Conceptual Foundations
Shel
For sustainability-related financial information to be useful, it should be relevant and faithfully represent what it claims to represent. These are the fundamental qualities of useful sustainability-related financial information.
The usefulness of this information is improved if it is comparable, verifiable, timely, and understandable. These are additional qualities that enhance useful sustainability-related financial information.
Fair presentation requires disclosing relevant information about sustainability-related risks and opportunities that could reasonably be expected to affect the organisation’s prospects, and representing that information faithfully according to the principles in this standard. To achieve faithful representation, an organisation should provide a complete, neutral, and accurate description of those sustainability-related risks and opportunities.
Fair presentation also requires an organisation to:
- provide information that is comparable, verifiable, timely, and understandable; and
- provide additional information if following the specific requirements in IFRS SDS1 is not enough for users of general purpose financial reports to understand how sustainability-related risks and opportunities affect the organisation’s cash flows, access to finance, and cost of capital over the short, medium, and long term.
An organisation’s sustainability-related risks and opportunities come from its interactions with stakeholders, society, the economy and the natural environment throughout its value chain. These interactions, both direct and indirect, arise from how the organisation runs its business in pursuit of its strategic goals and from the external environment in which it operates. The organisation functions within an interconnected system, relying on various resources and relationships across its value chain to generate cash flows while also affecting those same resources and relationships through its activities and outputs. These effects can support the preservation and development of resources and relationships, or lead to their harm and decline. These dependencies and impacts can give rise to sustainability-related risks and opportunities that could reasonably be expected to affect the organisation’s cash flows, access to finance and cost of capital over the short, medium and long term.
For example, if an organisation’s business model depends on a natural resource like water, it can both affect and be affected by the quality, availability and cost of that resource. Specifically, if the resource is degraded or depleted, whether through the organisation’s own activities or other factors, this could disrupt operations, impact the organisation’s business model or strategy, and ultimately harm its financial performance and position. On the other hand, if the resource is preserved or regenerated, again whether through the organisation’s own actions or other factors, this could have a positive effect.
Similarly, if an organisation operates in a highly competitive market and relies on a specialised workforce to achieve its goals, its future success will likely depend on its ability to attract and keep that workforce. This ability partly depends on employment practices such as investment in employee training and wellbeing, as well as levels of employee satisfaction, engagement and retention. These examples show the close link between the value an organisation creates, preserves or reduces for others and its own ability to succeed and meet its objectives.
Resources and relationships that an organisation depends on and influences through its activities and outputs can take many forms, including natural, manufactured, intellectual, human, social or financial. These resources and relationships can be internal, such as the organisation’s workforce, expertise or internal processes, or external, such as the materials and services it needs to access, or its relationships with suppliers, distributors and customers. Additionally, resources and relationships include, but are not limited to, those recognised as assets in the organisation’s financial statements.
An organisation’s dependencies and impacts are not limited to the resources it uses directly or its direct relationships. They also include resources and relationships throughout the organisation’s value chain. For example, these can relate to the organisation’s supply and distribution channels, the effects of how its products are consumed and disposed of, and the organisation’s sources of finance and investments, including investments in associates and joint ventures. If the organisation’s business partners throughout its value chain face sustainability-related risks and opportunities, the organisation could also be exposed to the related consequences.
An organisation should use all reasonable and supportable information available to it at the reporting date without undue cost or effort:
- to identify the sustainability-related risks and opportunities that could reasonably be expected to affect the organisation’s prospects; and
- to determine the scope of its value chain, including its breadth and composition, in relation to each of those sustainability-related risks and opportunities.
Reasonable and supportable information used by an organisation in preparing its sustainability-related financial disclosures should cover factors specific to the organisation as well as general conditions in the external environment. In some cases, such as when identifying sustainability-related risks and opportunities that could reasonably be expected to affect the organisation’s prospects, reasonable and supportable information includes information about past events, current conditions, and forecasts of future conditions.
An organisation may use various sources of data that can be both internal and external. Possible data sources include the organisation’s risk management processes, industry and peer group experience, and external ratings, reports, and statistics. Information that the organisation uses in preparing its financial statements, operating its business model, setting its strategy, and managing its risks and opportunities is considered to be available to the organisation without undue cost or effort.
An organisation does not need to conduct an exhaustive search for information to identify sustainability-related risks and opportunities that could reasonably be expected to affect its prospects. The assessment of what counts as undue cost or effort depends on the organisation’s specific circumstances and requires a balanced consideration of the costs and efforts for the organisation and the benefits of the resulting information for primary users. This assessment can change over time as circumstances change.
Applying IFRS SDS, along with additional information when needed, is assumed to produce sustainability-related financial disclosures that achieve fair presentation.
An organisation should disclose material information about the sustainability-related risks and opportunities that could reasonably be expected to affect its prospects.
In sustainability-related financial disclosures, information is material if leaving it out, misstating it, or hiding it could reasonably be expected to affect the decisions that primary users of general purpose financial reports (financial statements and sustainability-related financial disclosures) make based on those reports.
