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With recent record-breaking weather events globally, including the wettest
September in southern England and unprecedented climate-related incidents such as the Valencia floods, the impact of climate change is undeniable. The International Sustainability Standards Board (ISSB) has responded to this urgency with the introduction of IFRS S1 and IFRS S2 – pivotal standards for sustainability-related financial disclosures.
"These standards provide businesses with frameworks to identify, manage, and disclose material climate-related risks and opportunities. For companies navigating an evolving landscape of climate risk, adopting these standards is more than regulatory compliance; it’s a strategic move to align with investor expectations, protect asset values, and foster long-term resilience", Jose Hopkins, CEO and Founder Simplify Climate.
Key climate change reporting considerations under IFRS S1 and S2
Assessing material sustainability risks: IFRS S1 highlights the importance of evaluating material sustainability risks and their potential financial impacts. Recent weather events underscore the physical risks businesses face, such as Storm Kirk in France, which brought Paris its heaviest October rainfall since 1920, and flash floods in Spain’s Valencia region.
Businesses should also consider transition risks, using materiality thresholds to focus disclosures on factors that could significantly impact financial performance or investor decisions. Exploring What is Double Materiality? - Sustainability & ESG Reporting can help firms understand how climate risks affect not only their business but also the broader environment.
Disclosing climate-related metrics and emissions: IFRS S2 places a strong emphasis on transparent climate metrics, specifically the measurement and reporting of Scope 1, 2, and 3 GHG emissions.
Aligning emissions with climate targets is essential, as recent events, like record temperatures in the western United States (117°F in Palm Springs), demonstrate the increased urgency of managing transition risks. Transparent emissions data enables investors to assess a company’s progress towards decarbonisation and its impact on pricing strategies as it transitions to a lower-carbon future.
Scenario analysis for future resilience: A unique feature of IFRS S2 is its focus on scenario analysis, where businesses evaluate how various climate scenarios might impact their financial health and operations.
The October flooding in China’s Hainan province, with record-breaking rainfall from Tropical Storm Trami, illustrates how sudden, extreme events can disrupt operations.
By modelling potential climate outcomes, companies can better plan for and manage risks, from regulatory shifts to physical impacts. This proactive approach offers investors insights into the resilience of a company’s strategy under different climate conditions.
Ensuring consistency with financial statements: One of the key requirements of IFRS S1 and S2 is aligning sustainability disclosures with traditional financial statements. This means that claims about sustainability initiatives should be reflected in financial outcomes, such as investments in sustainable technologies or anticipated costs for future decarbonisation.
For example, companies investing in greener technologies in response to extreme weather events must ensure these costs are accurately represented in their financial reporting.
Strengthening governance and controls: As scrutiny of climate-related disclosures increases, companies must have robust governance mechanisms in place. Ensuring that sustainability data is reliable and accurate is essential, particularly when preparing disclosures in line with IFRS standards.
Strong internal controls also build stakeholder trust and demonstrate a company’s commitment to transparent reporting practices.
Evaluating asset impairment risks: Climate change increases the risk of asset impairment, particularly for companies with assets tied to fossil fuels or other carbon-intensive operations.
October’s extreme weather events are a stark reminder of this, with unseasonably warm conditions in the Northeast United States, including a notably warm Halloween, underscoring the vulnerability of infrastructure and assets to climate-related impacts.
Companies with fossil fuel-dependent or high-emission assets should regularly reassess asset values to reflect potential impairments resulting from both regulatory changes and physical climate risks.
Conclusion
The IFRS S1 and S2 standards offer a clear pathway for integrating climate change into financial reporting, ultimately helping businesses navigate the challenges posed by climate risks. By aligning disclosures with investor expectations and strengthening transparency, companies can enhance their strategic resilience.
As climate-related risks and opportunities become central to financial decision-making, adapting to these standards will be crucial for businesses aiming to safeguard their long-term performance.
At Simplify Climate, we help businesses simplify the integration of climate risks and sustainability into their models. By understanding and incorporating both physical and transition risks, companies can not only meet reporting standards but also drive strategic success in an uncertain world.
To discuss how we can support your business, email help@simplifyclimate.co.uk
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