On Monday 26 June 2023, the International Sustainability Standards Board (ISSB) released its new sustainability standards, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.
Stakeholder expectations of transparency in sustainability and climate-related reporting have been rapidly increasing in Australia and worldwide. Since the IFRS Foundation announced the formation of the ISSB at COP26 in Glasgow in 2021, the organisation has been working to address calls for “high-quality, globally comparable information on sustainability-related risks and opportunities”. It has now launched its new standards which will “help to improve trust and confidence in company disclosures about sustainability to inform investment decisions”.
We take a look at the new standards and what they mean for organisations in Australia.
What are the new sustainability standards?
As general sustainability and climate-related issues are now acknowledged as material to an organisation’s long-term value, the ISSB’s two new standards will guide companies in assessing and communicating the relevant, related disclosures. According to the ISSB, IFRS S1 and S2 are “designed to set a global baseline to enable companies to provide information about sustainability-related risks and opportunities that is useful for investors’ decision-making.”
The objective of IFRS S1 is to “require an entity to disclose information about its sustainability-related risks and opportunities that is useful to primary users of general purpose financial reports in making decisions relating to providing resources to the entity.” That is to say, organisations should consider any and all material information relating to sustainability-related risks and opportunities that could reasonably be expected to affect cash flows, access to finance or cost of capital over the short, medium or long term.
IFRS S2 on the other hand is intended to “require an entity to disclose information about its climate-related risks and opportunities” through its general purpose financial reporting. This will allow report users and decision-makers to understand an organisation’s exposure and resilience to climate-related physical risks and transition risks. IFRS S2 requires organisations to calculate their carbon footprint in relation to scope 1, 2 and 3 greenhouse gas (GHG) emissions.
In developing these standards, the ISSB has incorporated existing sustainability reporting initiatives in developing these standards, where appropriate. Both IFRS S1 and S2 “fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)”. The standards and frameworks also reference the standards issued by the Climate Disclosure Standards Board (CDSB), the Value Reporting Foundation’s Integrated Reporting Framework and industry-based Sustainability Accounting Standards Board (SASB) Standards and the World Economic Forum’s Stakeholder Capitalism Metrics.
Our new TCFD checklist consolidates the 11 recommended TCFD disclosures and 'guidance for all sectors' to help organisations to perform a gap analysis as they embark on TCFD reporting, which is a great stepping stone to the eventual implementation of the newly issued IFRS S2.
Effective timing for implementation IFRS S1 and IFRS S2
IFRS S1 and IFRS S2 is requiring organisations to apply IFRS S1 and IFRS S2 for annual reporting periods beginning on or after 1 January 2024. Earlier application is permitted, but only if both IFRS S1 and S2 are applied at the same time. However, it is up to each jurisdiction to decide on the effective dates. On Tuesday, 27 June 2023, Australian Treasury published the second round of consultation on Climate-related financial disclosure.
The ISSB has also announced that one year of transition relief is available for IFRS S1. For an organisation applying this in the first year, the requirements in IFRS S1 would apply only as they relate to the disclosure of climate-related financial information in accordance with IFRS S2, and would require disclosure of the use of transitional relief (IFRS S1, Appendix E, E5).
Relief in the first annual reporting period has also been granted for:
- Reporting sustainability-related disclosures after the related financial statements (IFRS S1, Appendix E, E4)
- When measuring scope 1, 2 and 3 emissions, if the entity has been using a different methodology to the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004) (GHG Protocol) in the period immediate to the first application of IFRS S2, it can continue to use the alternate method (IFRS S2, Appendix C, C4), and
- Disclosing scope 3 emissions (IFRS S2, Appendix C, C4).
In our upcoming sustainability webinars, we take a deep dive into the GHG Protocol, stepping through the process of measuring scope 1, 2 and 3 emissions before approaching a decarbonisation strategy.
Impacts of the new sustainability standards on Australian organisations
From December 2022 to February 2023, the Australian Government entered into two consultation processes relating to sustainability standards and climate-related disclosures. Through these processes, it has indicated an intention to adopt the new sustainability standards, and potential to mandate for large listed organisations and large financial institutions.
With the standards now officially released, Treasury has announced its second round of consultation on Climate-related financial disclosure, so we await the outcomes of that process to understand the required approach to sustainability reporting for Australian organisations.
While not all organisations are likely to be mandated to comply with the new sustainability reporting standards in the immediate term, the impact could soon be felt by entities of all sizes across the supply chain. Driving this will be the requirement of mandatory reporters to gain data to accurately calculate their scope 3 emissions – i.e. purchased goods and services. For some organisations, scope 3 emissions can be the source of the bulk of the carbon footprint, so those working to reduce their footprint may see the opportunity to drive down their calculated emissions via their suppliers. Therefore, non-mandated and non-reporting entities may have their hands forced into measuring and reporting carbon footprints to maintain their contracts and position in the supply chain.
Collaboration is key to the adoption of the sustainability standards
As organisations progress towards assessing sustainability and climate-related disclosures, the collaboration between sustainability, finance and risk leaders will be paramount to ensure appropriate consideration is given to developing a holistic picture of the risks and opportunities they face.
Care is also required to ensure the reporting format and location meet all stakeholder and regulator needs and that all information is disclosed in the relevant component of the report. IFRS S1, for example, says, “An entity is required to provide disclosures required by IFRS Sustainability Disclosure Standards as part of its general purpose financial reports” (paragraph 60), noting that the location within the report may differ based on the jurisdiction requirements.
It's only the beginning
As the effect of mandatory sustainability reporting trickles through the business world, the requirement for sustainability and climate-related information will continue to impact organisational access to capital, markets and people – regardless of whether an organisation's reporting is voluntary or mandatory. Banks, investors, supply chains, and partner organisations will likely be interested in sustainability-related information from organisations of all sizes as they calculate carbon footprints or even assess and minimise risks.
But, this is only the beginning. The launch of IFRS S1 and S2 marks the formal start of the ISSB’s sustainability standards journey, while work is already underway to develop standards on other topics, believed to include biodiversity, workforce and supply chain.
Here to help
No matter where you are on your sustainability journey, our national sustainability team can help your organisation with:
- Sustainability reporting
- Carbon footprint calculations or mandatory climate-related disclosures
- Developing your sustainability strategy
- Carbon emission reduction strategies
- Assurance over your carbon footprint or sustainability reporting.
Contact us today.
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