven constituent GHGs, IFRS S2 requires an entity’s disclosure of its absolute gross GHG emissions generated during the reporting period to be expressed in metric tonnes of CO2 equivalent (CO2e). [IFRS S2.29(a)(i)].
- 124. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 123 If an entity uses direct measurement (also known as ‘direct monitoring’) to measure its GHG emissions by measuring the concentration of GHGs and the rate of emissions from operations and processes, this means that the entity will be directly, and separately, measuring the specific constituent GHG emitted (e.g., the units of methane (CH4) emitted). To convert the constituent GHGs into a CO2 equivalent value, IFRS S2 requires an entity to use global warming potential (GWP) values based on a 100-year time horizon, from the latest Intergovernmental Panel on Climate Change assessment available at the reporting date. [IFRS S2.B21]. Each of the seven constituent GHGs have a different GWP. The GWP of a given GHG indicates how much energy one unit of the GHG absorbs (i.e., the ability of that gas to trap heat in the atmosphere) compared to one unit of carbon dioxide, generally over a 100-year period. The larger the GWP, the more that the GHG warms the earth compared to carbon dioxide over the stated time period. For example, PFCs and HFCs often absorb thousands of times more energy than carbon dioxide. The GWP of each GHG is used to convert GHGs, other than carbon dioxide, into carbon dioxide equivalent (CO2e) units. Therefore, the CO2e unit of measurement is used to evaluate releasing (or avoiding releasing) different GHGs against a common basis. [IFRS S2 Appendix A]. If an emission factor used by an entity has already converted the constituent gases into CO2e values, IFRS S2 does not require the entity to recalculate the emission factors using GWP values based on a 100-year time horizon from the latest Intergovernmental Panel on Climate Change assessment available at the reporting date. However, if the emission factors are not converted into CO2e values, then the entity is required to use the GWP values based on a 100-year time horizon from the latest Intergovernmental Panel on Climate Change assessment available at the reporting date. [IFRS S2.B22]. 5.3.3 Using information from reporting periods that are different from the entity’s reporting period An entity’s reporting period may be different from the reporting periods used by some or all the entities in its value chain. A consequence of mismatched reporting periods is that GHG emissions information that relates to the entity’s value chain may not be readily available for the entity to use when it prepares its own disclosures for its reporting period. The ISSB acknowledged that different reporting periods can cause challenges in preparing disclosures that rely on value chain information. For that reason, where an entity’s reporting period is different from the reporting periods of entities in its value chain, IFRS S2 permits an entity to measure its GHG emissions using information for reporting periods that are different from its own reporting period if all of the following conditions are met: [IFRS S2.B19]. • The entity uses the most recent data available from those entities in its value chain without undue cost or effort to measure and disclose its GHG emissions. • The length of the reporting periods is the same. • The entity discloses the effects of significant events and changes in circumstances (relevant to its GHG emissions) that occur between the reporting dates of the entities in its value chain and the date of the entity’s general purpose financial reports. 5.4 Scope 1 GHG emissions Scope 1 emissions are emissions from sources owned or controlled by a reporting entity. For example, emissions from equipment, a vehicle or production processes that are owned or controlled by the reporting entity are considered Scope 1 emissions. These emissions include all direct emissions
- 125. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 124 within the entity’s inventory boundary. The combination of organisational and operational boundaries make up a reporting entity’s inventory boundary, which is also called the reporting boundary. Two or more reporting entities should never account for the same emissions as Scope 1 emissions. For example, emissions from the generation of heat, electricity or steam that is sold to another entity are not subtracted from Scope 1 emissions but are reported as Scope 2 emissions by the entity that purchases the related energy. Theoretically, if every entity and individual throughout the world reported their GHG emissions using the same organisational boundary (e.g., equity share, financial control or operational control approach), the total of all Scope 1 emissions would equal the total GHGs emitted throughout the world. 