The Exposure Drafts of the IFRS Sustainability Disclosure Standards seek to streamline corporate reporting on corporate and climate sustainability and lay the foundation on the globally recognized information set.
The International Sustainability Standard Board (ISSB) in an effort to streamline corporate sustainability disclosures has published its first two proposed (Exposure Draft) IFRS Sustainability Disclosure Standards which – once finalized – will form a comprehensive global baseline (baseline) for sustainability disclosures useful in meeting investors’ needs in determining enterprise value.
The first draft, known as “IFRS S1 General Requirements Exposure Draft“, covers sustainability-related financial disclosures (General Requirements Exposure Draft), i.e., disclosures that address significant risks and opportunities related to corporate sustainability, while “IFRS S2 Climate-related disclosures” (Climate Exposure Draft) focuses on climate-related risks and opportunities. Compared to the financial reporting on sustainability in financial statements, the Exposure Drafts (EDs) provide more extensive disclosures about:
- the entity’s management of sustainability-related risks and opportunities and its strategy for addressing them;
- to decisions made by the entity that could affect future cash flows (inflows/outflows), and have not yet met the criteria for recognition in the financial statements;
- to the reputation, performance and prospects of the entity as a result of actions taken, such as its relationships with people, the planet and the economy as well as its impacts and dependencies on them.
More in detail, ED IFRS S1 – General Requirements – proposes to disclose information about significant sustainability-related risks and opportunities, correlating it with what is reported in the financial statements and focusing on governance, strategy, risk management, metrics and objectives used to measure, monitor and manage significant sustainability-related risks and opportunities. Sustainability reporting covers the entire value chain of an entity, defined as “the full range of activities, resources and relationships related to an entity’s business model and the external environment in which it operates.”
In general, ED IFRS S1 proposes guidelines and requirements regarding:
- To the comparison of information;
- To the frequency of reporting;
- The positioning of information;
- to the use of financial data and assumptions;
- sources of estimation uncertainty related to results.
Finally, recall that the Standard, inspired by the principles of fairness (fairly), proposes to require entities to fully, fairly, and faithfully represent information about sustainability-related risks and opportunities by applying the principles set forth in the Standard, and the guidance of other standard-setters, while also paying attention to sustainability-related risks and opportunities identified by entities operating in the same industries or geographies.
The Exposure Draft Climate-related Disclosures (IFRS S2) uses the same approach as the former to represent material information about significant climate-related risks and opportunities, thereby enabling an investor to assess the effect of those climate-related risks and opportunities on enterprise value.. The proposed Standard requires entities to disclose information about the impacts that climate change may have on their business model, strategy, and short-, medium-, or long-term cash flows, their access to financing, and their cost of capital (e.g., continuing to operate a particular line of business of the entity could be detrimental to its reputation and limit its ability to access financing).
For this Standard, an entity is required to identify risks (physical or transitional) and explain to what extent and how processes to identify, assess, and manage climate-related risks and opportunities are integrated into the entity’s overall risk management process. It is also required to communicate how it prioritizes climate-related risks relative to other types of risks, including information on the use of risk assessment tools (such as science-based risk assessment tools).
It is now clear that climate-related risks can test an entity’s resilience. For this reason, in order to help investors understand resilience to such risks and opportunities, an entity will, for example, need to disclose information about whether it can continue to use its assets and investments in the way it has been doing, or whether a climate risk, such as a flood risk, could cause the entity to relocate, dispose of assets, or improve them.
These EDs will help provide standards and greater clarity, on the disclosures that entities must, ever more carefully, disclose to meet the growing information needs of investors and all stakeholders involved. Once International Sustainability Standards Board has considered and processed all comments on the Exposure Drafts, it will publish the final version of the Standards, which is expected by the end of 2022.