These decisions include:
buying, selling, or holding shares (equity) and bonds (debt instruments);
providing or issuing loans and other forms of credit; or
using voting or influence rights to affect how the organisation’s management uses its economic resources.
These decisions depend on what returns primary users expect, such as dividends, loan repayments, interest, or rising market prices. These expectations are based on two key factors:
their estimate of the organisation’s future net cash inflows, including the amount, timing, and uncertainty; and
their evaluation of how well the organisation’s management and leadership (e.g., board or governing individuals) oversee its economic resources.
To determine if information could influence primary users’ decisions, two things need to be considered:
the characteristics of those users and what matters to them; and
the organization’s specific situation i.e. its unique context and circumstances.
Sustainability-related financial disclosures are prepared for primary users with reasonable knowledge of business and economic activities who diligently review and analyze information. Even well-informed users may sometimes require an adviser’s assistance to understand this sustainability-related financial information.
Different primary users often have varying, and sometimes competing, information needs and preferences. These needs can also change over time. Sustainability-related financial disclosures aim to address the shared information requirements of primary users.
Identifying material information
Materiality is a factor specific to each organisation that relates to the importance of information based on its nature, size, or both, within the context of the organisation’s sustainability-related financial disclosures.
Materiality assessments are unique to each organization. Because of this, the standard does not set fixed materiality thresholds or determine in advance what would be considered material in any specific case.
To identify material information about a sustainability-related risk or opportunity, an organisation should apply the requirements of the IFRS Sustainability Disclosure standard that specifically applies to that sustainability-related risk or opportunity. If no standard specifically applies, the organisation should apply the requirements on sources of guidance specified in general requirements. Those sources specify information, including metrics, that may be relevant to a particular sustainability-related risk or opportunity, to a particular industry or in specified circumstances.
When assessing materiality, an organisation should consider both quantitative and qualitative factors. For instance, the organisation might examine the size and nature of the impact of a sustainability-related risk or opportunity on the organisation.
Sometimes, IFRS SDS require organisations to disclose information about potential future events with uncertain results. When deciding if this information is material, an organisation should consider:
how these events might affect the amount, timing and uncertainty of the organisation’s future cash flows in the short, medium and long term (called ‘the possible outcome’); and
the range of possible outcomes and how likely each outcome is within that range.
When considering possible outcomes, an organisation should consider all pertinent facts and circumstances. Information about a possible future event is more likely to be judged as material if the potential effects are significant and the event is likely to occur. However, an organisation should also consider whether information about low-probability, high-impact outcomes might be material either individually or when combined with information about other similar outcomes.
For example, an organisation might face multiple sustainability-related risks that could each cause the same type of disruption, such as supply chain interruptions. Information about any single risk source may not be material if disruption from that specific source is highly unlikely. However, information about the combined risk of supply chain disruption from all sources might be material.
If a potential future event would impact an organisation’s cash flows but only many years later, this information is typically less likely to be considered material compared to a similar event with nearer-term effects. However, in certain cases, information may still influence primary users’ decisions regardless of the event’s potential impact size or timing. For instance, this could occur when information about a specific sustainability-related risk or opportunity receives significant attention from users of the organisation’s general purpose financial reports.
An organisation should disclose additional information when meeting the specific requirements of an IFRS SDS does not sufficiently explain to users how sustainability-related risks and opportunities impact the organisation’s cash flows, its access to finance, and its cost of capital across short, medium and long-term periods.
An organisation should clearly identify its sustainability-related financial disclosures and separate them from other information it provides. An organisation shall not hide important information. Information is considered hidden if it is presented in a way that would be as misleading to primary users as leaving it out or stating it incorrectly. Situations where important information might become hidden include:
- failing to clearly separate important information from less important details;
- including important information in the disclosures but using unclear wording;
- spreading important details about a sustainability-related risk or opportunity throughout different parts of the disclosures;
- combining unrelated items of information together;
- separating similar items of information unnecessarily; and
- making the disclosures hard to understand by burying important information in less important details to the point where primary users cannot identify what matters.
An organisation should review its materiality assessments at every reporting date to account for changes in circumstances and assumptions. Due to shifts in the organisation’s situation or external environment, some information included in previous sustainability reports may no longer be material. On the other hand, some information not previously disclosed may become material.
Aggregation and disaggregation
An organisation applying IFRS SDS should evaluate all relevant facts and circumstances to determine how to group or separate information in its sustainability-related financial disclosures. The organisation should not make its disclosures harder to understand by mixing important information with unimportant details or combining unrelated items of important information.
An organisation should not combine information if this would obscure important details. Information should be grouped together when items share common features and should not be grouped when they do not. The organisation may need to separate information about sustainability-related risks and opportunities, such as by geographic region or based on geopolitical factors. For instance, to prevent important information from being hidden, an organisation might need to break down its water usage data to show separately water taken from plentiful sources versus water taken from areas experiencing water shortages.