5.5 Scope 2 GHG emissions According to the GHG Protocol, an entity’s Scope 2 GHG emissions need to be measured using either a location-based approach or a markets-based approach. This is described further in section 5.2.3 above on the application of the GHG Protocol. As noted in section 5.2.3 above, IFRS S2 requires an entity to: [IFRS S2.29(a)(v), IFRS S2.B30]. • Disclose its location-based Scope 2 GHG emissions • Provide information about any ‘contractual instruments’ the entity has entered into if it has entered into those instruments and information about those instruments would inform users’ understanding of the entity’s Scope 2 GHG emissions The meaning of a ‘contractual instrument’ is explained in IFRS S2: [IFRS S2.B31]. Extract from IFRS S2 B31 Contractual instruments are any type of contract between an entity and another party for the sale and purchase of energy bundled with attributes about the energy generation or for unbundled energy attribute claims (unbundled energy attribute claims relate to the sale and purchase of energy that is separate and distinct from the greenhouse gas attribute contractual instruments). Various types of contractual instruments are available in different markets and the entity might disclose information about its market-based Scope 2 greenhouse gas emissions as part of its disclosure. 5.6 Scope 3 GHG emissions IFRS S2 requires an entity to disclose information about its Scope 3 GHG emissions according to the 15 categories of Scope 3 GHG emissions as described in the GHG Protocol. The purpose of this disclosure is to enable users of general purpose financial reports to understand the source of the entity’s Scope 3 emissions. [IFRS S2.29(a)(vi), IFRS S2.B32]. As such, when an entity prepares its Scope 3 GHG emissions disclosures, IFRS S2 requires the entity to: [IFRS S2.B32, IFRS S2.B34]. • Consider its entire value chain (upstream and downstream) • Reassess which Scope 3 categories and entities throughout its value chain to include in the measurement of its Scope 3 GHG emissions if a significant event or a significant change in circumstances has occurred. This reassessment is consistent with the requirements in IFRS S1 about reassessing the scope of sustainability-related risks and opportunities
- 126. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 125 (see relevant discussion in section 1.2.3 of Part A – Introduction to IFRS S1) 5.6.1 Scope 3 measurement framework Scope 3 GHG emissions can be quantified by either direct measurement (i.e., the direct monitoring of GHG emissions) or estimation (which involves approximate calculations of data based on assumptions and appropriate inputs). The ISSB considers that, in theory, direct measurement provides the most accurate evidence of an entity’s Scope 3 GHG emissions. However, the ISSB also acknowledges that, due to the challenges of directly measuring Scope 3 GHG emissions, an entity's measurement of Scope 3 GHG emissions is likely to include the use of estimation rather than solely comprising direct measurement. [IFRS S2.B38, IFRS S2.B43, IFRS S2.B44, IFRS S2.B45]. IFRS S2 requires an entity to use a measurement approach, inputs and assumptions that result in a faithful representation of its measurement of Scope 3 GHG emissions. Although IFRS S2 does not specify the inputs an entity is required to use to measure its Scope 3 GHG emissions, the standard does require the entity to prioritise inputs and assumptions using the following identifying characteristics: • Data based on direct measurement (see section 5.6.1.A below) • Data from specific activities within the entity’s value chain (see section 5.6.1.B below) • Timely data that faithfully represents the jurisdiction of, and the technology used for, the value chain activity and its GHG emissions (see section 5.6.1.C below) • Data that has been verified (see section 5.6.1.D below) Each of these characteristics are explained further in the sections below, noting that these characteristics are not listed in a particular order and, as such, an entity’s prioritisation of the measurement approach, inputs and assumptions may require management to use judgement to make trade-offs between data. [IFRS S2.B40, IFRS S2.B42]. An example of a trade-off that management may need to make is between the timeliness of the data and specificity of the data. Recent data may provide less detail about the specific value chain activity (such as technology used, location and jurisdiction of the activity) whereas data that is older and published infrequently might be more representative of the value chain activity and its GHG emissions. [IFRS S2.B42]. When an entity selects the measurement approach, inputs and assumptions to measure its Scope 3 GHG emissions, IFRS S2 specifies that the entity is required to use all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort. [IFRS S2.B39]. IFRS S2 states that an entity is required to apply the Scope 3 measurement framework to prioritise inputs and assumptions even if: [IFRS S2.B41]. • The entity is required by a jurisdictional authority or securities exchange to use a method other than the GHG Protocol to measure its GHG emissions • The entity has elected to use the transition relief that allows the entity to measure its GHG emissions using a method other than the GHG Protocol for its first annual reporting period when its applies IFRS S2 5.6.1.A Data based on direct measurement IFRS S2 requires an entity to prioritise direct measurement of Scope 3 GHG emissions, but acknowledges that it expects that Scope 3 GHG emissions data will include estimation. [IFRS S2.B43, IFRS S2.B44].
