Navigating Climate Disclosures: Key Takeaways from the IFRS S2 Webinar

Authored by Hannah Janknecht, Regulatory Analyst at Compliance & Risks

Following the release of IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures on 26 June 2023, the IFRS Foundation hosted two webinars to explain these major developments in detail. 

This blog summarizes the key takeaways from the second webinar on IFRS S2.

1. What Are The Main Objectives Of The New Standard?

The IFRS Sustainability Standards, developed by the International Sustainability Standards Board (ISSB), aim to set a globally harmonized baseline for the reporting of financial sustainability information. IFRS S2 provides investors with the information needed to understand the risks that a company faces due to climate change, including physical (i.e. flooding, wildfires) and transition risks (i.e. necessary changes to its business model and supply chain). In addition, reporting under this standard gives investors information on the opportunities that potentially arise from climate change for a company. This information shall enable investors to determine the company’s prospects and potential, assess its capability to adapt to climate change and understand the risks it faces throughout the entire value chain.

IFRS S2 on climate-related disclosure must be read in conjunction with IFRS S1, which helps companies to understand the way in which the required information has to be disclosed. IFRS S1 inter alia sets the timeline for reporting, defines the concept of materiality and provides several relief and phasing-in measures. Please refer to our blog on IFRS S1 for an in-depth analysis. In order to identify relevant risks and opportunities, companies shall furthermore consider the SASB (Sustainability Accounting Standards Board) Standards. The ISSB took over responsibility for the development and maintenance of the SASB Standards in 2022, which furthermore provide the basis for the industry-specific disclosure requirements. Companies may also take into account other sources such as the GRI Standards to the extent that is necessary to meet investors information needs. 

2. How Is IFRS S2 Aligned With Other Reporting Frameworks?

IFRS S2 fully incorporates the four core recommendations and eleven recommended disclosures of the Task-force on Climate Related Financial Disclosure (TCFD). This means that, going forward, companies applying IFRS S2 will automatically comply with the TCFD recommendations as well. IFRS S2 however goes beyond the TCFD recommendations i.e. by including industry-specific information, information about the current and planned use of carbon credits and disclosure of financed emissions. The IFRS Foundation has released a full comparison of the two frameworks drafted by ISSB.

In addition, IFRS S2 is aligned with the requirements of the Carbon Disclosure Project (CDP). This means that companies complying with IFRS S2 can use the same information to populate their CDP forms, making reporting procedures more efficient. 

The final text of the IFRS S2 standard is furthermore as much as possible aligned with the European Sustainability Reporting Standard (ESRS) on Climate Change under the Corporate Sustainability Reporting Directive (CSRD), although there are a number of differences between these two frameworks. ESRS in its current version i.e. does not require the reporting of financed emissions. As explained in further detail in our blog post on IFRS S1, the IFRS standards moreover focus on single materiality instead of double materiality as applied under the CSRD. In order to make the reporting under both frameworks more efficient, ISSB is currently developing further guidance documents on the comparison of both frameworks.

3. What Are The Key Concepts Of IFRS S2?

The information that must be reported based on IFRS S2 can be divided into two key categories: Strategy and Metrics/ Targets.

Strategy refers to information on:

• The company’s business strategy and decision making,
• Current and anticipated financial effects of climate change and
• Information on its climate resilience.

Metrics and targets entail:

• Data on the company’s GHG emissions and
• Climate-related targets.

4. Strategy: How To Disclose Financial Effects And Conduct A Climate Resilience Assessment?

As stakeholder feedback on the Draft IFRS standards has shown, it is crucial for investors to understand how the climate and sustainability information relates to the financial prospects of a company. Therefore, IFRS S2 directly links the disclosure of a company’s business strategy to its current and anticipated financial effects from climate change. The disclosed information must demonstrate the effects that climate change has on the financial performance, financial positions and cash flows of the company. The report must also inform about the way in which the company will position itself regarding those risks. Future risks refer to all aspects, including potential effects due to stricter laws and regulations. Reporting on current and anticipated financial effects mostly requires the disclosure of quantitative information. Where this is not possible without undue cost or effort, i.e. in cases with a high level of uncertainty, quantitative information can be provided instead or in addition. 

