S1 Business and Sustainability Reporting (International)

A. Sustainability reporting: the IFRS Sustainability Disclosure Standards

IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information requires an entity to disclose information about the sustainability-related risks and opportunities that could reasonably be expected to affect its prospects, meaning its cash flows, its access to finance and its cost of capital, over the short, medium and long term. IFRS S2 Climate-related Disclosures applies the same structure to climate-related risks and opportunities. The aim is information that is useful to the primary users of general purpose financial reports: investors, lenders and other creditors.

The disclosures follow four core areas. Governance covers the body or individual that oversees the risks and opportunities and management's role. Strategy covers the risks and opportunities, their effect on the business model, strategy and value chain, their financial effects on position, performance and cash flows, and the resilience of the strategy. Risk management covers how the risks are identified, assessed, prioritised and monitored, and whether this is integrated into overall risk management. Metrics and targets covers the measures used to assess performance and progress against targets.

Climate-related risks are physical (acute events such as floods, and chronic changes such as rising temperatures) or transition (policy and legal change, technology, market and reputation). Metrics under IFRS S2 include gross greenhouse gas emissions for Scope 1 (direct), Scope 2 (purchased energy) and Scope 3 (value chain), measured using the GHG Protocol, together with amounts or percentages of assets or business activities exposed to climate risks, capital deployed, internal carbon prices and links to remuneration.

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions of primary users. The sustainability information is reported for the same reporting entity as the financial statements, at the same time, and in a way that connects to those statements, so that users can see how, for example, a climate risk affects the impairment test, the useful lives of assets or provisions. An entity must not state compliance with the standards unless it complies with all of their requirements, and it can use proportionality relief for items such as the estimates of financial effects where it lacks the skills or resources.

Worked figures

Scope 1 emissions are 12,000 tonnes of CO2e, Scope 2 are 8,000 tonnes and Scope 3 are 80,000 tonnes. Revenue is $200 million. Total emissions are 100,000 tonnes and the intensity is 100,000 / 200 = 500 tonnes per $ million of revenue. Scope 1 and 2 together are 20 percent of the total, so a plan that looks only at the entity's own operations ignores 80 percent of the footprint.

Key terms

• Primary users: Existing and potential investors, lenders and other creditors.
• Physical risk: Risk from acute events or chronic changes in the climate.
• Transition risk: Risk arising from the move to a lower carbon economy.
• Scope 3 emissions: Indirect emissions in the value chain, other than purchased energy.

Study tip: Name the four pillars and then apply each to the facts. Marks go for linking the risk to the effect on cash flows, not for listing the headings.

Practice questions for section A

B. Frameworks, assurance and strategic advice

Other frameworks exist alongside IFRS S1 and S2, for example the GRI Standards for impacts on the economy, environment and people (an impact view), the European Sustainability Reporting Standards, which use double materiality (impact and financial), the TCFD recommendations that IFRS S2 builds on, and integrated reporting. Be ready to explain the difference between financial materiality (what affects the entity's value) and impact materiality (what the entity does to people and the environment), and why a group operating in several jurisdictions may need to report under more than one framework.

Strategic advice includes helping the board to identify which risks and opportunities are significant, to consider how they connect to the financial statements, to build reliable data systems and controls for the information, to set credible targets and to avoid greenwashing, which is making unsupported or misleading claims. Reporting needs controls as strong as those for financial data, and users value assurance, which may be limited or reasonable.

The usefulness of sustainability information depends on the same qualitative characteristics as financial information: relevance, faithful representation, comparability, verifiability, timeliness and understandability. Forward-looking information involves estimates and uncertainty, so disclose the assumptions and the range of outcomes.

Key terms

• Double materiality: Materiality that considers both the effect on the entity and the entity's impact on people and the environment.
• Greenwashing: Misleading or unsupported claims about environmental performance.

Study tip: If asked to advise, give the board a clear recommendation and name the controls that make the data reliable.

C. Judgement, uncertainty and ethics

Judgement and uncertainty affect many numbers: expected credit losses, impairment, fair value, provisions, useful lives, deferred tax assets, climate risks in estimates and going concern. In an answer, state the judgement, the information used, the sensitivity to changing the assumption, the disclosure needed under the standard on estimates and judgements, and any bias that management may have, for example a wish to meet a target or a loan covenant.

Ethical behaviour covers integrity, objectivity, professional competence and due care, confidentiality and professional behaviour, and the threats of self-interest, self-review, advocacy, familiarity and intimidation. In Section A, 8 of the 50 marks are for ethics, so identify the issue, name the principle, say who is affected, and give a specific action: document, discuss with those charged with governance, seek advice and, if not resolved, consider whether to continue.

Professional skills carry 6 marks of Section A and are marked in the other questions too. Use the format that is asked, make a clear recommendation, challenge the information given and show that you understand the commercial setting.

Key terms

• Estimation uncertainty: The risk that an estimate needs a material adjustment in the next period.
• Management bias: A lack of neutrality in the preparation of information.

Study tip: For every judgement, say which way management would like the number to go and why.

Practice questions for section C