- 127. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 126 IFRS S2 outlines that estimates of Scope 3 GHG emissions are likely to use two types of inputs: [IFRS S2.B45]. • Data that represents the entity’s activity that results in GHG emissions (activity data). For example, the entity might use distance travelled as activity data to represent the transport of goods within its value chain. • Emission factors that convert activity data into GHG emissions. For example, the entity will convert the distance travelled (activity data) into GHG emissions data using emission factors. 5.6.1.B Data from specific activities within the entity’s value chain Measurement of an entity’s Scope 3 GHG emissions will be based on: [IFRS S2.B46]. • Primary data — data obtained directly from specific activities within the entity’s value chain (e.g., data provided by suppliers) • Secondary data — data not obtained directly from activities within the entity’s value chain (e.g., data from third party data providers and industry-average data) • A combination of both primary and secondary data IFRS S2 requires an entity to prioritise primary data when estimating the entity’s Scope 3 GHG emissions. This is because the ISSB considers that data from specific activities within an entity’s value chain provides a more accurate representation of the entity’s specific value chain activities and, thus, primary data provides a better basis to measure an entity’s Scope 3 GHG emissions. However, if an entity uses secondary data to measure its Scope 3 GHG emissions, IFRS S2 requires the entity to consider the extent to which the secondary data faithfully represents the entity’s activities. [IFRS S2.B47, IFRS S2.B48, IFRS S2.B49]. Examples of primary and secondary data are provided in Figure 5-3 below: Figure 5-3: Primary and secondary data Type of data Examples Primary data • Data sources include meter readings, utility bills and other methods that represent specific activities in the entity’s value chain. • Data sources may be from internal sources such as from the entity’s own records or from external sources such as from suppliers and other value chain partners (e.g., supplier-specific emission factors for purchased goods or services). [IFRS S2.B48]. Secondary data • Data sources include third-party data providers and industry-average data (e.g., from published databases, government statistics, literature studies and industry associations). • Secondary data includes both: [IFRS S2.B49]. • Data used to approximate the activity or emission factors • Primary data from a specific activity (proxy data) that is used to estimate GHG emissions for another activity
- 128. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 127 5.6.1.C Timely data that faithfully represents the jurisdiction of, and the technology used for, the value chain activity and its GHG emissions If an entity uses secondary data to measure its Scope 3 GHG emissions, IFRS S2 requires the entity to prioritise the use of activity or emissions data that is: [IFRS S2.B50, IFRS S2.B51, IFRS S2.B52]. • Based on, or represents, the technology used in the value chain activity the data is intended to represent (see Illustration 5-1 below) • Based on, or represents, the jurisdiction in which the activity happened (e.g., where the entity operates or where the activity took place) • Timely and representative of the entity’s value chain activity during the reporting period (e.g., considering whether the secondary data sources relied on information collected in the entity’s current reporting period or in a reporting period that is different from the entity’s current reporting period) The illustration below is based on an example used in IFRS S2: [IFRS S2.B50]. Illustration 5-1: Use of secondary data In measuring its Scope 3 GHG emissions from business travel, Entity A obtains primary data from its business travel activities including data about: • The specific aircraft model used for each flight • Distance travelled for each flight • Travel-class used by the travelling employees Entity A would then estimate its GHG emissions from business travel by applying this primary data with secondary data on the GHG emissions relating to each of those activities. 