February 27, 2024
Five-Minute Brief: How to Prepare for IFRS S1 and S2
Canada to launch proposed Canadian Sustainability Disclosure Standards in March 2024
In June 2023, the International Sustainability Standards Board (ISSB) issued its first two IFRS Sustainability Disclosure Standards, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. Jurisdictions around the world are currently consulting on the standards and some have begun to adopt them formally into their legal and regulatory frameworks.
The Canadian Sustainability Standards Board (CSSB) was formed that same month to advance the adoption of these standards in Canada. The CSSB will now issue drafts of the proposed Canadian standards with Canadian-specific modifications for public consultation in March 2024, including an effective date and proposed transition relief measures. These measures will likely follow those provided in IFRS S1 and S2, which means the Canadian Sustainability Disclosure Standard on Climate-related Disclosures (also known as CSDS 2) may be required reporting in 2026 for the 2025 financial year.
Q+P was at the IFRS Sustainability Symposium 2024 in New York City last week and engaged with companies, investors and regulators to discuss how best to advance consistent, comparable and reliable sustainability and climate disclosures that are better connected with financial reporting.
How You Can Prepare
Q+P has been advising our clients on the forthcoming IFRS S1 and S2 Standards since the drafts were released two years ago. When the final Standards were issued, we immediately began conducting IFRS S1 and S2 gap assessments to provide our clients with tangible actions they can take to prepare.
Publicly listed companies need to start preparing now. We also strongly recommend disclosing on a voluntary basis prior to the mandatory requirements coming into effect.
Here are three steps to take immediately:
1. Perform an IFRS S1 and S2 Gap Assessment and Develop a Roadmap
Gap assessments and roadmaps reveal how existing disclosures compare to IFRS S1 and S2 requirements and provide clear direction on pragmatic, stepwise actions to begin preparing immediately.
We find that companies tend to be more aligned with IFRS S2 requirements, especially if they have already identified their climate risks and opportunities and aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and Sustainability Accounting Standards Board (SASB) Standards. High-effort initiatives for closing IFRS S2 gaps typically relate to assessing the effects of climate risks and opportunities on a company’s financial position, performance and cash flows, and describing the resilience of the business model, strategy and value chain accordingly.
Companies should begin preparing for IFRS S2 by incorporating existing climate disclosures into upcoming Annual Reports. The disclosure should include a clear narrative describing how the climate risks and opportunities impact the company’s business model and inform its strategic decision-making and begin describing the financial impacts of climate-related risks and opportunities.
2. Conduct Materiality Assessments Aligned with IFRS S1 and S2
Identifying and understanding material sustainability and climate risks and opportunities is a pre-requisite to disclosing on many IFRS S1 and S2 requirements. Following the gap assessment, companies should assess the financial materiality of identified risks and opportunities, evaluate which areas of the business may be most affected and discern if those impacts are likely in the short, medium and long-term. IFRS S1 does not specify thresholds for materiality or predetermine what would be material in a particular situation. Materiality judgments are therefore company-specific, requiring input from those who are closest to the users of the company’s financial information. We find that is typically those responsible for investor relations, risk, finance, internal audit and legal matters.
3. Review and Update Existing Governance Structures
Historically, oversight for sustainability and climate has been assigned to either the Board of Directors or Board-level committees such as the Nominating and Governance Committee, Risk Committee or Human Resources Committee. We see this evolving to the Board Audit Committee as it requires oversight of and expertise in complex measurement and disclosures on financial position, performance and cash flows.
Disclosing sustainability information alongside financial reporting will mean shifting accountability for sustainability and climate information to Chief Financial Officers and their teams. The finance team has the skills and experience to develop robust processes and controls and can help connect the business operations, data flows and forward-looking impacts to support high quality sustainability and climate disclosures.
Companies should begin collaborating internally and ensure affected individuals and teams are building capacity to measure, monitor and assess sustainability and climate information. To do so, we expect to see the creation of new roles and responsibilities, such as a Sustainability Controller and Sustainability Financial Reporting Policy.
How Q+P Can Help
Our experienced team has been advising clients on preparing high-quality disclosures for over a decade and has been actively working with our clients on the IFRS Sustainability Disclosure Standards since their inception. We have proven IFRS Gap Assessment tools that we tailor for our clients’ specific needs and a pragmatic approach to assessing financial sustainability and climate materiality. We also provide innovative approaches to double materiality that address both IFRS Sustainability and Corporate Sustainability Reporting Directive (CSRD) requirements.
If you are ready to start, please get in touch.
Please refer to our Five-Minute Brief from March 2023 for background information on the IFRS Standards.