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This article is designed to guide companies that are new to Corporate Sustainability and Sustainability Reporting. It provides a concise summary of the key aspects of the new IFRS S2 standard and offers step-by-step guidance to help professionals like you prepare for its adoption effectively.
Background
In June 2023, the International Sustainability Standards Board (ISSB) introduced its first two standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.
In September 2024, as part of efforts to establish a globally aligned sustainability reporting framework, the Securities Commission Malaysia (SC) issued the National Sustainability Reporting Framework (NSRF). This framework aligns Malaysia’s sustainability reporting practices with the ISSB’s IFRS Sustainability Disclosure Standards, adopting IFRS S1 and IFRS S2 as baseline disclosure standards for companies in the country.
This article explores how companies can begin preparing to adopt IFRS S2 for comprehensive and integrated reporting.
Overview of IFRS S2 Climate-related Disclosures and TCFD
Objective
The objective of IFRS S2 is to ensure entities disclose information about the climate-related risks and opportunities that can help users of financial reports make informed resource allocation decisions. It requires entities to report on climate-related risks and opportunities that could the financials and business prospects over the short, medium, or long term.
Scope
Companies are required to disclose material information about climate-related risks and opportunities, as explained below:
- Climate-related risks
Companies are required to evaluate and assess the potential impacts of climate change on their business operations. This includes identifying and disclosing both the qualitative and quantitative effects of climate-related risks on their assets, activities, and overall performance.
- Climate-related opportunities available to the company
While climate change poses risks, it also offers opportunities for businesses to innovate and strengthen their sustainability. Companies are expected to identify and disclose how climate-related opportunities could positively impact their business prospects, such as enhancing resilience, gaining a competitive edge, or improving long-term business sustainability.
Understanding Task Force on Climate-Related Financial Disclosures (TCFD) pillars
With the TCFD framework now integrated into IFRS standards, the four-pillar framework serves as the disclosure baseline for companies reporting under IFRS Sustainability Standards. TCFD recommendations are structured around four thematic areas for sustainability and climate-related disclosure as shown below.
Step-by-step Preparation
Step 1: Measure GHG emissions
As IFRS S2 focuses on climate-related disclosures, companies must first measure their Scope 1, 2, and 3 emissions. These organizational greenhouse gas (GHG) emissions will serve as the baseline for building climate resilience and tracking progress toward climate targets.
Establishing GHG emissions data and a baseline enables the company to assess climate resilience through climate-related scenario analysis. This foundation supports the development of climate strategies, the management of climate risks, the setting of climate targets, and the integration of these elements into governance processes at later stages.
Step 2: Identify climate-related opportunities and risks
Companies are required to identify climate-related risks and opportunities, along with their impact on the business. This includes assessing the likelihood and magnitude of these factors over the short, medium, and long term. A summary of the climate-related risks are as follows:
Source: TCFD: Climate related risks and opportunities https://www.tcfdhub.org/Downloads/pdfs/E06%20-%20Climate%20related%20risks%20and%20opportunities.pdf and Persefoni.
For climate-related opportunities, TCFD has identified a number of areas that companies to look into, including:
- Resource Efficiency – cost savings initiatives and more,
- Energy Source – investment in renewables and more,
- Products and Services – new and/or improved products and services and more,
- Markets – new market entrants, collaborations, green financing and more,
- Resilience – managing and responding to climate-related risks and more.
Industry specific
In the preparation process, companies need to consider industry-specific factors. Refer to SASB Climate-related Disclosure Topics and Metrics by Industry to identify the disclosure topics that are relevant to the company’s industries.
After identifying climate-related risks and opportunities, companies are required to quantify the financial impact, such as effects on the company’s Balance Sheet, Profit & Loss, assets and liabilities, revenue and expenses, cash flow, and more over the short, medium and long term.
An interconnected illustration is shown below:
Source: Recommendations of the Task Force on Climate-related Financial Disclosures https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf
Step 3: Embed the TCFD framework for disclosure
Figure from: BDO https://www.bdo.com.au/en-au/insights/esg-sustainability/the-four-pillars-of-tcfd-recommendations
The TCFD framework is integrated into the disclosure requirements of IFRS S2. Step 2, which focuses on identifying climate-related risks and opportunities, falls under the TCFD thematic pillar of Risk Management.
The findings from Steps 1 and 2 provide insights into the materiality and impact of these climate-related factors on the business, serving as the foundation for developing effective strategies to address them.
Subsequently, metrics will be established to track the company’s performance in managing climate-related risks and opportunities. Progress will be monitored against these targets over time. Companies should disclose information relevant to the following cross-industry metric categories: (a) Greenhouse gas emissions, (b) Climate-related transition risks, (c) Climate-related physical risks, (d) Climate-related opportunities, (e) Capital deployment, (f) Internal carbon prices (if applicable), (g) Remuneration tied to climate-related considerations (if applicable).
Additionally, companies must disclose both quantitative and qualitative climate-related targets and monitor progress towards achieving these goals. The process for monitoring and reviewing each target must also be detailed and explained.
As an optional disclosure, companies may choose to include a transition plan if they have a roadmap for decarbonising their business and emissions.
Conclusion
In conclusion, IFRS S2 establishes clear guidelines for companies to disclose climate-related risks and opportunities, ensuring transparency and accountability in how businesses address climate change.
The standard encourages companies to assess their climate resilience, set targets, and disclose strategies, metrics, and financial impacts across short, medium, and long-term time horizons. By doing so, companies can not only mitigate risks but also seize opportunities for growth and innovation.
Lastly, it is crucial for companies to integrate climate considerations into their business operations and forward planning, aligning sustainability with long-term value creation and ensuring that climate risks and opportunities are effectively managed for future success.
How we can help
We hope you find the information helpful in giving useful insight into IFRS Sustainability Disclosure Standards IFRS S2. If you would like to discuss any of the points raised or engage in any Sustainability Reporting and/or Sustainability Consulting services, kindly contact esg.my@visionwide.co.