5.6.1.D Verified data IFRS S2 requires an entity to prioritise Scope 3 GHG emissions data that is verified. Data can be subject to internal or external verification and may involve on-site checking, reviewing calculations, or cross-checking of data against other sources. [IFRS S2.B53]. The ISSB acknowledges that an entity might need to use unverified data if it is unable to verify its Scope 3 GHG emissions without undue cost or effort. [IFRS S2.B54]. 5.6.1.E Disclosure of inputs to Scope 3 GHG emissions As part of an entity’s disclosure of information about the measurement approach, inputs and assumptions that the entity uses to measure its Scope 3 GHG emissions in accordance with IFRS S2 (as discussed in section 5.3.1 above), the entity is required to disclose information about: [IFRS S2.B55, IFRS S2.B56]. • The characteristics of the data inputs referred to in section 5.6.1 on Scope 3 measurement framework that are used in the measurement of Scope 3 GHG emissions • How the entity has prioritised the highest quality data available, which faithfully represents the value chain activity and its Scope 3 GHG emissions • The extent to which the entity’s Scope 3 GHG emissions are measured using: • Inputs from specific activities within the entity’s value chain • Inputs that are verified
- 129. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 128 IFRS S2 includes a specifically stated presumption that Scope 3 GHG emissions can be estimated reliably using secondary data and industry averages. However, if an entity determines it is impracticable to estimate its Scope 3 GHG emissions (i.e., the entity cannot apply the requirement after making every reasonable effort to do so), IFRS S2 requires the entity to disclose how it is managing its Scope 3 GHG emissions. The ISSB expects that cases when measuring Scope 3 GHG emissions is impracticable will be rare. [IFRS S2.B57]. 5.7 Financed emissions IFRS S2 requires an entity participating in financial activities, including commercial and investment banks, asset managers and insurance entities to provide additional and specific disclosures about its Category 15 Scope 3 GHG emissions or those emissions associated with its investments, specifically its ‘financed emissions’ in: [IFRS S2.B59]. • Asset management (see section 5.7.1 below) • Commercial banking (see section 5.7.2 below) • Insurance (see section 5.7.3 below) Extract from IFRS S2 Appendix A Defined terms financed emissions The portion of gross greenhouse gas emissions of an investee or counterparty attributed to the loans and investments made by an entity to the investee or counterparty. These emissions are part of Scope 3 Category 15 (investments) as defined in the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011). The amount of financed emissions of an entity participating in financial activities is a key focus area for users of general purpose financial reports because it is an indicator of an entity’s exposure to climate-related risks and opportunities and how the entity might need to adapt its financial activities over time. This is because: [IFRS S2.B58]. • Investees, borrowers and counterparties with high GHG emissions could be more susceptible to risks associated with technological changes, shifts in supply and demand and policy changes. • As a consequence, those risks could increase the exposure of entities providing financial services to counterparties, borrowers and investees to credit risk, market risk, reputational risk and other financial and operational risks (such as credit risk associated with financing borrowers affected by carbon taxes or reputational risks from financing fossil fuel projects). The application guidance in IFRS S2 supports the use of different measurement approaches to calculate an entity’s financed emissions. In developing this application guidance, the ISSB’s intention was to allow for measurement methodologies for different asset classes to emerge and be accepted by the market, such as the measurement methodologies developed by the Partnership for Carbon Accounting Financials. [IFRS S2.BC125].