Interaction with law or regulation
Laws or regulations may require an organisation to include certain sustainability-related information in its general purpose financial reports. In these cases, the organisation may include this legally required information in its sustainability-related financial disclosures even if the information isn’t material. However, this legally required information must not hide or make any material information unclear.
An organisation should disclose material sustainability-related financial information, even if laws or regulations allow the organisation not to disclose it.
An organisation is not required to disclose information mandated by an IFRS SDS if laws or regulations prohibit its disclosure. When an organisation omits material information for this reason, it should specify what type of information was not disclosed and state the legal basis for this omission.
Commercially sensitive information
An organisation may omit commercially sensitive information about a sustainability-related opportunity from its sustainability-related financial disclosures in limited situations such as:
the sustainability-related opportunity information isn’t publicly available;
disclosing it would likely seriously harm potential economic benefits from pursuing the opportunity; and
the organisation confirms it’s impossible to disclose the information (for example, at an aggregated level) in a way that would both meet disclosure objectives and avoid seriously harming those economic benefits.
This exception applies even when the information would otherwise be required by an IFRS SDS and would normally be considered material.
For each piece of omitted information, the organisation should state that it has used the exemption and re-evaluate at every reporting date whether the information still qualifies for exemption.
Exemptions should not be used for sustainability-related risks or as justification for widespread omission of sustainability-related financial information.
Sustainability-related financial disclosures should be for the same reporting organisation as the related financial statements.
For instance, when consolidated financial statements are prepared under IFRS Accounting Standards, they report on both the parent company and its subsidiaries as one unified organisation. Therefore, these sustainability disclosures must allow users of general purpose financial reports to assess how sustainability-related risks and opportunities impact cash flows, access to financing and cost of capital , for both the parent company and its subsidiaries across short-term, medium-term and long-term periods.
An organisation should provide information in a way that helps users of general purpose financial reports understand:
the connections between the items the information relates to, such as connections between different sustainability-related risks and opportunities that could reasonably be expected to affect the organisation’s prospects; and
the connections between disclosures made by the organisation:
within its sustainability-related financial disclosures, such as connections between information on governance, strategy, risk management, and metrics and targets; and
across its sustainability-related financial disclosures and other general purpose financial reports published by the organisation, such as its related financial statements.
An organisation should identify the financial statements that the sustainability-related financial disclosures relate to.
Connected information helps show relationships between relevant items. For example:
if an organisation pursued a sustainability-related opportunity that increased its revenue, connected information would show how its strategy affected financial performance;
if an organisation identified a trade-off between two sustainability-related risks and acted based on that assessment, connected information would show how those risks influenced its strategy;
if an organisation committed to a sustainability-related target that hasn’t yet impacted its financial position or performance, connected information would still show this relationship.
explaining how the combined impact of an organisation’s sustainability-related risks, opportunities, and strategy affects its financial position, performance, and cash flows in the short, medium, and long term. For instance, if declining demand for its products occurs due to consumer preference for low-carbon alternatives, the organisation may need to clarify how its strategic response (such as closing a major facility) would impact employees, local communities, asset useful lives, and impairment assessments.
describing alternative strategies the organisation considered when addressing sustainability-related risks and opportunities, including trade-offs evaluated. For example, the organisation might need to explain how operational restructuring in response to a sustainability risk could change the size and structure of its workforce.
Connected information covers:
links between different details about a sustainability-related risk or opportunity, including:
- connections between governance, strategy and risk management disclosures; and
- connections between written explanations and numerical data covering related metrics, targets, and financial statement information.
- links between disclosures about different sustainability-related risks and opportunities. For instance, if an organisation combines its management of sustainability-related risks and opportunities, it should also combine its governance disclosures rather than providing separate governance details for each risk and opportunity.
Linking disclosures involves providing clear explanations and cross-references and using consistent data, assumptions, and measurements
When presenting connected information, an organisation should:
- clearly and concisely explain relationships between disclosures;
- avoid redundant details if IFRS SDS already require the same information elsewhere; and
- disclose major differences between data/assumptions used in sustainability reports and those used in financial statements.
To provide connected information, an organisation may need to:
explain how its strategy impacts or will likely impact its financial statements and planning, and how this strategy aligns with the metrics tracking progress toward targets; or
describe how its natural resource use or supply chain changes could increase or decrease sustainability-related risks and opportunities, linking these to:
- current or expected financial impacts on production costs;
- strategic actions to address risks; and
- investments in new assets.
The organisation may also need to connect written explanations to relevant metrics, targets, and financial statement data.
Data and assumptions used in preparing the sustainability-related financial disclosures should be consistent, as much as possible, considering the requirements of IFRS Accounting Standards or other applicable GAAP, with the data and assumptions used in preparing the related financial statements.
When currency is used as the unit of measure in sustainability-related financial disclosures, the organisation should use the presentation currency of its related financial statements.
Previous: Scope
Next: Core Content
Footnotes
IFRS Sustainability Disclosure Standards↩︎