A common language for disclosing the effect of climate-related risks and opportunities on a company’s operations has arrived.
Last month, the International Sustainability Standards Board (ISSB) issued its first two inaugural standards — IFRS S1 and IFRS S2 — ushering in a new era of sustainability-related disclosures in capital markets worldwide. The ISSB hopes that the Standards will improve trust and confidence in company disclosures regarding sustainability.
IFRS S1 requires companies to communicate the sustainability risks and opportunities they face over the short, medium, and long term.
The requirements are designed to ensure that companies provide investors information relevant to decision-making.
They do this by identifying fundamental qualitative characteristics of useful sustainability-related financial information. This includes: fair presentation; material information; identification of the reporting entity; and any connected information such as risk, prospects, or opportunities, and corresponding financial statements.
The disclosures that are identified include:
- Governance: controls and procedures used to monitor, manage, and oversee sustainability-related risks and opportunities;
- Strategy: approach for managing these risks and opportunities;
- Risk Management: processes used to identify, assess, prioritize and monitor; and
- Metrics and Targets: performance in relation to sustainability-related risks and opportunities, including progress towards any targets the company has set or is required to meet by law or regulation.
A company’s sustainability-related financial disclosure report is to be filed at the same time as its related financial statements and covers the same reporting period.
IFRS S2 is designed to be used with IFRS S1. It applies to climate-related physical or transition risks to which the company is exposed, as well as climate-related opportunities.
It is effective for annual reporting periods beginning on or after January 1, 2024.
Both S1 and S2 are based on recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), SASB Standards, CDSB Framework, Integrated Reporting Framework and World Economic Forum metrics to streamline sustainability disclosures.
According to the IFRS, consolidation will help companies to benefit from their investments they’ve already made in sustainability disclosures while reducing the ‘alphabet soup’ of sustainability disclosures.
Emmanuel Faber, ISSB chair, speaking at the IFRS Foundation Conference on June 26, 2023, referenced Charlie Chaplain’s movie Gold Rush. “This movie, released 98 years ago, today, summarized the limitations of ruthless economics.”
“We pay nothing for what we take from nature,” but are paying a high price for exploring, drilling, distributing, and consuming resources that cannot be replaced, Faber said.
With these new standards, the ISSB is hoping to overturn past practices.
“June 26, 2025, when the first IFRS S1 and S2 reports come out of the jurisdictions, marks the 100th anniversary of Charlie Chaplin’s Gold Rush,” Faber concluded, “and hopefully we will have departed from bad economics.”
Click here to find out more about the standards.