- 130. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 129 5.7.1 Asset management IFRS S2 requires an entity that participates in asset management activities to disclose the information set out in Figure 5-4 below: Figure 5-4: Asset management disclosures Information to disclose Further considerations The entity’s absolute gross financed emissions, disaggregated by Scope 1, Scope 2 and Scope 3 GHG emissions [IFRS S2.B61(a)] - For each of the disaggregated Scope 1, Scope 2 and Scope 3 GHG emissions disclosures, the total amount of assets under management (AUM) included in the entity’s financed emissions disclosures, expressed in the presentation currency of the entity’s financial statements [IFRS S2.B61(b)] - The percentage of the entity’s total AUM included in the financed emissions calculation [IFRS S2.B61(c)] For exclusions Explain the exclusions, including the type of assets excluded and associated amount of AUM, if the percentage of the entity’s total AUM included in the financed emissions calculation is less than 100%. The methodology used by the entity to calculate its financed emissions [IFRS S2.B61(d)] Describe the allocation method used by the entity to attribute its share of emissions in relation to the size of its gross exposure. 5.7.2 Commercial banking IFRS S2 requires an entity that participates in commercial banking activities to disclose the information set out in Figure 5-5 below: Figure 5-5: Commercial banking disclosures Information to disclose Further considerations The entity’s absolute gross financed emissions, disaggregated by Scope 1, Scope 2 and Scope 3 GHG emissions for each industry by asset class. For disaggregation by industry The Global Industry Classification Standard (GICS) 6-digit industry-level code is required to classify counterparties (using the latest version of the classification system available at the reporting date).
- 131. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 130 [IFRS S2.B62(a)]. For disaggregation by asset class Asset classes include: • Loans • Project finance • Bonds • Equity investments • Undrawn loan commitments If financed emissions are calculated and disclosed for other asset classes, the entity is required to explain why including those additional asset classes provides relevant information to users of general purpose financial reports. The entity’s gross exposure to each industry by asset class, expressed in the presentation currency of the entity’s financial statements. [IFRS S2.B62(b)]. For funded amounts Gross exposure is to be calculated as the funded carrying amounts (before subtracting any loss allowance), whether prepared in accordance with IFRS accounting standards or other GAAP. For undrawn loan commitments The full amount of the commitment is disclosed separately from the drawn portion of loan commitments. The percentage of the entity’s gross exposure included in the financed emissions calculation. [IFRS S2.B62(c)]. For exclusions Explain the exclusions, including the type of assets excluded, if the percentage of the entity’s gross exposure included in the financed emissions calculation is less than 100%. For funded amounts Exclude all impacts of risk mitigants (if applicable) from gross exposure. For undrawn loan commitments Separately disclose the percentage of the entity’s undrawn loan commitments included in the financed emissions calculation. The methodology used by the entity to calculate its financed emissions. [IFRS S2.B62(d)]. Describe the allocation method used by the entity to attribute its share of emissions in relation to the size of its gross exposure. 5.7.3 Insurance IFRS S2 requires an entity that participates in insurance activities to disclose the information set out in Figure 5-6 below:
- 132. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 131 Figure 5-6: Insurance disclosures Information to disclose Further considerations The entity’s absolute gross financed emissions, disaggregated by Scope 1, Scope 2 and Scope 3 GHG emissions for each industry by asset class. [IFRS S2.B63(a)]. For disaggregation by industry The GICS 6-digit industry- level code is required to classify counterparties (using latest version of the classification system available at the reporting date). For disaggregation by asset class Asset classes include: • Loans • Bonds • Equity investments • Undrawn loan commitments If financed emissions are calculated and disclosed for other asset classes, the entity is required to explain why including those additional asset classes provides relevant information to users of general purpose financial reports. The entity’s gross exposure for each industry by asset class, expressed in the presentation currency of the entity’s financial statements. [IFRS S2.B63(b)]. For funded amounts Gross exposure is to be calculated as the funded carrying amounts (before subtracting any loss allowance), whether prepared in accordance with IFRS accounting standards or other GAAP. For undrawn loan commitments The full amount of the commitment is disclosed separately from the drawn portion of loan commitments. The percentage of the entity’s gross exposure included in the financed emissions calculation. [IFRS S2.B63(c)]. For exclusions Explain the exclusions, including the type of assets excluded, if the percentage of the entity’s gross exposure included in the financed emissions calculation is less than 100%. For undrawn loan commitments Separately disclose the percentage of the entity’s undrawn loan commitments included in the financed emissions calculation.
