IFRS 18 Sustainability Reporting Just Behind Your Door

Two newest standards, IFRS S1 and IFRS S2, were published in June 2023.

#1 When should we all apply IFRS S1 and IFRS S2?

Both standards are mandatorily applicable for annual reporting periods beginning on or after 1 January 2024.

It practically means that you need to have the appropriate processes in place to monitor and gather all the data you need to provide, so that you can actually start gather the data from 1 January 2024.

Therefore, the first report with incorporating information related to IFRS S1 and IFRS S2 will be published sometime in 2025, related to the year 2024.

#2 What about comparatives?

The good news is that NO, you do not have to present comparative information in the first annual financial statements, that would be related to the period before the date of initial application. So, no worries about monitoring and gathering data in 2023.

Of course, if you do that voluntarily, that’s OK, you can present it.

#3 Can you apply sustainability standards earlier than in 2024?

Yes, of course, provided that you apply both of them at the same time.

#4 Is there any relief in reporting?

Yes, a bit. You need to provide the disclosures on climate-related risks in the first place, in accordance with IFRS S2.

If you cannot disclose all the related disclosures in accordance with IFRS S1, then you do not need to do so, but only in the first annual reporting period when you apply the standards.

However, in these first annual financial statements with sustainability disclosures, you need to disclose the climate-related disclosures at minimum and then also state that you applied transition relief.

So, what is IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information about?

As its title says, it is about the general requirements for disclosure of sustainability-related financial information.

As a result, you will not find any specific rules for the disclosures, because IFRS S1 serves as a framework for your reporting.

It is something like the equivalent of IAS 1, IAS 8 or Conceptual Framework in IFRS.
In other words, it is YOU (or the related company) who shall develop its own sustainability disclosures and IFRS S1 just gives you guidance for doing so.

#1 Which information should you provide?

Not ALL possible. That would be time and cost demanding, and not very useful.

Instead, you should provide only material information about sustainability-related risks and opportunities that can affect your (entity’s) cash flows, access to finance or cost of capital, etc. Also, please note the focus on “material” – that is, the one that can affect the decisions of the users of your financial statements.

#2 Where should you report sustainability-related information?

Directly in the general-purpose financial reports, for example in the management commentary, annual reports, etc..

And, make it all connected to these financial statements. It means using the same assumptions and estimates, using the same presentation currency, providing the connections between the information on sustainability and financials, etc.

#3 So what’s the process?

The process of developing your IFRS S1 disclosures has two basic steps:

Step 1: Identify which risks and opportunities you will report on
Here, IFRS S1 does not tell you which specific risks and opportunities you need to report on. Instead, it primarily refers you to SASB standards, but you can use the other guidance, too.

SASB standards are developed by The Sustainability Accounting Standards Board (hence the abbreviation SASB) and they are industry-specific. Currently, there are 77 different SASB standards for 77 different industries, so what you need to do is to use the SASB standard applicable for your own industry. For example, if you work for internet media & services organization, then you just apply the SASB standard for that industry. You can download these standards from SASB website at no cost.

Step 2: Identify applicable disclosure requirements
Once you identified what you are going to report about, you need to identify what information you are going to provide about it.

Your information must be relevant, true and should include the disclosures about governance of that risk, the strategy used to manage risks and opportunities, risk management and different metrics and targets.

And then, of course, you need to gather the relevant data.

#4 How much will this cost us?

Of course, the total costs of gathering data in line with IFRS S1 will depend on the specifics of your company, but let me give you the estimate.

According estimates made by AI, companies with turnover of USD20 million can expect to incur costs in the range of USD10,000 to USD100,000 annually, just to meet the requirements of IFRS S1.

Climate-related disclosures as arranged by IFRS S2 affect literally every single company without exception. IFRS S1and IFRS S2 function as one package. They are intertwined, working together and you need to apply both requirements in IFRS S1 and IFRS S2.

#1 What is IFRS S2 about?

IFRS S2 requires you to disclose material information about climate-related risks, more specifically:

• Physical risks, such as the risks resulting from severity of extreme weather, and
• Transition risks, for example those associated with policy action and changes in technology, that can affect how a company can run its business in a future.

