On June 26, the ISSB published its inaugural IFRS S1 and IFRS S2 standards, ushering in a new era of sustainability-related disclosures in capital markets around the world. These Standards, which incorporate the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), will help strengthen confidence in companies' sustainability disclosures to inform investors' decisions.
The importance of IFRS S1 and IFRS S2 lies in the fact that an entity's ability to generate cash flows is closely linked to its interactions with stakeholders, such as society and the natural environment throughout its entire value chain. The relationship between the company and the other agents might generate sustainability-related risks and opportunities for the company.
“The issuance of the regulations provides a unified comprehensive framework for the adoption of ESG criteria and defines the entry into the corporate information scenario of issues traditionally considered as non-financial. This represents a commitment to ensure sustainability values and a challenge to face the current demands of investors, regulators and other participants in the business world”, says Marcelo Pinto, Advisory Partner of Grant Thornton Argentina.
The new standards designed by the ISSB aim to require the disclosure of information about risks and opportunities in the short, medium and long term that is useful for primary users of general-purpose financial reports.
IFRS S1 requires a company to disclose information about all risks and opportunities that could be expected to affect the entity’s cash flows, its access to finance and cost of capital. It must disclose:
On the other hand, IFRS S2 establishes the requirement of specific disclosures on the physical and transition risks related to the climate to which the entity is exposed and the opportunities available. Climate-related risks and opportunities that could not reasonably be expected to affect an entity's prospects are outside the scope of this Standard. However, information should be disclosed so that it enables users of general-purpose financial reports to understand the IFRS S1 data. When disclosing the processes of identification, evaluation, prioritization and monitoring of risks and opportunities, it will have to be included if these processes are integrated and inform the general risk management process of the entity and how they do it.
These Standards are designed for companies to provide sustainability information in their financial reports. They have been developed to be used in conjunction with any accounting requirements. They are also built on the concepts that underpin the IFRS Accounting Standards (which are required in more than 140 jurisdictions). In addition, since they are suitable for application in different countries, they create a truly global baseline, that will allow to expand sources of financing.
IFRS S1 and S2 come into effect for annual periods beginning on/after January 1, 2024, so the first reports will be seen in 2025. However, they can be used earlier as long as both standards are applied together.
It should be noted that the ISSB provided a series of transitional reliefs for the first-year reports, which will allow companies to adapt and be able to satisfactorily comply with all the requirements from the second year of implementation.
The ISSB will work collaboratively with the different reporting jurisdictions and entities throughout the adoption process and will create a Transition Implementation Group to support companies applying the Standards. It will also launch capacity-building initiatives to assist the adoption and effective implementation of both standards.
In turn, the ISSB will work with those jurisdictions that desire incremental disclosures beyond the global baseline, to achieve greater interoperability of the Standards.
At Grant Thornton we are prepared to give support to our clients on their path to implment these Standards, evaluating their impact on the generation and disclosure of comprehensive information on their businesses and on the orientation towards ESG and Sustainability values. For more information or support, please contact us.