In June of 2023, the International Sustainability Standards Board (ISSB) released IFRS S1, which includes general requirements for disclosure of sustainability-related financial information. Sustainability reporting has become increasingly important for financial statement users and the ISSB aims to create a framework that enhances the comparability of sustainability disclosures. Specifically, IFRS S1 requires qualitative and quantitative disclosures surrounding the anticipated financial effects of sustainability-related risks and opportunities. When preparing these disclosures, it is essential to comprehend several pertinent pieces of information outlined within IFRS S1. Paragraphs 34-40 outline the criteria that should be used to disclose information surrounding how a company’s financial position, financial performance, and cash flows are affected by sustainability-related risks and opportunities. This article follows the flow of information presented in this area of the standard. It begins by outlining specific required disclosures, then addresses considerations for reasonable and supportable information, and finally discusses when it is not necessary to include quantitative information.
Required Disclosures Surrounding the Financial Position, Financial Performance, and Cash Flows of a Company
Entities are required to disclose information that enables end users of the financial statements to understand the current and anticipated effects of sustainability-related risks and opportunities on the entity’s financial position, financial performance, and cash flows (IFRS S1 Para. 34). Paragraphs 34-40 of IFRS S1 outline the disclosure criteria. Paragraph 35 lists specific disclosures surrounding an entity’s strategy that necessitate qualitative and quantitative information. The graphic below provides a summarized overview of these disclosures. According to paragraph 36, any quantitative information presented in these disclosures can be presented as a single amount or within a range.
Reasonable and Supportable Information
The standard continues by outlining how companies can approach the preparation of these disclosures in a way that is both cost-conscious and helpful to the end user of the financial statements. Paragraph 37 states that “in preparing disclosures about the anticipated financial effects of a sustainability-related risk or opportunity an entity shall: (a) use all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort; and (b) use an approach that is commensurate with the skills, capabilities and resources that are available to the entity for preparing those disclosures”. There are three pertinent details. First, the information must be reasonable and supportable. Second, the information must be available to the entity at the reporting date. Third, acquiring the information should not place undue burden or cost on the entity.
Reasonable and Supportable
Reasonable and supportable information encompasses both entity-specific factors and factors surrounding the general conditions in the external environment (IFRS S1 Appendix B Paragraph B8). The data can be sourced from both internal and external sources. Possible sources include internal risk management processes, industry and peer group experiences, external ratings, as well as reports and statistics (IFRS S1 Appendix B Paragraph B9). Essentially, reasonable and supportable information requires companies to consider information that is reasonably available and to not disregard known information. Furthermore, any information under consideration should be supportable, meaning that the information is dependable and credible.
Available to the Entity at the Reporting Date
Although forward-looking information may change over time, the disclosures should consider information that is available at the time of the reporting date and are not required to consider information that was unavailable at the reporting date.
Undue Burden or Cost
Undue cost or effort varies from one entity to another depending on specific circumstances. When determining what data is pertinent, the entity should balance the costs and effort required to acquire information with the resulting benefits to the primary users of the financial statements. In reference to the basis for conclusion, the PwC firm guide clarifies that “the more useful the sustainability-related information for users, the more effort is expected of an entity in obtaining that information.” This assessment can change as time and circumstances change (IFRS Appendix B Paragraph B10). As time progresses and data becomes more readily accessible to entities, it is expected that disclosures will incorporate a greater level of detail.
Information that is currently used by the entity for financial reporting, operations, strategy setting, or managing risks and opportunities is considered by the IFRS to be available without undue cost or effort (IFRS Appendix B Paragraph B9).
The notion of ‘reasonable and supportable information available to the company’ might appear as a way for entities to avoid gathering and disclosing information while still complying with the standard, but the inclusion of this wording does not absolve entities of the responsibility to include the specified disclosures. According to KPMG, the standard “aims to support all types of companies to report information with a high degree of judgment or uncertainty because it is proportionate based on an individual company’s circumstances. However, it does not give companies an exemption from providing the required disclosures”. It is the responsibility of each entity to gain insight into what information is ‘reasonable and supportable’ for them. KMPG adds that “to ensure information is supportable, companies need to ensure that they have the appropriate processes and systems and controls in place. This is likely to require additional cost and effort, in terms of management time and/or direct spend, but is proportionate”.
