IFRS Foundation Issues Guide to Help Businesses Address Sustainability Risks and Opportunities
The International Sustainability Standards Board (ISSB), under the IFRS Foundation, has introduced a practical guide to help organisations identify and disclose material information about sustainability-related risks and opportunities. This initiative is designed to enhance transparency and provide critical insights for investors and capital markets, focusing on factors that could affect companies’ cash flows, access to finance, or cost of capital across different timeframes.
Key Aspects of the Guide:
- Clarity on Sustainability-Related Risks and Opportunities
The guide builds on IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, offering companies a structured way to understand how sustainability-related risks and opportunities emerge. These often stem from an organisation’s reliance on, or impact on, various resources and relationships — including human, financial, natural, and social capital — throughout its value chain. By recognising their dependencies and impacts, companies can better assess how these factors influence sustainability-related risks and opportunities that may affect their financial performance and long-term viability. - Integrated Thinking and Value Chain Perspective
A central theme of the guide is the concept of integrated thinking — an approach that emphasises the interconnected nature of a business, its stakeholders, and its external environment. Companies are encouraged to consider the broader social, economic, and environmental dynamics that influence their operations and value creation. - Alignment with IFRS Materiality Judgements
The guide aligns its materiality framework with the established process outlined in the IFRS Practice Statement 2: Making Materiality Judgements. This approach helps organisations streamline their sustainability-related disclosures, especially those already adhering to IFRS Accounting Standards in over 140 jurisdictions. By leveraging familiar processes, companies can seamlessly integrate sustainability considerations into their reporting practices. - Strengthening Connectivity Between Financial and Sustainability Reporting
The guide highlights the importance of aligning sustainability-related financial disclosures with a company’s financial statements. This integrated reporting approach offers a cohesive narrative, making it easier for investors and other stakeholders to assess performance and risks holistically. - Interoperability with Other Frameworks
Recognising the diversity of reporting requirements globally, the guide provides insights for aligning ISSB Standards with other frameworks such as the European Sustainability Reporting Standards (ESRS) and Global Reporting Initiative (GRI) Standards. This interoperability supports organisations in addressing the information needs of both investors and a broader set of stakeholders.
Definition of Material Information and Key Aspects of Disclosure
Aligning financial and sustainability disclosures has become a crucial factor in providing comprehensive and reliable data that can influence stakeholder decisions. One of the key elements of this alignment is a clear understanding of what constitutes "material information."
The IFRS Accounting Standards and IFRS Sustainability Disclosure Standards offer similar definitions, which helps improve the connection between different types of reporting. In this context, it is important to consider not only the common principles but also the distinctions in approaches that require separate analysis for financial and sustainability data.
Important Aspects of Disclosure:
1. Definition of Material Information
- IFRS Accounting Standards and IFRS Sustainability Disclosure Standards define material information in a similar manner:
- Information is material if omitting, misstating, or obscuring it could reasonably be expected to influence the decisions of primary users;
- Scope distinction:
- IFRS Accounting Standards focus on financial information.
- IFRS Sustainability Disclosure Standards include both financial and sustainability-related disclosures.
2. Connectivity Considerations
- Aligned definitions of material information across financial statements and sustainability disclosures improve connectivity between the two, allowing users to link financial and sustainability data more easily;
- The common definition ensures consistency and meets the information needs of primary users, such as stakeholders interested in both financial and sustainability information.
3. Distinct Materiality Judgements
- Different materiality judgements are required for:
- Sustainability disclosures and financial statements, due to distinct types of information and time horizons;
- For sustainability disclosures, materiality focuses on the impact of sustainability-related risks and opportunities on the entity’s future prospects.
4. Interoperability Considerations
- ISSB Standards use the term "material information" in the context of sustainability-related risks and opportunities, but do not directly refer to material risks or material opportunities;
- The absence of references to these terms does not imply that all sustainability-related risks or opportunities should be disclosed; only those that could impact the entity’s future prospects are required.
5. Materiality in Other Standards
- Other standards, such as ESRS (European Sustainability Reporting Standards) and GRI (Global Reporting Initiative), use terms like "material matters" or "material topics" to discuss the significance of risks, opportunities, and impacts;
- ISSB Standards do not use these specific terms, but the concept of materiality remains consistent across frameworks. If something is considered materially significant under one standard, it will likely be deemed material under another.
6. Materiality Assessment
- ISSB Standards do not explicitly require a "materiality assessment" to identify which sustainability topics to report on;
- While some other standards require a materiality assessment, the underlying principle of materiality remains the same in ISSB Standards, focusing on the potential impact of information on users' decisions.
Source: IFRS Guide: Sustainability-related Risks and Opportunities and the Disclosure of Material Information
Pioneering a Unified Approach
The guide reinforces the ISSB’s vision of establishing a global baseline for sustainability reporting, promoting greater transparency and consistency across markets. By adopting the principles of integrated thinking and aligning with established frameworks, businesses can enhance their ability to manage risks, seize opportunities, and build long-term value for investors and society.
This initiative marks a significant step forward in equipping companies to navigate the complexities of sustainability and strengthen trust within the global financial ecosystem.
