How sustainably ready are you?

On June 26, 2023, the International Sustainability Standards Board (ISSB) made a significant announcement by issuing its first-ever global sustainability disclosure standards, launching them in South Africa on 29 June 2023. These standards, comprise IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2), which aim to enhance transparency and trust in company disclosures pertaining to sustainability. Their implementation is expected to play a pivotal role in aiding investment decisions where sustainability-related risks and opportunities are reasonably expected to affect an entity’s prospects.

IFRS S1 Comprehensive communication of sustainability-related risks and opportunities

Follow this link to the standard: IFRS S1.

The IFRS S1 standard is the IAS 1 and IAS 8 of the sustainability standards, it prescribes a comprehensive set of disclosure requirements, enabling companies to effectively disclose sustainability-related risks and opportunities that could impact cash flows, access to finance or cost of capital across the short, medium-, and long-term.

When companies incorporate this standard in their reports, they are expected to present a holistic view of their sustainability practices, which ensures transparency in their operations and allows the investors, creditors and lenders to make informed decisions about providing resources to the entity.

IFRS S2 Climate-related Disclosures

Follow this link to the standard: IFRS S2.

The IFRS S2 standard focuses specifically on climate-related disclosures. It is designed to complement the IFRS S1 requirements. The world is seeing significant changes due to climate change, changes in weather patterns, as well as natural disasters. In South Africa, we have the example of floods in KwaZulu Natal at the same time as one of the longest-ever droughts in the Eastern Cape, just a few 100 km away. While the ISSB has released the climate standards first it was very quick to say, ‘climate first, but not climate only’, focusing on climate first due to the urgency of climate change and its impact on companies. This standard sets out specific guidelines for disclosing a company’s climate-related information, particularly climate-related physical risks and climate-related transition risks along with their climate-related opportunities available to the company. By applying IFRS S2 alongside IFRS S1, companies can provide a comprehensive account of their sustainability efforts, particularly in relation to climate-related risks and opportunities.

Integration with Financial Statements

Application of the new standards requires companies are required to incorporate sustainability-related information alongside their financial statements. By including this information within the same reporting package, investors gain a more complete understanding of a company's financial performance and its sustainability practices. This integration reinforces the significance of sustainability as a crucial component of overall business performance and comprehensive disclosure about its impact on the environment. At the launch, it was emphasised that management is always balancing sustainable practices with profits. This will enable users to get insight into that.

Alignment with IFRS Accounting Standards

The ISSB's global sustainability disclosure standards are intended to work in tandem with the existing accounting requirements outlined in the IFRS Accounting Standards. This is also demonstrated by the ISSB keeping to the same definition of materiality as in IFRS, items that it reasonably expected to influence the decisions of the users.

This integration ensures that sustainability disclosures can be seamlessly incorporated into the overall financial reporting framework. By combining financial and sustainability information within a cohesive framework, companies will be better equipped to provide investors with a comprehensive and accurate overview of their operations.

Scope

IFRS S1 shall apply to all entities that prepare and report sustainability-related financial disclosures. This standard may be applied, regardless of whether the financial statements are prepared in accordance with IFRS or other generally accepted accounting principles or practices (GAAP). This will, therefore, apply to IFRS for SMEs too.

IFRS S2 shall apply to all climate-related risks to which the entity is exposed, whether it be climate-related physical risks and climate-related transition risks; as well as climate-related opportunities available to the entity.

If sustainability-related- or climate-related risks and opportunities are not reasonably expected to affect an entity's prospects, then the entity is out of the scope of these standards.

Effective date

An entity shall apply these Standards for annual reporting periods beginning on or after 1 January 2024. Earlier application is permitted. If an entity applies one Standard earlier, it shall disclose that fact and apply the other sustainability standard at the same time.

Transitional relief

Both standards provide transitional relief. Entities must work through the standards to determine what transitional relief they will need to apply.

On Transition

An entity will not be required to disclose comparative information in the first annual reporting period in which the Standard is applied.

In the initial year of implementing these Standards, an entity is allowed to report its sustainability-related financial disclosures separately after it has published its regular financial statements. When utilising this transition relief, the entity must ensure that its sustainability-related financial disclosures are reported in a clear and transparent manner.

Another relief that is permitted is the ‘climate first’ transition relief, which permits an entity to disclose information only on climate-related risks and opportunities in the first year it applies IFRS S1 and IFRS S2. This allows for the application of IFRS S1 only with regards to climate-related risks and opportunities for the first year (no comparatives) and full application from year two with comparatives provided only for the climate information. If this relief is applied, it must be clearly stated.

IFRS S2 provides transition relief for the measurement of greenhouse gas emissions.

Conclusion

The introduction of the ISSB’s global sustainability disclosure standards represents a crucial milestone in promoting transparency and accountability in corporate sustainability reporting. By providing clear guidelines for disclosing sustainability-related information and climate-related risks, these standards enhance trust and confidence among investors, lenders and creditors. By integrating sustainability disclosures with financial statements, companies are expected to be better positioned to communicate their commitment to sustainability.

 Authors:

Frans Smith, IFRS Manager

Justine Combrink, IFRS Partner

Karolina Martin, IFRS Director

10 July 2023

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