- 133. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 132 The methodology used by the entity to calculate its financed emissions. [IFRS S2.B63(d)]. Describe the allocation method used by the entity to attribute its share of emissions in relation to the size of its gross exposure. 6 Effective date IFRS S2 is effective for annual reporting periods beginning on or after 1 January 2024. An entity is permitted to apply IFRS S2 earlier than 1 January 2024, but to do so, the entity is required to disclose that fact and it is also required to apply IFRS S1 at the same time. [IFRS S2.C1]. The actual effective date for entities will depend on when the ISSB standards become mandatory in the jurisdictions in which they operate, unless those entities voluntarily apply the standards before they become mandatory in their jurisdictions. See also relevant discussion in section 8 of Part A – Introduction to IFRS S1. 7 Transition reliefs to IFRS S2 In developing IFRS S2, the ISSB decided to provide some relief to ease an entity’s transition to the new requirements in the entity’s first year of applying those requirements. The transition reliefs set out in Table 7-1 below are available for an entity to use in the first annual reporting period in which the entity applies IFRS S2. The entity can choose to use all, some, or none of those reliefs in its first annual reporting period. [IFRS S2.C4, IFRS S2.BC174]. Figure 7-1: Transition reliefs for IFRS S2 Relief topic Nature of relief that applies to the first annual reporting period in which the entity applies IFRS S2 Comparative information An entity is not required to disclose comparative information. [IFRS S2.C3]. GHG Protocol An entity is permitted to continue to use a method other than the GHG Protocol to measure its GHG emissions if the entity used that method to measure its GHG emissions in the annual reporting period immediately preceding the date of initial application of IFRS S2. [IFRS S2.C4(a)]. The date of initial application is the start of the reporting period in which an entity first applies IFRS S2. Scope 3 GHG emissions An entity is not required to disclose its Scope 3 GHG emissions, including the additional information about financed emissions (if applicable). [IFRS S2.C4(b)]. If an entity uses either of the abovementioned reliefs relating to the GHG Protocol or Scope 3 GHG emissions, IFRS S2 allows the entity to continue to use that relief so that it is not required to present that information as comparative information in subsequent reporting periods. [IFRS S2.C5]. This is explained further in Illustration 7-1 below: Illustration 7-1: Comparative information transition relief Entity A applies ISSB standards for the first time for the annual reporting period ending 31 December 2024.
- 134. December 2023 - Applying IFRS – Introduction to IFRS S1 and IFRS S2 133 In its first set of sustainability-related financial disclosures, Entity A elects to not disclose its Scope 3 GHG emissions in accordance with the transition relief options available in IFRS S2. In its second set of sustainability-related financial disclosures, which is for the annual reporting period ending 31 December 2025, Entity A is required to disclose its Scope 3 GHG emissions for the 2025 reporting period. However, in accordance with the transition relief in IFRS S2, Entity A elects to not disclose its Scope 3 GHG emissions for the 2024 comparative period. In its third set of sustainability-related financial disclosures, which is for the annual reporting period ending 31 December 2026, Entity A is required to disclose its Scope 3 GHG emissions for the 2026 reporting period and its Scope 3 GHG emissions for the 2025 comparative period. This is because the transition relief for Scope 3 GHG emissions only applies to the Scope 3 GHG emissions that relate to the first annual reporting period.
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