Also, you need to provide information about climate-related opportunities. Unlike risks, those are potential positive effects of climate change for a company, for example, adoption of low-emission energy sources, development of new products and services, etc. All this information is important for investor to understand how the company is affected by the climate change.

#2 How and where should you provide the information in line with IFRS S2?

This is arranged by the general standard IFRS S1. In short, you should provide only relevant and material information that affect YOUR company. Not all of it. And, you should definitely provide this information in the general-purpose financial report, together with and at the same time as the financial statements.

#3 What are the key disclosures of IFRS S2?

The company needs to disclose the information in two main categories:

1. Strategy, governance and risk management specifically related to climate:
   • Strategy and decision making;
   • Current and anticipated financial effects;
   • Climate resilience (please see more about it below)
2. Metrics and targets related to climate:
   • GHG emissions Scope 1 to Scope 3 (see more about it below)
   • Industry-based disclosures
   • Climate-related targets.

#4 What is climate resilience?

This is the resilience of company’s strategy and business model to climate-related changes, developments and uncertainties.

Here, you would need to use climate-related scenario analysis to form your disclosures about climate resilience, but IFRS S2 does not tell you WHICH scenarios you should use.
So, that is up to individual company to select the appropriate type of scenario, but then you need to provide information what you have used, including your assumptions.

Just as an example, you can use the quantitative scenario narrative, or even complex statistical modelling. IFRS S2 does require using a method for climate-related scenario analysis that is commensurate with company’s circumstances. To select this method, you are required to assess:

• The company’s exposure to climate-related risks and opportunities (the greater is exposure, the more precise or elaborate scenario analysis is required)
• The company’s skills, capabilities and the resources available for that scenario analysis

#5 What are GHG Emissions Scope 1 to 3?

GHG emissions are greenhouse gases emissions.
You are required to disclose the information about both direct and indirect emissions; in three scopes:

• Scope 1: Direct emissions
• Scope 2: Indirect emissions from the generation of purchased energy consumed by the company
• Scope 3: All other indirect emissions that occur in the company’s value chain – here, 15 categories of these emissions are listed.

A company should apply GHG Protocol Corporate Standard.
If you are using different method, you can apply it in the first year of reporting under S2, but then you should switch to GHG Protocol Corporate Standard.

#6 Why does IFRS S2 apply to every single company?

Even if your company is NOT producing direct emissions, you need to report on the indirect emissions, too. So, are you purchasing electricity? From which sources? If it is not purely green energy, then you need to calculate indirect emissions caused by your purchases. Of course, IFRS S2 is not just about emissions, but this is just one example of how it might affect your company.

#7 Working in a bank or other financial institution? Then watch out:

One of the categories of Scope 3 emissions are so-called financed emissions – those are emissions that banks and investors finance through their loans and investments.
For example, if you work in a bank which provided a loan to another company generating emissions, this bank needs to include emissions generated by its borrower as Scope 3 GHG emissions in their sustainability report.

As you can see, the bank then needs to gather the information about indirect emissions generated by its borrowers.

#8 What are industry-specific requirements?

IFRS S2 requires reporting on certain industry-based metrics that are associated with common business models and activities within specific industry.

You can find detailed information about the specific industries in a document “Industry-based guidance on implementing IFRS S2 Climate-related disclosures”.

The guidance is indeed extensive – on more than 500 pages, you can find the specifics about financials sector, consumer goods sector, services sector, etc.

#9 When should you apply IFRS S2?

Both IFRS S1 and IFRS S2 are mandatorily applicable for annual reporting periods beginning on or after 1 January 2024. So, I just hope that you have your monitoring processes for gathering data in place.

How can Astria help?

Astria can assist you in implementing new accounting standards such as IFRS S1 and S2 as we stay on top of regulatory changes and updates, providing clients with up-to-date guidance and ensuring that their financial reporting practices remain compliant and efficient.

To learn more about how we can help you leverage the opportunities in Singapore, contact us today and speak with one of our experts.