IFRS Climate-related disclosure
Companies’ relationships with the environment have become progressively more significant, with the impact of climate change resulting in greater and more pervasive risks for all entities and their activities. Entities may be exposed to various climate-related risks both directly, through their businesses as well as indirectly, through third parties such as suppliers and customers. Although climate change affects all economic sectors, the degree to which each entity is exposed, is likely to differ depending on sector, industry, and geography.
As a result, users of the general-purpose financial statements require ready and comparable information about an entity to better understand its attempt to manage climate-related risks, the results of its attempts to achieve climate-related performance targets and how it will adapt its business model in light of the need to reduce its ecological footprint.
In order to support the corporate reporting necessary to achieve this, the International Sustainability Standards Board (ISSB) was established and directed to initially focus its efforts on climate-related disclosures, while also working towards meeting the information required by investors on other sustainability-related risks and opportunities.
The ISSB has since its formation issued two exposure drafts focusing on sustainability-related disclosures and climate-related disclosures.
Quoting from the ED on climate-related disclosures, “The Exposure Draft would require an entity to provide information that enables users of general-purpose financial reporting to understand:
- governance—the governance processes, controls, and procedures an entity uses to monitor and manage climate-related risks and opportunities;
- strategy—the climate-related risks and opportunities that could enhance, threaten, or change an entity’s business model and strategy over the short, medium and long term,
- risk management—how climate-related risks and opportunities are identified, assessed, managed, and mitigated by an entity;
- metrics and targets—the metrics and targets used to manage and monitor an entity’s performance in relation to climate-related risks and opportunities, including:
- performance and outcome measures that support the qualitative disclosures across governance, risk management and strategy disclosure requirements; and
- targets that an entity uses to measure its performance goals related to significant climate-related risks and opportunities”
From the foregoing and the approach that the IFRS Foundation is taking in the crafting of the sustainability standards, it is evident that the requirements of the sustainability standards will have far reaching impact on the current corporate reporting landscape. As such, they should be given due consideration before their finalisation. The exposure drafts are open for comment until the 29th of July 2022.
