Core Content

Author

Shel

An organisation should provide disclosures about:

  • Governance : the governance processes, controls, and procedures the organisation uses to monitor and manage sustainability-related risks and opportunities;

  • Strategy : the approach the organisation uses to manage sustainability-related risks and opportunities;

  • Risk management : the processes the organisation uses to identify, assess, prioritise, and monitor sustainability-related risks and opportunities; and

  • Metrics and targets : the organisation’s performance regarding sustainability-related risks and opportunities, including progress towards any targets set or required by law or regulation.

The objective of sustainability-related financial disclosures on governance is to help users of general purpose financial reports understand the governance processes, controls, and procedures an organisation uses to monitor, manage, and oversee sustainability-related risks and opportunities.

To meet this objective, an organisation should provide information about:

  1. the governance body or bodies, such as a board, committee, or similar group, responsible for governance or individuals responsible for overseeing sustainability-related risks and opportunities. The organisation should:

    1. identify those bodies or individuals and explain how their responsibilities for sustainability-related risks and opportunities are described in terms of reference, mandates, role descriptions, and related policies;

    2. explain how they determine whether the necessary skills and expertise are available or will be developed to oversee strategies for managing sustainability-related risks and opportunities;

    3. describe how and how often they are informed about sustainability-related risks and opportunities;

    4. explain how they consider sustainability-related risks and opportunities when overseeing the organisation’s strategy, major decisions, risk management processes, and related policies, including whether they consider trade-offs linked to these risks and opportunities; and

    5. explain how they oversee the setting of targets for sustainability-related risks and opportunities and monitor progress, including whether and how related performance measures are part of remuneration policies.

  2. management’s role in the governance processes, controls, and procedures used to monitor, manage, and oversee sustainability-related risks and opportunities, including:

    1. whether the role is assigned to a specific management-level position or committee, and how oversight of that role or committee is carried out; and

    2. whether management uses controls and procedures to support oversight of sustainability-related risks and opportunities, and how these are connected with other internal functions.

The objective of sustainability-related financial disclosures on strategy is to help users of general purpose financial reports understand an organisation’s strategy for managing sustainability-related risks and opportunities.

Specifically, the organisation should disclose information to enable users of general purpose financial reports to understand:

  1. the sustainability-related risks and opportunities that could reasonably be expected to affect the organisation’s prospects;

  2. the current and anticipated effects of those sustainability-related risks and opportunities on the organisation’s business model and value chain;

  3. the effects of those sustainability-related risks and opportunities on the organisation’s strategy and decision-making;

  4. the effects and anticipated effects of those sustainability-related risks and opportunities on the organisation’s financial position, financial performance and cash flows for the reporting period, and over the short, medium and long term, taking into consideration how those sustainability-related risks and opportunities have been factored into the organisationʼs financial planning; and

  5. the resilience of the organisation’s strategy and its business model to those sustainability-related risks.

a) Sustainability-related risks and opportunities

An organisation should provide information that helps users of general purpose financial reports understand the sustainability-related risks and opportunities that could reasonably be expected to affect the organisation’s prospects.

Specifically, the organisation should:

  1. describe the sustainability-related risks and opportunities that could reasonably be expected to affect its prospects;

  2. specify the time periods i.e. short, medium, or long term, over which the effects of each of these risks and opportunities could reasonably be expected to happen; and

  3. explain how it defines ‘short term’, ‘medium term’, and ‘long term’, and how these definitions are connected to the planning periods used for strategic decision-making.

Short-, medium-, and long-term time horizons can vary between organisations and depend on several factors. These include industry-specific characteristics such as:

  1. cash flow, investment and business cycles,

  2. the planning periods commonly used in the organisation’s industry for strategic decisions and capital allocation, and

  3. the time frames used by users of general purpose financial reports to assess organisations in that industry.

b) Business model and value chain

An organisation should provide information that helps users of general purpose financial reports understand how sustainability-related risks and opportunities currently affect, and are expected to affect, its business model and value chain.

Specifically, the organisation should disclose:

  1. a description of the current and expected effects of sustainability-related risks and opportunities on its business model and value chain; and

  2. a description of where in its business model and value chain these risks and opportunities are concentrated, for example, in certain geographic areas, facilities, or types of assets.

c) Strategy and decision-making

An organisation should provide information that helps users of general purpose financial reports understand how sustainability-related risks and opportunities affect its strategy and decision-making.

Specifically, the organisation should disclose:

  1. how it has responded to, and plans to respond to, sustainability-related risks and opportunities in its strategy and decision-making;

  2. the progress made on plans disclosed in previous reporting periods, including both quantitative and qualitative information; and

  3. any trade-offs between sustainability-related risks and opportunities that it considered, for example, when choosing a location for new operations, the organisation might have weighed environmental impacts against job creation in a community.

d) Financial position, financial performance and cash flows

An organisation should provide information that helps users of general purpose financial reports understand:

  1. current financial effects i.e. the effects of sustainability-related risks and opportunities on its financial position, financial performance, and cash flows during the reporting period; and

  2. anticipated financial effects i.e. the expected effects of sustainability-related risks and opportunities on its financial position, financial performance, and cash flows over the short, medium, and long term, considering how these risks and opportunities are included in the organisation’s financial planning.