In order to provide comprehensive information on their resilience to climate change, companies are required to conduct a climate resilience assessment, analyzing the effects of climate change on the business model and its capacity to adapt over the short, medium and long term. The standard does not prescribe a specific climate scenario that must be used as a basis for the analysis, it only requires the use of a relevant scenario and disclosure on the scenario that has been used. 

5. Metrics And Targets: Why Do Companies Need To Disclose Their GHG Emissions?

IFRS S2 requires companies to disclose their gross scope 1, 2 and 3 greenhouse gas emissions. This requirement might initially come as a surprise to those who would consider this type of information to be relevant for the company’s impact, but not necessarily for the evaluation of the risks that the company itself faces due to climate change. ISSB however decided to incorporate this requirement due to overwhelming feedback from stakeholders on the necessity of this information to properly assess a company’s prospects. The level of GHG emissions can affect the company’s prospects due to changing consumer preferences and stricter regulations around greenhouse gas emissions such as carbon pricing mechanisms in certain industries and markets. Reporting of GHG emissions must be based on the Greenhouse Gas Protocol Corporate Standard, unless other legislation on GHG emissions reporting is applicable, aiming to avoid duplicative reporting. 

With regard to the reporting of scope 3 GHG emissions, all 15 categories of the Greenhouse Gas Protocol Corporate Standard must be considered and assessed depending on their materiality. This includes upstream and downstream emissions reaching from the purchase of goods and services to transport, franchises, waste generation and end-of-life treatment of sold products. In the event that one of those categories is not assessed as material, an explanation as to how the company has come to this conclusion can be incorporated in the report. In addition, information on a company’s financed emissions must be included in the reporting of scope 3 GHG emissions. This refers to activities associated with asset management, commercial banking and insurance. The standard entails detailed lists on the disclosure of emissions for all three activities. 

As a relief for companies, scope 3 emissions reporting is not mandatory in the first year of reporting and information obtained from companies along the value chain can be reported with a different reporting cycle. In addition, the ISSB will provide further guidance on scope 3 emissions reporting to facilitate the prioritization of data inputs.  

6. Do Companies Have To Set Climate-Related Targets?

It is important to highlight that IFRS S2 does not require companies to set climate-related targets or introduce a transition plan. The standard does however ask companies to disclose on climate-related targets that have already been set and those that a company is required to meet based on laws and regulations in a certain jurisdiction.

This entails information on:

• The way the company sets its targets,
• The measurement and monitoring of these targets and
• Its performance against each target, including the use of carbon credits.

When disclosing the way in which climate-related targets have been set, the company must also explain how the latest international agreement on climate change (currently the Paris Agreement) has informed the setting of these targets.

7. What Industry Specific Information Must Be Included In The Report?

In addition to the cross-industry requirements explained above, companies are furthermore required to report information that is specific to a certain activity or business model. This aims to reduce the costs of unnecessary information for companies while at the same time providing more comparable and relevant details for investors. For the time being, IFRS S2 however only provides guidance for the reporting of industry-specific information rather than requirements, with the intention to make this type of reporting mandatory in the future. The Accompanying Guidance Document developed by ISSB provides non-comprehensive information on the application and implementation of industry-specific parameters.

8. What Relief Does IFRS S2 Provide?

In order to phase-in the reporting process, IFRS S1 and S2 entail a number of relief measures. IFRS S1 states that in the first year of reporting, companies only need to report on their climate-related risks and opportunities. This however does not mean that IFRS S1 should be disregarded in the first year of reporting, since it contains many of the general requirements that are necessary for the correct reporting of climate-related risks and opportunities under IFRS S2. It also provides for further general relief measures such as the relief regarding commercially sensitive information. Further measures embedded in IFRS S2 concern the possibility to provide qualitative rather than quantitative climate information under certain circumstances and the requirement to only provide reasonable information that is available without undue cost or effort.

9. What To Expect Next In The Field Of Climate-Related Disclosures?

The International Organization of Securities Commissions (IOSCO), a leading international regulatory forum, announced its endorsement of the IFRS Sustainability Standards on 25 July 2023, calling on its 130 member states to facilitate application of the standards and consider their incorporation into their own regulatory frameworks. Therefore, not only companies reporting under the IFRS Sustainability Standards, but everyone conducting business in any of the mentioned jurisdictions is advised to closely monitor the development of further voluntary and mandatory reporting requirements.

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