On June 26, 2023, the International Sustainability Standards Board (ISSB) announced the official launch of its new global sustainability and climate disclosure standards (IFRS S1 and IFRS S2). A key purpose of the new standards is to create a global common language in how companies report their sustainability and climate risks and opportunities to provide decision useful information to investors. The standards incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and consolidate the requirements of SASB and several other leading sustainability reporting frameworks. These standards are expected to be used by regulators around the world to inform their sustainability and climate risk reporting requirements.
In this blog, we provide an overview of the S1 and S2 standards, when they take effect, how these standards are likely to impact Canadian publicly traded and privately held companies, and how companies should start preparing today.
IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information
S1 is the ISSB’s foundational document that sets out general requirements for a company to disclose material information about its sustainability-related risks and opportunities that is decision-useful to investors. This includes all matters that could reasonably be expected to affect the company’s financial prospects, including its cash flows, access to finance, or cost of capital over the short, medium, or long term. According to IFRS Accounting Standards, information is considered material if “omitting, misstating or obscuring it could reasonably be expected to influence investor decisions”.
S1 applies the TCFD framework (i.e., governance, strategy, risk management, metrics and targets) and requires industry-specific disclosures. S1 indicates that the SASB standards must be used as a key resource to help companies identify material topics for their sector and which information should be disclosed, but a company may also consider other additional relevant resources.
The disclosures are to be prepared for the same reporting entity and reporting period as the related financial statements, including being issued at the same time and including data and assumptions that are consistent with the corresponding financial statements.
IFRS S2 Climate-Related Disclosures
S2 is the standard focused on climate-related disclosures. It requires the disclosure of material information about climate-related risks and opportunities, including physical risks (e.g., extreme weather and chronic climate change impacts) and transition risks (e.g., changes to policy, technology, and markets) to meet investor needs. It fully incorporates the TCFD recommendations and requires industry-specific disclosures. S2 points to the SASB Standards to assist companies in identifying industry-specific metrics.
The climate-related information disclosed should enable investors to determine the effects of climate-related risks and opportunities on the company’s performance and prospects, understand the company’s strategy for managing its climate related risks and opportunities, including its climate related transition planning, evaluate the company’s ability to adapt its planning, business model and operations, and understand the risks and opportunities in a company’s value chain.
To help investors understand the implications of climate change on strategy and business model, S2 requires companies to use scenario analysis to assess the company’s resilience to climate-related change over the short, medium and long term. S2 does not specify which scenarios are to be used and includes application guidance on how to conduct scenario analysis building on the TCFD guidance. The scenario analysis should be commensurate with a company’s circumstances, climate exposure, and capacity – meaning that qualitative scenario analysis may be appropriate for some companies while more complex quantitative scenario analysis may be indicated for others.
The standard requires the disclosure of the company’s absolute Scope 1, 2, and 3 greenhouse gas (GHG) emissions. Scope 1 are the company’s direct emissions. Scope 2 are the indirect emissions from the generation of purchased energy consumed by the company and Scope 3 are all other indirect emissions that occur in the company’s value chain. These emissions should be measured in accordance wit the GHG Protocol Corporate Standard.
When do the Standards Take Effect and Is there Relief?
The IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after January 1, 2024, with first disclosures occurring in 2025. The IFRS provides relief for the first year of application, whereby companies can limit their disclosure to climate-related information only. Scope 3 disclosure is also not required for the first year.
It should be noted that IFRS S1 and S2 are voluntary standards – not rules or regulations. However, many regulators around the world will reference these standards or versions of them in their upcoming reporting rules and regulations.
How will these standards impact publicly traded companies in Canada?
On July 5, 2023, the Canadian Securities Administrator (CSA) welcomed the publication of the ISSB IFRS S1 and S2 disclosure standards. CSA staff intend to conduct further consultations to adopt disclosure standards based on the ISSB standards, with “modifications considered necessary and appropriate in the Canadian context”. CSA stated that a further update will follow in the coming months.
We suspect that CSA may be waiting to see what the U.S. Securities and Exchange Commission (SEC) decides to do with respect to their climate-related disclosure rules, which are expected to be released this fall.
In short, climate-related disclosure rules for Canadian publicly traded companies will be issued soon. To stay ahead of your competition, publicly traded companies should be preparing now for disclosures, including identifying and assessing their material climate-related risks and opportunities and quantifying their GHG emissions, including their Scope 3 (value chain emissions).
How will these standards impact privately held companies in Canada?
Privately held companies in the value chain of reporting companies are expected to be impacted by these global standards because reporting companies are required to disclose their value chain/Scope 3 emissions. In other words, reporting company Scope 3 emissions are the Scope 1 and 2 emissions of companies in the value chain. So privately held companies may be asked to disclose their GHG emissions to win work from reporting companies. As such, privately held companies should prepare by quantifying their GHG emissions.
Achieve Sustainability Can Help!
Reach out and let us help you get prepared for sustainability and climate disclosures. We can assist with executive education, gap analysis, materiality assessments, GHG emission inventories, climate risk assessments, and reporting. Sign up here for a complimentary consultation.