An organisation should provide both quantitative and qualitative information about:

  1. how sustainability-related risks and opportunities have affected its financial position, financial performance, and cash flows during the reporting period;
  1. how the sustainability-related risks and opportunities identified above that could lead to a significant risk of a material adjustment to the carrying amounts of assets and liabilities in the related financial statements within the next annual reporting period;

  1. how the organisation expects its financial position to change over the short, medium, and long term, based on its strategy for managing sustainability-related risks and opportunities, considering:

    1. its investment and disposal plans (such as capital spending, major acquisitions or sales, joint ventures, business transformation, innovation, new business areas, and retiring assets), including plans it is not yet contractually committed to; and

    2. its planned sources of funding to carry out its strategy; and

  2. how the organisation expects its financial performance and cash flows to change over the short, medium, and long term, based on its strategy for managing sustainability-related risks and opportunities.

When preparing disclosures about the expected financial effects of a sustainability-related risk or opportunity, an organisation should:

  1. use all reasonable and supportable information available at the reporting date, without incurring undue cost or effort; and

  2. use an approach that matches the skills, capabilities, and resources the organisation has available to prepare those disclosures.

An organisation does not need to provide quantitative information about the current or expected financial effects of a sustainability-related risk or opportunity if it determines that:

  1. those effects cannot be identified separately; or

  2. the level of uncertainty in measuring those effects is so high that the resulting numbers would not be useful.

An organisation also does not need to provide quantitative information about the expected financial effects of a sustainability-related risk or opportunity if it does not have the skills, capabilities, or resources to do so.

If an organisation decides not to provide quantitative information about the current or expected financial effects of a sustainability-related risk or opportunity based on the criteria above, it should:

  1. explain why it has not provided the quantitative information;

  2. provide qualitative information about those financial effects, including which line items, totals, and subtotals in the related financial statements are likely to be, or have been, affected; and

  3. provide quantitative information about the combined financial effects of that sustainability-related risk or opportunity together with other sustainability-related risks or opportunities and other factors, unless it determines that such combined information would not be useful.

e) Resilience

An organisation should provide information that helps users of general purpose financial reports understand its ability to adapt to uncertainties from sustainability-related risks.

The organisation should disclose a qualitative and, if applicable, quantitative assessment of how resilient its strategy and business model are to those risks. This should include details on how the assessment was performed and the time horizon used.

When providing quantitative information, the organisation may disclose either a single amount or a range.

Other IFRS SDS1 may specify the type of information an organisation should disclose about its resilience to specific sustainability-related risks and how to prepare those disclosures, including whether scenario analysis2 is required.

The objective of sustainability-related financial disclosures on risk management is to help users of general purpose financial reports:

  1. understand an organisation’s processes for identifying, assessing, prioritising and monitoring sustainability-related risks and opportunities, including whether and how these processes are integrated into and inform the organisation’s overall risk management process; and

  2. assess the organisation’s overall risk profile and its overall risk management process.

To achieve this objective, an organisation should disclose information about:

  1. the processes and related policies it uses to identify, assess, prioritise, and monitor sustainability-related risks, including details about:

    1. the inputs and parameters used, such as data sources and the scope of operations covered;

    2. whether and how it uses scenario analysis to identify sustainability-related risks;

    3. how it assesses the nature, likelihood, and size of those risks (for example, considering qualitative factors, quantitative thresholds, or other criteria);

    4. whether and how it prioritises sustainability-related risks compared to other risks;

    5. how it monitors sustainability-related risks; and

    6. whether and how these processes have changed since the previous reporting period;

  2. the processes it uses to identify, assess, prioritise, and monitor sustainability-related opportunities; and

  3. how much, and in what way, the processes for managing sustainability-related risks and opportunities are integrated into and inform its overall risk management process.

The objective of sustainability-related financial disclosures on metrics and targets is to help users of general purpose financial reports understand an organisation’s performance related to its sustainability-related risks and opportunities, including progress toward any targets it has set or is legally required to meet.

For each sustainability-related risk and opportunity that could reasonably be expected to affect its prospects, an organisation should disclose:

  1. the metrics required by the relevant IFRS SDS; and

  2. the metrics it uses to measure and monitor:

    1. that sustainability-related risk or opportunity; and

    2. its performance related to that risk or opportunity, including progress toward any targets it has set or is legally required to meet.

The metrics disclosed by an organisation should include those related to specific business models, activities, or other common features that describe participation in an industry.

If an organisation discloses a metric from a source other than IFRS SDS, it should identify both the source and the metric used.

If an organisation develops a metric, it should disclose information about:

  1. how the metric is defined, including whether it is based on a metric from another source outside IFRS SDS, and if so, which source and how it differs;

  2. whether the metric is an absolute measure, a ratio, or a qualitative measure;

  3. whether the metric is validated by a third party, and if so, who that party is; and

  4. how the metric is calculated, including the inputs, any limitations of the method, and significant assumptions made.

An organisation must disclose details about the targets it has set or is required to meet by law or regulation, to track its progress toward strategic sustainability goals. For each target, it must include:

  1. the metric used to set and monitor the target;

  2. the specific target, whether it’s a number, percentage, or qualitative goal;

  3. the time frame for achieving the target;

  4. the starting point or base year from which progress is measured;

  5. any milestones or interim goals set along the way;

  6. how well the organisation is performing against the target, including any trends or changes.

  7. Any revisions made to the target and the reason for the changes.

The definition and calculation of metrics, including those used to set the organisation’s targets and track progress towards them, should remain consistent over time.

If a metric is changed or replaced, the organisation should:

  1. disclose a revised comparative amount, unless it is impracticable to do so;
  2. explain the changes; and
  3. explain the reasons for those changes, including why the redefined or replacement metric provides more useful information.

An organisation should label and define metrics and targets using meaningful, clear, and precise names and descriptions.


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Footnotes

  1. IFRS Sustainability Disclosure Standards↩︎

  2. Scenario analysis is a process for identifying and assessing a potential range of outcomes of future events under conditions of uncertainty.↩︎