The future of annual reporting: general and climate-related disclosures

Endorsement of the new ISSB standards is due early next year. We provide insight into the proposed requirements.

The International Sustainability Standards Board (ISSB) issued its first two sustainability reporting standards in June 2023. Their aim is to “set a global baseline to enable companies to provide information about sustainability-related risks and opportunities that is useful for investors’ decision-making”, says the ISSB.

The first standard, IFRS S1, outlines the general requirements for disclosing sustainability-related financial information. It emphasis the identification and disclosure of material sustainability-related risks and opportunities that could impact the entity’s prospects in the short, medium, and long term.

The second standard, IFRS S2, focuses specifically on climate-related disclosures and is to be applied in conjunction with IFRS S1.

Both standards will be effective for annual reporting periods starting on or after 1 January 2024, with the possibility of early adoption. There are transition reliefs available when applying the standards for the first time, including the choice to report only on climate-related risks and opportunities under IFRS S2 in the first year.

But note that the standards are still subject to endorsement by local jurisdictions. The UK Government announced in May that it will make endorsed standards available in the first quarter of 2025.

The specific companies that will be subject to mandatory reporting requirements are yet to be confirmed. They are expected to be public entities, large entities, and those which prepare their financial statements under International Financial Reporting Standards (IFRS). This will be clarified on endorsement.

What are the core contents?

The reporting standards require a company to provide disclosures about:

Governance — the governance processes, controls and procedures used to monitor, manage and oversee sustainability and climate-related risks and opportunities
Strategy — the approach taken to manage sustainability and climate-related risks and opportunities that could impact the company’s prospects, business model and value chain
Risk management — the processes used to identify, assess, prioritise and monitor sustainability and climate-related risks and opportunities
Metrics and targets — the metrics and targets used to measure and monitor the company’s performance in relation to sustainability and climate-related risks and opportunities, including progress towards any company-set and mandated targets.

For IFRS S2, there are required disclosures in relation to the following cross-industry metric categories:

Greenhouse gasses, such as:
- Total scope 1, 2 and 3 greenhouse gas emissions
- The approach used and the rational for the chosen method
- Location-based scope 2 emissions and information on relevant contractual instruments
- Categories within scope 3 emissions and additional information on category 15 emissions.

Measurement should be in line with the Greenhouse Gas Protocol (unless alternative methods are required by jurisdictional authorities or exchanges), and entities will also need to disaggregate emissions between the consolidated accounting group and other investees for scope 1 and scope 2 emissions.

Climate-related transition risks, physical risks and opportunities.
Capital deployment: provide information on the amount of capital expenditure, financing or investment deployed towards climate-related risk and opportunities.
Internal carbon prices: describe how the entity applies a carbon price in decision making and disclose the price of greenhouse gas emissions.
Remuneration: explain whether and how climate-related considerations are factored into executive remuneration and disclose the percentage of executive management remuneration recognised in the period.

These reporting standards aim to improve transparency and provide stakeholders with comprehensive information on companies’ sustainability and climate-related performance.

IFRS S1 requires disclosure of risks and opportunities that could have a significant impact and asks that companies identify and include the ‘material information’ related to those risks and opportunities.

In sustainability-related financial disclosures this refers to information that, if omitted, misstated or obscured, could reasonably influence the decisions made by users of the financial reports. This includes both financial statements and sustainability-related financial disclosures that provide information about a reporting entity.

The concept of materiality in the context of sustainability-related financial disclosures is relatively new and is expected to evolve over time. So each company should establish appropriate processes to make materiality judgements based on its specific circumstances.

Companies are required to provide sustainability-related financial disclosures together with their financial statements, covering the same reporting period. If a company changes the end of its reporting period and provides sustainability-related disclosures for a period longer or shorter that 12 months, it must provide a reason for using a different period and the fact that the disclosed amounts may not be entirely comparable.

If a company receives information about conditions that existed at the end of the reporting period but before the authorised issue date of the financial disclosures, it must update the relevant disclosures with that new information.

Where should the core content be disclosed?

Sustainability-related financial disclosures should be included in an entity’s general purpose financial reports. They can be incorporated into the management commentary if that is part of the financial reports.

Is comparative information required?

Yes, comparative information should be included for all disclosed amounts in the reporting period. Narrative and descriptive information should also be comparative if it helps users to understand sustainability-related financial disclosures. Material errors from a prior period should be corrected by restating comparative amounts, if possible.

The effects of climate-related matters on financial statements are becoming more important. Here are some examples.

IAS 1, Presentation of financial statements

IAS 1 emphasises the disclosure of the management’s judgements that have a significant impact on the amounts recognised in the financial statements. For climate-related matters, judgements and assumptions must also be disclosed.

IAS 1 also requires management to assess the company’s ability to continue as a going concern. Since climate-related risks may introduce significant judgements that affect that assessment, additional disclosures may be necessary if applicable.

IAS 36, Impairment of assets

IAS 36 requires impairment assessments when there are indicators suggesting that an asset may be impaired. Climate-related matters can serve as such indicators. For example, a decline in demand for products emitting greenhouse gases may indicate impairment, which would require the asset to be tested in this way.

IAS 2, Inventories

Climate-related issues can have an impact on both the selling price and the cost of inventory items. As a result, inventories may become obsolete, prices may decline, or there may be an increase in completion costs. So it’s crucial to consider these factors carefully to determine the net realisable value of inventories.

IAS 16, Property, plant and equipment and IAS 38, Intangible assets

Climate-related matters can significantly affect the useful lives and the residual values of intangible assets. If management revises its estimates of an asset’s useful life or residual value due to climate-related factors, the company must disclose the nature and amount of these changes.

IAS 12, Income taxes

Climatic factors could increase the level of uncertainty around future tax profits. As a result, a company wouldn’t be able to recognise deferred tax assets or would be required to reverse previous recognition of deferred tax assets.

How PKF can help

The new standards will have a significant impact on companies as they navigate the demand for transparency and accountability in these areas. PKF is well-positioned to support companies in meeting these standards through our expertise in sustainability reporting and climate risk assessment. We can provide guidance and assistance to ensure companies comply with the new requirements and effectively communicate their sustainability efforts to stakeholders.

For further information or guidance, please contact Nick Joel.