The basis for conclusion conveys that the ISSB chose to use the language ‘all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort’ because it clarifies four expectations to entities. First, the entity is “prohibited from overstating or understating the anticipated financial effects of opportunities or risks premised on information that is unsupportable or unreasonable”. While the ISSB understands that there is significant uncertainty in many of the estimates presented, they expect these estimations to be based on supportable and reasonable information to reduce the amount of measurement uncertainty. Second, entities are not “required to carry out an exhaustive search for information”, but rather “the entity is permitted to carry out an information search that is proportional to the cost and effort involved in obtaining that information”. Third, the entity is “not required to carry out an exhaustive search for information to measure the anticipated financial effects”. The IFRS S1 standard strives to increase comparable sustainability disclosures while aiming to avoid placing an immense burden on companies to obtain measurement information that does not yield returns to the users of financial statements. Fourth, the entity “is permitted to use only the information that is available to the entity at the reporting date… and is not required to use information that only becomes available after that date” (IFRS S1 BC106).
The second requirement within paragraph 37 is that an entity use an approach commensurate with its available skills and resources. The basis for conclusion gives insight into what approaches are considered acceptable. It states that “an entity cannot avoid providing quantitative information for anticipated financial effects because it does not have the skills or capabilities to do so if it has the resources available to obtain or develop those skills or capabilities” (IFRS S1 BC107). While the ISSB does allow companies to create a more detailed approach as their skills and resources align with the requirements, it still anticipates that it may be costly for companies to comply with the new standard. Specifically, they expect that the costs will be highest in the first year of application. Additionally, large companies with complex operations, those with minimal sustainability reporting experience, and those operating in developing economies should expect higher implementation costs. Furthermore, the ISSB states that “Although IFRS S1 and IFRS S2 introduce new specific disclosures about governance and strategy for sustainability-related risks and opportunities, they do not require a radically new approach to the strategic business model analysis.”  Companies should leverage existing knowledge and reporting experience while also developing any essential skills and capabilities when reporting under IFRS S1.
To assist in developing an appropriate strategy the IFRS clearly outlines applicable frameworks that entities may employ. When preparing disclosures surrounding sustainability-related risks and opportunities “IFRS S1: (a) requires a company to consider the SASB Standards; and (b) permits a company to consider the CDSB Framework Application Guidance, industry practice, the materials of investor-focused standard-setters; the GRI Standards, and the European Sustainability Reporting Standards (ESRS).” IFRS S1 aims to establish a foundational reporting framework that can be expanded upon by other detailed frameworks that have been produced. While there are not yet specific examples of acceptable approaches under IFRS S1, these frameworks are good references to consult while preparing disclosures.
When is Quantitative Information Not Necessary for Disclosures?
Under certain conditions, IFRS S1 does not require entities to provide quantitative information about current or anticipated financial effects of sustainability-related risks and opportunities. If the financial effects are not separately identifiable, or the level of measurement uncertainty involved in estimating those effects is so high that the quantitative information would not be useful, quantitative information need not be provided. According to the basis for conclusion of IFRS S1, the concept of ‘separately identifiable’ has been used by the ISSB “to describe items that can be isolated in a manner that supports robust measurement”. This indicates that quantitative information is not necessary if a financial effect cannot be isolated to the extent necessary to provide robust measurements surrounding the effect. The basis for conclusion continues by stating “an entity might not be able to quantify current and anticipated financial effects if quantifying (these effects) …would involve a high level of measurement uncertainty (IFRS S1 BC 109).” The ISSB concludes that certain information must be provided when an entity does not provide quantitative information. The entity must a) explain why the information has not been provided, b) provide qualitative information surrounding the financial effects, including identifying line items that may be affected, and c) provide quantitative information surrounding the combined effects of sustainability-related risks or opportunities, unless this information is deemed not useful (IFRS S1 BC 110).
Additionally, if an entity lacks the skills, capabilities, or resources to provide quantitative information, it is not required to include such information. Referring back to the statement from the ISSB, the entity is not exempt from these quantitative disclosures if it can obtain or develop those skills and capabilities.
IFRS S1 establishes a framework that will increase the comparability of sustainability-related financial disclosures. After identifying sustainability-related risks and opportunities, entities must understand what information is reasonable and supportable to be utilized in both quantitative and qualitative disclosures. Companies should assess whether their existing skills and capabilities are sufficient to create the required disclosures. If the company has resources available to develop those skills and capabilities, they should prepare by developing the necessary competencies to use an acceptable approach. If an entity deems that the level of measurement uncertainty is too high, quantitative disclosures may not be necessary. The ISSB aims to increase the usefulness of these disclosures without imposing an undue cost or burden on entities reporting under IFRS S1. Companies should weigh the costs of obtaining information with the benefits for financial statement users.