On June 26, 2023, the International Sustainability Standards Board (ISSB) released its first set of global reporting standards: IFRS S1 and IFRS S2. Across all industries, these standards aim to establish a common language between companies and their investors. The standards provide the framework for reporting on sustainability and climate-related risks and opportunities that influence companies’ financial prospects. The ISSB hopes these standards will simplify the disclosure process and enable companies to comprehensively represent their ESG efforts.
Beginning in January 2024, companies can start applying these ISSB standards, and the first reports adhering to them will be available to investors in 2025. Currently, the decision to adopt these standards is voluntary, but in the future, individual countries may make compliance mandatory. Down below, we break down what both IFRS S1 and IFRS S2 entail.
The primary objective of IFRS S1 is to require companies to provide investors with information about sustainability-related risks and opportunities. The reports will offer insight into how social, environmental, and economic factors will impact a company’s cash flow and access to capital in the short, medium, and long term. Companies will specify the duration of these timelines with regard to industry-specific considerations.
IFRS S1 requires disclosure in four main areas:
- Governance – Companies are required to disclose information regarding management’s role in overseeing and responding to sustainability-related risks and opportunities, as well as how management considers these factors when making decisions. Companies will also discuss whether and how they consider performance metrics in remuneration policies.
- Strategy – Companies must disclose information about their strategies for managing sustainability-related risks and opportunities, including plans for financing strategies, such as investments and capital expenditures.
- Risk Management – Companies are required to identify, assess, and monitor the likelihood and magnitude of sustainability-related risks, including disclosing information on data sources, inputs, and parameters. Additionally, companies must discuss whether and how they integrate sustainability-related risks into their overall risk management processes.
- Metrics and Targets – Companies will disclose their targets and metrics, as well as those mandated by regulations and laws, concerning sustainability-related risks and opportunities.
IFRS S1 will encourage companies to generate reports that offer a holistic view of their sustainability efforts, recognizing both the positive areas and identifying places of potential vulnerability.
IFRS S2 is designed to work in tandem with IFRS S1. The objective of IFRS S2 is to make information about climate-related risks and opportunities accessible to companies’ investors. Like IFRS S1, IFRS S2 requires reporting on governance, strategy, risk management, and metrics and targets; under IFRS S2, companies will apply these requirements to climate-related risks and opportunities.
In addition to these requirements, IFRS S2 requires companies to disclose the following:
- Greenhouse Gas (GHG) Emissions: Companies will disclose their Scope 1, 2, and 3 GHG emissions. Scope 1 emissions are those emitted directly by the company, while Scope 2 emissions result from purchasing electricity, steam, heating, or cooling. Scope 3 emissions are those indirectly emitted throughout the entire value chain (upstream and downstream). Companies will have an additional year to include Scope 3 in their reports because of the challenges posed by data collection for the entire value chain. Furthermore, companies will disclose carbon credits used to offset emissions and achieve targets.
- Capital Deployment: Companies are required to disclose the amount of capital expenditure, financing, or investment dedicated to addressing climate-related risks and opportunities.
- Climate-Related Risks: IFRS S2 requires companies to designate climate-related risks as either transition or physical risks. Transition risks occur during the shift to a low-carbon economy, such as policy and reputational risks. Physical risks can be either acute, such as floods or storms, or chronic, like rising sea levels.
- Climate Resilience: IFRS S2 requires companies to conduct climate-related scenario analysis. For each scenario, companies must assess their exposure to risks and opportunities and disclose their available resources.
- Carbon Prices: IFRS S2 requires companies to disclose whether and how they incorporate carbon prices into their decision-making. Additionally, companies must disclose the price per metric tonne of GHG emissions used to assess the costs of their GHG emissions.
Benefits of Disclosure
Disclosure acts as a means for facilitating communication in ways that benefit all parties involved. These standards benefit investors by providing strategic insights into the risks and opportunities that affect companies’ cash flow and overall financial situation, both positively and negatively.
In addition to benefiting investors, it is important to note that the new standards also offer significant advantages to companies themselves. Through these reports, companies can highlight their efforts to integrate sustainable practices into their business models, and they can emphasize relevant information specific to their business and industry. Increasing transparency in business practices helps foster trust and credibility.
Capaccio is committed to informing our clients about the latest developments in ESG standards, regulations, and policies. For clients who adopt the new ISSB reporting standards, we will offer assistance throughout all stages of the reporting process. We begin by conducting a materiality assessment to help clients identify and establish key targets and metrics, a core component of the new standard’s disclosure process. We have developed the EHS-Dashboard™, a highly customizable software that tracks ESG metrics and monitors progress toward targets. The EHS-Dashboard™ equips clients with the necessary information for reporting purposes. For example, the software can assist companies in calculating Scope 1, 2, and 3 GHG emission values to ensure compliance with IFRS S2.
To learn more about the capabilities of the EHS-Dashboard™, schedule a demo. The disclosure process can seem daunting, but Capaccio will guide our clients through the process in a way that will best serve your company’s needs.