Definition: Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
- Full Name: International Sustainability Standards Board (ISSB)
- Established: November 3, 2021, at the COP26 climate conference
- Goal: To create a global baseline for sustainability disclosure standards
- First Standards: Issued its first two standards in June 2023 (IFRS S1 and IFRS S2)
Purpose: To require companies to disclose material information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity's prospects, which effect on the entity's cash flows and its access to finance or cost of capital over the short, medium or long.
IFRS S1 required information relates to general aspects of how an entity operates, in particular:
| Area | Description |
|---|---|
| Governance | How the company oversees sustainability issues |
| Strategy | How these issues affect the company's business model and plans |
| Risk Management | The processes used to identify and manage risks |
| Metrics & Targets | Performance indicators and goals related to sustainability |
Purpose: To require disclosure of information about climate-related risks and opportunities that is useful to investors.
- Physical Risks: Risks from climate change (e.g., extreme weather, rising sea levels)
- Transition Risks: Risks from shifting to a lower-carbon economy (e.g., policy changes, new technologies)
IFRS S2 requires disclosure of GHG emissions broken down into:
| Scope | Description |
|---|---|
| Scope 1 | Direct GHG emissions that occur from sources that are owned or controlled by an entity |
| Scope 2 | Indirect GHG emissions from the generation of purchased electricity, steam, heating, and cooling |
| Scope 3 | Indirect GHG emissions (Not included in Scope 2) that occur in the value chain of an entity |
- Enables users to understand the governance framework used by an entity to monitor, manage and oversee such risks and opportunities
- Improves users' understanding of the strategy the entity is adopting to manage the risks and opportunities
- Helps users understand how climate-related risks and opportunities are integrated into the entity's overall risk management process
- Disclosure of metrics and targets enables users to understand the performance of an entity in relation to its climate-related risks and opportunities and whether targets are being met
Question 1: Describe the scope and objectives of the general disclosures required by IFRS S2 Climate-related Disclosures.
Answer: The objective of IFRS S2 - Climate-related Disclosures - is for an entity to disclose information about its climate-related risks and opportunities which is useful to primary users of general purpose financial reports in making decisions relating to providing resources to the entity. These are the risks and opportunities which could reasonably affect the entity's prospects.
IFRS S2 requires disclosure of:
- The climate-related risks to which an entity is exposed
- Climate-related opportunities available to the entity
Risk Categories:
- Physical risks: Those which are driven by events or arise as a result of long-term shifts in climatic patterns.
- Transition risks: Those arising from a move toward a lower-carbon economy.
Those risks and opportunities which are unlikely to affect an entity's prospects are outside the scope of the Standard.
Question 2: Explain the usefulness to external users of the financial statements of disclosing climate-related risks and opportunities.
Answer: Disclosing climate-related risks and opportunities provides several benefits to external users of financial statements:
- Enables users to understand the governance framework used by an entity to monitor, manage and oversee such risks and opportunities.
- Improves users' understanding of the strategy the entity is adopting to manage the risks and opportunities.
- Helps users understand how climate-related risks and opportunities are integrated into the entity's overall risk management process.
- Disclosure of metrics and targets enables users to understand the performance of an entity in relation to its climate-related risks and opportunities and whether targets are being met, whether set internally or by law or regulation.