UK reporters should note that IFRS S2 Climate-related Disclosures will not be available to UK companies until it is endorsed for use in the UK as a UK Sustainability Disclosure Standard (UK SDS). Following endorsement, but before decisions are made on the scope and implementation of any mandatory reporting requirements, UK companies will be permitted to apply UK SDSs voluntarily.
To be compliant with IFRS Sustainability Disclosure Standards, entities must apply both IFRS S2 and IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information. It should be noted, however, that certain transition reliefs are available for the first annual reporting period in which an entity applies the Standards.
Companies can apply IFRS S1 and IFRS S2 whether their financial statements are prepared in accordance with IFRS Accounting Standards or other generally accepted accounting principles or practices (GAAP).
Objective and scope
IFRS S2 requires an entity to disclose information about climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects (ie, cash flows, access to finance or cost of capital over the short, medium or long term).
Climate-related risks include both physical risks, such as those resulting from increased severity of extreme weather, and transition risks, such as those associated with a government’s policy or changes in technology connected with the move towards a low carbon economy.
Climate-related opportunities are the potential positive effects arising from climate change for an entity, for example opportunities to develop new products.
IFRS S2 requires information about climate-related risks and opportunities to be disclosed when it is useful to primary users of general purpose financial reports in making decisions about providing resources to the entity, thereby focusing on the information needs of investors. In assessing what to disclose, entities must consider material information as defined in IFRS S1. IFRS S1’s definition of materiality has a financial focus, in which sustainability-related information is material if omitting, misstating or obscuring that information could reasonably be expected to influence investors’ decisions.
While IFRS S2 fully incorporates the Task Force on Climate Related Financial Disclosures (TCFD) recommendations, it requires disclosure beyond the TCFD recommendations. As well as requiring disclosure on the same four key areas as TCFD, being governance, strategy, risk management, and metrics and targets, IFRS S2 also requires consideration of industry-based metrics for example. The IFRS Foundation has published a comparison of IFRS S2 with the TCFD recommendations.
IFRS S2 requires disclosure of information that enables investors to understand the governance processes, controls and procedures the entity uses to monitor, manage and oversee climate-related risks and opportunities. Disclosures should include information about the governance bodies responsible for oversight of climate-related risks and opportunities such as:
- how responsibilities for climate-related risks and opportunities are reflected in the terms of reference, mandates and other related policies applicable to governance bodies;
- how the governance bodies determine whether appropriate skills and competencies are available or will be developed to oversee strategies designed to respond to climate-related risks and opportunities; and
- how the governance bodies take climate-related risks and opportunities into account when overseeing the entity’s strategy.
Entities must also disclose information about management’s role in the governance process, for example whether management’s role is delegated to a specific position or committee, and whether management uses controls and procedures to support the oversight of climate-related risks and opportunities.
Entities must disclose information that enables investors to understand their strategy for managing climate-related risks and opportunities.
Description of identified risks and opportunities
Entities must describe the climate-related risks and opportunities that could reasonably be expected to affect its prospects. Such disclosure must specify the time horizons – short, medium or long term - over which the effects of climate-related risks and opportunities are expected to occur, including explanation of how the entity defines these time horizons. For climate-related risks, entities must explain whether each risk is considered to be a physical risk or a transition risk.
In identifying the climate-related risks and opportunities that could reasonably be expected to affect an entity’s prospects, entities are required to consider the applicability of the industry-based disclosure topics defined in the Industry-based Guidance on Implementing IFRS S2. This guidance originates from the SASB Standards.
Current and anticipated effects
For the climate-related risks and opportunities identified, entities must describe the current and anticipated effects on:
- the business model and value chain, including where in the entity’s business model and value chain climate-related risks and opportunities are concentrated (for example, geographical areas or certain types of asset).
- strategy and decision-making, including information about any climate-related transition plan the entity has.
- financial position, financial performance and cash flows, with information on current financial effects being connected to the financial statements (for example, an entity might disclose asset impairments that arose due to changes in the entity’s transition plan).
Note that IFRS S2 doesn’t require entities to have transition plans or climate targets. Rather, IFRS S2 requires entities to report on any plans or targets they have in place.
Disclosures should explain how the entity plans to achieve any climate-related targets, either that it has set itself or that it is required to meet by law or regulation. The entity is also required to disclose how it is resourcing these plans and activities.
IFRS S2 requires quantitative and qualitative disclosures, but, like IFRS S1, outlines circumstances in which an entity need not provide quantitative information.
Entities must disclose information that enables primary users to understand the resilience of the entity’s strategy and business model to climate-related changes, developments and uncertainties. Disclosures must explain the entity’s capacity to adjust or adapt its strategy and business model to climate change over the short, medium and long term.
An entity must undertake climate-related scenario analysis to assess its climate resilience, using an approach that is commensurate with its circumstances. Entities are then required to provide information about the assumptions used in the scenario analysis to enable users to understand the disclosures and the related methodology.
Entities are required to disclose information that enables primary users to understand the entity’s processes to identify, assess, prioritise and monitor climate-related risks and opportunities. This includes information on the extent to which, and how, risk management processes related to climate-related risks and opportunities are integrated into, and inform, the entity’s overall risk management process.
Metrics and targets
IFRS S2 requires entities to disclose information to enable investors to understand the entity’s performance in relation to its climate-related risks and opportunities. Entities are required to disclose:
- information related to cross-industry metric categories;
- industry-based metrics associated with its business model and economic activities; and
- targets it has set, or those it is required to meet by law or regulation, to mitigate or adapt to climate related risks or take advantage of climate related opportunities, including metrics used to measure progress towards these targets.
An entity must disclose information on its absolute gross greenhouse gas emissions generated during the reporting period, expressed as metric tonnes of CO2 equivalent. Greenhouse gas (GHG) emissions should be classified as:
- Scope 1, being direct GHG emissions that occur from sources that are owned or controlled by the entity.
- Scope 2, being indirect GHG emissions from the generation of purchased or acquired electricity, steam, heating or cooling consumed by the entity. Scope 2 GHG emissions physically occur at the facility where electricity is generated.
- Scope 3, being indirect GHG emissions (not included in Scope 2 GHG emissions) that occur in the value chain of an entity, including both upstream and downstream emissions. Scope 3 emissions include those generated by suppliers in the production of goods or services purchased by the entity, customers in the use of sold products, and the end-of-life treatment of sold products.
IFRS S2 acknowledges that measurement of Scope 3 GHG emissions is likely to include the use of estimation.
The Standard generally requires entities to measure greenhouse gas emissions in accordance with the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004).
In addition to GHG metrics, cross-industry metric categories include:
- the amount and percentage of assets or business activities:
- vulnerable to climate-related transition risks
- vulnerable to climate-related physical risks
- aligned with climate-related opportunities;
- the amount of capital expenditure, financing or investment deployed towards climate-related risks and opportunities;
- internal carbon prices used to assess the cost of emissions; and
- remuneration of executives and management linked to climate related considerations.
In disclosing industry-based metrics, entities are required to refer to and consider disclosure topics in the Industry-based Guidance on Implementing IFRS S2. This aspect of IFRS S2 reflects many investors’ belief that industry-specific disclosures are an essential factor to help them to understand and assess an entity.
In disclosing the climate related targets it has set, as well as those it is required to meet by law or regulation, an entity is required to disclose:
- the characteristics of each target;
- how it sets and reviews each target; and
- its performance against each target.
Disclosures must explain how the latest international agreement on climate change (currently the Paris Agreement), including jurisdictional commitments, has informed each target.
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