Key financial sustainability reporting considerations for IFRS S1 and S2

With the increasing frequency and severity of extreme weather events globally, it’s becoming even more important for businesses to integrate climate change into their business model and sustainability reporting.

BBC article "wettest September in southern England for more than a century" (01 October 2024)

The introduction of IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2) by the International Sustainability Standards Board (ISSB) marks a crucial step towards integrating sustainability into financial reporting. Understanding these standards is essential for ensuring compliance and aligning with increase net zero investor expectations.

IFRS S2 standard help businesses disclose material climate-related risks and opportunities information transparently, reflecting a true and fair view as to the impact of climate change on long-term financial performance.

Key financial sustainability reporting considerations

1. Materiality of sustainability risks: A key reporting consideration under IFRS S1 is assessing the material sustainability risks that could impact financial performance. This involves evaluating both climate-related risks, such as physical damage from extreme weather, and opportunities, like cost-saving green initiatives. We would recommend the use of materiality thresholds to ensure your sustainability disclosures focus on risks that could materially alter financial performance or investor decisions.

   
   

   Refer to What is Double Materiality? - Sustainability & ESG Reporting (youtube.com)

   Refer to Impact Materiality - How to Get Started? - Sustainability & ESG Reporting (youtube.com)

   
   

2. Disclosure of climate-related metrics: Under IFRS S2, there is a strong emphasis on disclosing specific climate-related metrics, particularly greenhouse gas (GHG) emissions. Companies are required to quantify and disclose their Scope 1, 2, and 3 emissions, and demonstrate how these align with climate targets. This can influence costs and pricing strategies as businesses transition towards lower-carbon operations.

   
   

3. Scenario analysis: IFRS S2 standard encourage companies to conduct scenario analysis, projecting how different climate outcomes, such as regulatory changes or physical climate impacts, could affect their operations. Scenario analysis allows businesses to plan for a range of possible futures, helping investors understand the resilience of a company’s strategy in the face of climate-related risks.

   
   

4. Consistency with financial statements: A critical aspect of IFRS S1 and S2 is ensuring that non-financial sustainability disclosures are consistent with traditional financial statements. Companies must ensure that sustainability claims are reflected in their financial outcomes, such as investments in greener technology or anticipated future decarbonisation costs.

   
   

5. Governance and control mechanisms: Companies should strengthen their internal governance and control systems for sustainability reporting. With increased scrutiny on climate-related disclosures, having robust control mechanisms helps ensure that sustainability information is accurate, reliable, and compliant with the standards.

   
   

6. Risk of asset impairment: Climate change poses significant risks to asset values, especially in carbon-intensive industries. Companies may need to reassess the value of assets that could become stranded due to regulatory changes or physical damage, ensuring they are appropriately impaired in the financial statements. Refer to effects-of-climate-related-matters-on-financial-statements.pdf (ifrs.org)

Conclusion 

The IFRS S1 and S2 standards are essential tools for aligning financial reporting with sustainability objectives. By integrating climate-related risks and opportunities into financial disclosures, businesses can ensure transparency, meet investor expectations, and be better equipped to navigate the challenges posed by climate change. Accounting teams must adapt to these standards to ensure comprehensive, accurate, and forward-looking disclosures that reflect the financial impacts of climate risks.

Carbon brief article on Antarctic sea ice levels (October 2024)

We at Simplify Climate are transforming and simplifying the integration of climate change. It is crucial for businesses to increase their understanding and start the integration of physical and transition risks related to climate change as this is crucial for long term strategic success.

Visit our website at www.simplifyclimate.co.uk, to schedule a discussion with our consultants.

Sources:

• IFRS - IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information

• IFRS - IFRS S2 Climate-related Disclosures

• TCFD Knowledge Hub Online Learning (tcfdhub.org)

• effects-of-climate-related-matters-on-financial-statements.pdf (ifrs.org)