Companies need to plan way ahead and allocate sufficient time and resources in this identification phase. This should be an important focus for the leadership teams when assessing the company’s sustainability reporting.
In the identification process of sustainability-related risks and opportunities, IFRS S1 requires a company to refer to a broader list of IFRS Sustainability Disclosure Standards (i.e., IFRS S1, IFRS S2 and other future standards) as well as consider how the disclosure topics in the industry-based Sustainability Accounting Standards Board (SASB) standards could be applicable. Also, it may be beneficial for a company to look at its competitors in the same industry or region to take note of the risks and opportunities they identified, to make its own identification process more comprehensive.
Under IFRS S1, companies are required to disclose material information about sustainability risks and opportunities that could impact the business. Specifically, companies must provide details about how these risks and opportunities could influence the company's business model, strategic plans, and consequently, cash flows, ability to raise funding, or cost of capital over the short, medium and long term. The goal is to give users a clear understanding of how environmental and social factors may affect the company financially, both now and in the future. This emphasizes how sustainability issues can directly impact a company’s financial performance. The emerging trend for companies to report on both financial and non-financial information reflects the growing need for integrated business reporting. Since IFRS S1 uses the same key concepts as IFRS Accounting Standards - like materiality, primary users, and general-purpose financial reports - it is in a position to facilitate integration in IFRS reporting in the future. However, the scope and objectives of IFRS S1 are not necessarily the same as those for other existing sustainability reporting frameworks and jurisdictional requirements. Therefore, companies currently reporting on sustainability will need to identify any differences when applying IFRS S1 for the first time.
Understand the differences between historical financial information and sustainability metrics and targets
In financial reporting, companies usually use the historical cost and fair value (or similar variations) to measure the items in financial statements. Accounting standards generally provide detailed requirements on how these items are measured, with examples like inventories and revenue. IFRS S1, however, doesn’t provide direct measurement guidance. Instead, companies are required to apply judgement and to consider metrics associated with the industry-based SASB standards and other frameworks. Metrics and targets cannot be established in isolation and a company has to take into account business models, activities and other common features that characterise participation in an industry together with stakeholders in other relevant business units. Sustainability-related financial disclosures are set to become more forward-looking than historical financial information, given that metrics will show a company’s progress towards targets it has set, or is required to meet by law or regulation.
Conclusion
The launch of IFRS S1 represents the beginning of the journey towards convergent global sustainability reporting. Sustainability reporting will likely remain a hot topic for investors, lenders, creditors, customers, suppliers and regulators for upcoming years. Effective leadership through appropriate and timely oversight will be a key factor in driving robust and reliable sustainability reporting by companies.
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Summary
With the issue of IFRS SI in June 2023, companies are required disclose information about their sustainability-related risks and opportunities to help users of sustainability reports make informed investment decisions. Companies need to commit sufficient time and resources now to ensure they identify the spectrum of risks and opportunities for their business models and future plans, including setting targets which are monitored and measured. This involves changes to processes, controls and governance and is a significant development in the drive to support the flow of capital to sustainable enterprises and to help make global capital markets more resilient.