What is IFRS S1?
As we mentioned in our previous blog post, earlier this year the International Sustainability Standards Board (ISSB) published two new disclosure standards for sustainability disclosures:
- IFRS S1 ‘General Requirements for Disclosure of Sustainability-related Financial Information’; and
- IFRS S2 ‘Climate-related Disclosures’.
IFRS S1 sets out overarching requirements for disclosing sustainability-related risks and opportunities while IFRS S2 focuses on supplementary requirements specifically for disclosing climate-related risks and opportunities. Both standards cater to the needs of investors for decision-useful information which enables them to compare investee companies in a global context. To this end, IFRS S1 builds on the SASB standards while IFRS S2 builds on TCFD.
The UK Government and the FCA are adopting ISSB as the reporting framework for sustainability disclosures in the UK. This means that if your company is incorporated in the UK and/or listed on the London Stock Exchange, you are likely to be in scope and should start preparing.
What should companies think about?
Firstly, the objective of ISSB is to disclose information about the sustainability-related risks and opportunities that could reasonably be expected to affect a company’s prospects. Since IFRS S1 applies to all sustainability-related risks and opportunities, from workforce health and safety to data security, you should start by identifying those that are material to your business.
Like SASB, ISSB is based on the concept of single (financial) materiality, which defines information as material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions of investors and other capital markets participants. As a first port of call, IFRS S1 therefore requires companies to consider the disclosure topics SASB lists as material for their specific industry. However, ISSB recognises that even within the same industry sustainability issues are individual to a company, so in the absence of a relevant SASB disclosure topic companies can report other information they have identified as decision-useful for investors as long as it faithfully represents their sustainability-related risks or opportunities and doesn’t conflict with ISSB’s own standards.
This leaves companies free to also consider sources like GRI or the European Sustainability Reporting Standards (ESRS) and their concepts of impact and double materiality. It also enables them to accommodate the increasingly long-term considerations of investors who understand that a company’s impacts on people and the environment today are tomorrow’s financial impacts on the company and therefore on the value of their investment.
Secondly, while ISSB’s definition of materiality is based on SASB, its reporting structure is based on TCFD’s four pillars of Governance, Strategy, Risk Management, and Metrics and Targets. This means that once a company has identified its material topics it needs to discuss all of them with reference to these four areas, not just climate change. To avoid unnecessary duplication, ISSB recommends consolidated Governance and Risk Management sections which cover all material topics, but generally you’re likely to have to disclose more details than before, even if you’re already a SASB reporter.
For example, as we explained in our blog post on IFRS S1, ISSB requires companies to disclose quantitative and qualitative information about the effects of sustainability-related risks and opportunities on their financial position, not just for the reporting period, but on their financial planning over the short, medium and long term, including their planned sources of funding.
Quantitative information can only be omitted under limited circumstances and commercial sensitivity is not one of them, unless disclosure would prevent the company from realising a sustainability-related opportunity. And for each target a company has set it needs to disclose the metric used to set the target and to monitor progress towards reaching it, the period over which the target applies, the base period from which progress is measured and any milestones and interim targets.
Lastly, while cross-referencing can be used to explain context and connections between related items of information, companies are guided to present their sustainability disclosures as “a coherent whole” to make them easy to follow. You might therefore wish to minimise fragmentation across your reporting suite, especially if your company has operations in the EU and is in scope of the Corporate Sustainability Reporting Directive (CSRD), which requires all disclosures to be assured by a third-party verifier.
Any questions?
Are you new to SASB reporting and/or considering an ISSB gap analysis? Are you looking to review your reporting suite? Please contact stephen.butler@luminous.co.uk
