Disclosure Requirements – IFRS S2
Similar to IFRS S1, IFRS S2 requires companies to disclose "climate-related risks and opportunities 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." The same materiality qualifier from IFRS S1 also applies to IFRS S2. IFRS S2 is, however, more granular than IFRS S1, as it requires companies to categorize climate-related risks into the following two subcategories, which are defined terms in IFRS S2:
Climate-related physical risks: Event-driven risks (acute physical risk) or risks that develop over a longer period due to changes in climate patterns (chronic physical risk).
Climate-related transition risks: Risks associated with the transition to a lower-carbon economy.
IFRS S2 is also organized around the Core Pillars and, in general, requires a level of disclosure that is comparable to IFRS S1, with certain modifications and/or additions as highlighted below:
Governance
Disclosure is required to the extent that there is no unnecessary duplication with IFRS S1. If disclosure according to IFRS S1 and IFRS S2 would overlap, then disclosing the information under IFRS S1 would suffice.
Most notably, IFRS S2 requires companies to present a detailed scenario analysis to illustrate how they assess the company's resilience against climate-related risks. Such disclosure entails, among other things:
the company's assessment of its climate resilience, including proposed reconciliation efforts to address any identified climate-related risks and significant areas of uncertainty in its assessment; and
the method used to conduct the scenario analysis, including any assumptions made with respect thereto.
The ISSB, however, indicated it is mindful that companies have varying levels of expertise and sophistication and, as such, some companies may provide a more advanced scenario analysis compared to others.
Risk Management
Disclosure is required to enable users to understand a company’s processes to identify, assess, prioritize, and monitor climate-related risks and opportunities, including how such processes are integrated into and inform a company’s overall risk management process.
Metrics and Targets
Companies are required to provide specific climate information, including:
1. Greenhouse Gas ("GHG") Emissions: Absolute gross GHG emissions classified as:
Scope 1 GHG emissions (all direct GHG emissions by a company).
Scope 2 GHG emissions (all indirect GHG emissions arising from a company's consumption of purchased electricity, steam, heating, or cooling).
Scope 3 GHG emissions (all other indirect GHG emissions that occur in the value chain of a company, other than those captured in Scope 2).
2. GHG Metrics: Metrics used to measure GHG emissions and the details of any measurement approach used.
3. Internal Carbon Pricing: A description of how the company incorporates internal carbon pricing into its decision-making process, including the price per metric ton of GHG emissions used to calculate GHG emissions costs.
4. Climate-related Targets: A description of any climate-related targets for reducing GHG emissions, if any, and an explanation of whether such target is on a gross or net basis.
5. Carbon Credits: A description of the planned use of carbon credit to offset GHG emissions, including:
the type of such carbon credit;
an explanation of whether the offset will be nature-based or technology-based;
the method used, either by reduction or removal, to achieve the offset; and
any information substantiating the credibility and integrity of the carbon credit.
6. Remuneration Policies: A description of how a company considers climate-related factors in determining remuneration policies, including how such factors impact executive remuneration and the percentage of executive management whose remuneration is tied to climate-related considerations.
The Standards aim to improve trust and confidence in company disclosures about sustainability to inform investment decisions and create a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects. IFRS S1 and S2 are effective for annual reporting periods beginning on or after 1 January 2024, with transitional period provisions in respect of an entity’s first annual reporting period.
As written before, IFRS S1 and S2 are set to become available for annual reporting periods starting in 2024, but the standards would not be mandatory unless adopted by individual jurisdictions. As ISSB is part of the IFRS Foundation, which develops the accounting rules used in more than 100 countries. It's possible to expect that there could be large-scale adoption of the ISSB standards as sustainability disclosure regulations become more commonplace.
By Giacomo Breda
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