Background and history

As the impact of climate change becomes more and more apparent, there is inevitably an increased focus on the extent to which corporate entities reconcile pursuit of their economic goals with the potential impact on the global environment. This naturally leads to a greater demand for the inclusion of ‘sustainability-related information’ in corporate reports generally, but particularly in those of large, listed entities.

Historically, the key focus of corporate reports was on the financial performance and position of the reporting entity. This is clearly borne out by the content of the IFRS Accounting Standards that have been issued to date by the International Accounting Standards Board (IASB) – under the oversight of the IFRS Foundation.

In recognition of the increasing call for corporate reports to include ‘sustainability content’ the IFRS Foundation created the International Sustainability Standards Board (ISSB) in November 2021. The avowed aim was to improve the consistency and quality of sustainability reporting across the globe, by matching the importance of sustainability reporting with existing financial reporting requirements. The ISSB sits alongside the IASB and is subject to the same oversight process as the IASB.

The work of the ISSB to date

The mandate of the ISSB is to create and develop IFRS Sustainability Disclosure Standards to meet investors' needs for sustainability reporting. The Sustainability Disclosure Standards provide a comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. These standards are then subject to the same mandating process that is currently applied to IFRS Accounting Standards that are issued by the IASB. Although the ISSB and IASB are separate and independent boards, they work alongside each other to enhance interconnectedness between financial reporting and sustainability reporting.

In June 2023, the ISSB issued its first two IFRS Sustainability Disclosure Standards:

• IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information: IFRS S1 provides the overarching framework for disclosing sustainability-related financial information. 
• IFRS S2 Climate-related Disclosures: IFRS S2 focuses on disclosures related to climate-related risks and opportunities. 

IFRS S1 – an outline

The main objective of IFRS S1 is to require disclosure of information about sustainability-related risks and opportunities that could reasonably be expected to affect a company’s prospects.

IFRS S1 provides the basic requirements for sustainability disclosures, which should be used with IFRS S2 as well as any future Sustainability Disclosure Standards that the ISSB releases. IFRS S1 requires disclosures under four key headings:

• Governance – the governance processes, controls and procedures the entity uses to monitor and manage sustainability-related risks and opportunities.
• Strategy – the approach the entity uses to manage sustainability-related risks and opportunities.
• Risk management – the processes the entity uses to identify, assess, prioritise and monitor sustainability-related risks and opportunities.
• Metrics and targets – the entity’s performance in relation to sustainability-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation.

IFRS S2 – an outline

IFRS S2 requires an entity to disclose information about climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term (collectively referred to as ‘climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects’).

IFRS S2 sets out the requirements for disclosing information about an entity’s climate-related risks and opportunities. IFRS S2 requires an entity to disclose information that enables users of general-purpose financial reports to understand:

• The governance processes, controls and procedures the entity uses to monitor, manage and oversee climate-related risks and opportunities.
• The entity’s strategy for managing climate-related risks and opportunities.
• The processes the entity uses to identify, assess, prioritise and monitor climate-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process; and
• The entity’s performance in relation to its climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation.

Applicability to future examinations for the Diploma in International Financial Reporting (DipIFR)

The current DipIFR syllabus contains two Learning Outcomes (LOs) relating to ‘sustainability issues’:

A1(e) – Explain the purpose and role of the International Sustainability Standards Board (ISSB^TM).

C8(a) – Regarding the IFRS Sustainability Disclosure Standards:

i) outline their scope, objectives and core content; and
ii) discuss the usefulness of disclosures of climate related risks and opportunities.

Given the nature of the two LOs in the DipIFR syllabus it is possible to envisage the inclusion of questions which contain one or more of the following elements:

• A discussion of the overall establishment of the ISSB and its place alongside the IASB under the oversight of the IFRS Foundation. This could conceivably include an appreciation of how the need for Sustainability Disclosure Standards has arisen.
• A discussion of the extent to which compliance with Sustainability Disclosure Standards could be mandated and how useful such disclosures are.
• An outline of the scope, objectives and core content of the two Sustainability Disclosure Standards issued to date.

It would not currently be the intention to expect DipIFR students to be aware of the detail of the IFRS S1 and S2 disclosure requirements. This is consistent with the approach taken to the issue of detailed disclosures required by IFRS Accounting Standards issued by the IASB.

Scenarios in the DipIFR exam may include references to sustainability and climate-related issues (eg an asset impairment required because of climate change), but the examination of the Sustainability Disclosure Standards themselves will be restricted to the scope of the related learning outcomes.

Written by a member of the DipIFR examining team