Global Sustainability Disclosure Standards Offer A Winning Strategy for Climate Transparency and Action
By Vishnupriya Chandramouli
From the devastating wildfires in Canada and Greece to the unprecedented heatwaves gripping much of the Northern Hemisphere and the catastrophic flooding that ravaged parts of Africa and Asia, the accelerating pace of extreme weather events is a stark reminder of the intensifying battle against climate change. But amidst the grim headlines, a significant development has emerged in the realm of sustainability: the June 2023 introduction of the International Sustainability Standards Board (ISSB)’s first global sustainability disclosure standards – IFRS S1 and IFRS S2. Similar to how International Financial Reporting Standards (IFRS) ensure consistency and transparency in financial reporting, these new standards aim to achieve the same for sustainability disclosures.
IFRS S1 General Requirements for Sustainability-related Financial Information establishes the foundation for sustainability reporting, outlining basic disclosures that impact a company’s financial performance and offer a holistic view of its sustainability posture. Complementing this foundation is IFRS S2 Climate-related Disclosures, the specific standard focuses on disclosing climate-related risks and opportunities. Similar to an annual report that provides a company’s overall performance, IFRS S1 paints a broad picture. IFRS S2, on the other hand, is analogous to a risk management report within that annual report. It zooms in on climate change, a key sustainability factor identified by IFRS S1, and prescribes disclosures on greenhouse gas emissions, climate-related targets and impacts of climate change on the company's business model and strategy.
If IFRS S1 sets the broad context, IFRS S2 focuses on four key pillars: governance, strategy, risk management, and metrics and targets, mirroring the recommendations established by the TCFD. But IFRS S2 truly breaks new ground in the realm of metrics and targets. Unlike previous standards, IFRS S2 demands a no-holds-barred look at a company's climate impact. Companies must unveil not just industry-specific metrics, but also cross-industry metrics, providing a more holistic view of their environmental footprint. It is like lifting the hood on a car — every source of emissions, from a company’s direct operations (Scope 1) to its entire supply chain (Scope 3 – accounting for about 75% of companies’ GHG emissions on average), is laid bare for scrutiny. Additionally, companies must disclose their use of carbon pricing in decision-making, including the specific price per tonne if applicable. For entities in asset management, banking or insurance, disclosures extend to financed emissions associated with their investments. Falling under Category 15 (Investments) of Scope 3 emissions as per the GHG protocol, these emissions represent the emissions associated with the investments a company makes, rather than the emissions directly generated by the company's own operations.
Notably, the standard acts as a powerful orchestrator, integrating seamlessly with established frameworks like TCFD, SASB, and the GHG Protocol. It also mandates companies to disclose their measurement approach, assumptions, and inputs used to calculate GHG emissions. In essence, it promotes transparency not just in what is reported, but also in how it is measured.
A vast swathe of companies will soon be subject to these new sustainability reporting requirements. Effective January 1, 2024, IFRS S1 and S2 apply to most companies already reporting under IFRS, a framework followed in more than 145 countries. This includes publicly traded companies and large private entities meeting specific criteria. However, individual countries and industries may determine the mandatory application of IFRS S2 and its companion standard, IFRS S1. While the specific implementation timeline varies, the momentum for climate transparency is undeniable. The UK, Malaysia, Hong Kong, Singapore, Australia, Canada, India, and Japan are actively considering adopting IFRS S1 and S2, a move that underscores the growing global importance of climate-related disclosures for companies.
Transparency is a cornerstone of environmental progress, but achieving real progress requires action. This is where net-zero certification, offered by organizations like the Global Network for Zero (GNFZ), takes the baton. We don't replace IFRS S2; we powerfully complement it. A key overlap between IFRS S2 requirements and net-zero certification lies in calculating and reporting Scope 1, 2, and 3 emissions. Both IFRS S2 and GNFZ leverage the Greenhouse Gas Protocol (GHG Protocol), a framework recognized by major regulatory bodies (also referenced in recent climate-related disclosure requirements, including ESRS and SEC rules), ensuring consistent and transparent climate disclosures. However, we must note that net-zero certifications go beyond disclosure, mandating science-based targets, action plans, and continuous progress towards net-zero.
IFRS S1 and S2 provide a powerful springboard for companies to excel in climate action and lead the low-carbon transition. By embracing transparency, robust action plans, data-driven decision-making, and stakeholder engagement, companies can build a thriving and sustainable future. Sustainability standards and net-zero certifications offer a clear path forward – credible reporting coupled with concrete actions demonstrate a genuine commitment to a sustainable future. Climate change is the defining challenge of our generation. The window for action is closing. The time is now to build a future where environmental sustainability underpins enduring prosperity.
Vishnupriya Chandramouli is an associate with the Global Network for Zero. With four years of diverse audit experience across manufacturing, banking, insurance and services sectors, she honed her financial acumen, leading her to pursue the ACCA qualification. Driven by a passion for driving sustainable growth and spreading awareness about ESG, she transitioned from a four-year audit career to focus on the intersection of finance and sustainability. As an ACCA member, she joined GNFZ to contribute to the development of innovative solutions at the forefront of net zero and climate reporting. Her role involves in-depth research, strategic analysis and close collaboration with the technical team to ensure GNFZ’s offerings align with the evolving regulatory landscape. Connect with Vishnupriya on LinkedIn.