The International Sustainability Standards Board has released IFRS S1 and IFRS S2 – its inaugural standards for sustainability-related and climate-related disclosures in global capital markets.
Also yesterday, Treasury released a consultation paper, Climate-related Financial Disclosure, which details the Australian government’s commitment to ensuring large businesses and financial institutions provide Australians and investors with greater transparency and accountability when it comes to their climate-related plans, financial risks and opportunities.
The government will introduce “standardised, internationally aligned reporting requirements.” It wants climate disclosure reforms to support Australia’s transition to net zero emissions by 2050.
The consultation paper said the Australian Accounting Standards Board will be responsible for developing Australian climate disclosure standards, which are expected to be closely aligned with the ISSB standards.
The ISSB, which is part of the International Financial Reporting Standards Foundation, said the new standards establish a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects.
The ISSB was established in 2021 and launched at COP26 in Glasgow. It has been working on the new standards since then, building on the work of the Task Force on Climate-related Financial Disclosure and other bodies.
It said it will now work with standard setting bodies in different markets to support adoption.
IFRS S1 requires an entity to disclose information about all sustainability-related risks and opportunities “that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short medium or long term”.
It prescribes how an entity prepares and reports its sustainability-related disclosures, with general requirements for content and presentation.
Entities will have to provide disclosures about their governance processes, controls and procedures they use to monitor, manage and oversee sustainability-related risks and opportunities. They will have to report on their strategies for managing those risks and opportunities.
They will have to disclose the processes they use to identify, assess, prioritise and monitor risks and opportunities and they will have to report on their performance in areas such as progress towards any targets they have set or are required to meet by law or regulation.
IFRS S2 is specifically about climate risks. Entities must disclose their exposure to climate-related physical risks and transition risks.
Both IFRS S1 and IFRS S2 are effective for annual reporting periods on or after 1 January 2024.
The ISSB said some of the requirements involve a high level of judgment or uncertainty, but it expects entities to reference “all reasonable and supportable information that is available at the reporting date without undue cost or effort”.
Information used in disclosures must be “comparable, verifiable, timely and understandable”.
It accepts that some entities will face “proportionality challenges” because of resource constraints, lack of data or lack of people with the necessary skills.
The standards emphasise that risks and opportunities that could be expected to affect an entity’s prospects include those that arise throughout its value chain.
For example: a beverage company might need to disclose risks associated with water use in areas where water is scarce, and how it affects communities near its operations; a clothing brand might describe