Exploring ISSB S2
Let's study unfamiliar terms in ISSB S2!
Approximately one month ago from now, the United Kingdom decided to create the UK SDS (UK Sustainability Disclosure Standards) based on the ESG disclosure standards of ISSB(International Sustainability Standards Board) until June 2024.
ISSB announced IFRS S1 and S2 at the end of June, which will be applied as follows: optional disclosure from next year, 2024, mandatory disclosure excluding scope 3 emissions from 2025, and full mandatory disclosure until 2026.
S1 is about general sustainability-related financial information disclosure requirements, and S2 pertains to climate-related financial information disclosure. S2 is divided into four parts: governance, strategy, risk management, and metrics and targets.
S2 consists of four main sections: governance, strategy, risk management, and metrics and targets.
Since only the strategy section is further divided into four specific items out of the four parts, it contains a lot of content and many unfamiliar terms. Let's explore the strategy section together and study these unfamiliar terms.
The first sub-item is Climate-related risks and opportunities. In this section, significant climate-related risks and opportunities must be defined, considering factors like timeframes (short, medium, long term) and types (physical risks and transition risks). Companies need to disclose how these risks and opportunities may affect their business models, strategies, cash flows, access to funding, and cost of capital.
Tip. Physical Risk & Transition Risk
The second sub-item is Strategy and decision-making. In this section, companies should provide information about the changes in strategy and resource allocation undertaken to address the risks and opportunities identified in the first sub-item. This includes ongoing direct and indirect adaptation and mitigation efforts, resource provision for those plans, emission targets, and carbon offset measures to achieve those targets.
Tip. Carbon offset
Carbon offset is not about reducing carbon emissions generated by corporate activities but rather neutralizing them.
- Carbon Removal: This method involves removing carbon already present in the atmosphere through approaches like afforestation and carbon capture, utilization, and storage (CCUS) technologies.
Emission Avoidance: It focuses on reducing emissions occurring outside a product's lifecycle or value chain as a result of using that product.
e.g.,
Using video conferencing software to reduce emissions generated by companies using the program.
The third sub-item is Financial position, financial performance and cash flows. In this section, companies need to disclose the impact on their financial position, performance, and cash flows caused by climate-related factors. Quantitative information is preferred, but if quantitative data is not available, qualitative information can be provided as a substitute.
The fourth sub-item is Climate resilience. In this section, information should be provided regarding how investments related to climate mitigation and adaptation affect climate resilience. This includes the impact on climate resilience, the availability and flexibility of existing financial resources for coping with climate-related risks and utilizing opportunities, and the ability to reallocate, repurpose, or dispose of existing assets for climate-related purposes. The use of climate-related scenario analysis is preferred for assessing climate resilience. If conducting such analysis is not possible, alternative methods or technologies may be used.
Tip. Climate Resilience
The ability of a social or ecological system to adapt to climate-related stress and change, maintaining its fundamental functions and structure, and the capacity to absorb disruption through self-organization.
We've now explored the climate-related financial information disclosure standards announced by ISSB, particularly S2. This post has covered these concepts briefly, and if you have any further questions, please feel free to leave a comment.
References
GOV.UK(2023), UK Sustainability Disclosure Standards, <UK Sustainability Disclosure Standards - GOV.UK (www.gov.uk)>.
ISSB(2023), Climate-related Disclosures.
WRI(2019), Estimating and Reporting the Comparative Emissions Impacts of Products.
IPCC(2007), Climate Change 2007: Synthesis Report. Contribution of Working Groups I, II and III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change.
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