IFRS S1 & S2 sustainability financial disclosures: A guide (2), By Innocent Okwuosa

Identification and understanding of all the sustainability related risks and opportunities that could reasonably be expected to affect an entity’s prospects underpin Governance, Strategy, Risk Management and Metrics and Target disclosures. It is the beginning of IFRS S1 & S2 sustainability financial disclosure implementation. As such, let me shed light on how to identify the sustainability related risks and opportunities that could reasonably be expected to affect the prospects of an entity, drawing from IFRS S1.

In my last piece I stated that an ideal content of a Sustainability Report should address the following: Governance, Strategy, Risk Management and Metrics and Targets. What is addressed in these core content elements are sustainability related risks and opportunities. Today, I provide guidance on the identification of these sustainability related risks and opportunities.

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IFRS S1(3) requires an entity to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s cash flows, its access to finance or cost of capital, over the short, medium, or long term. IFRS S1 (3) concludes by stating that for the purposes of the Standard, these risks and opportunities are collectively referred to as ‘sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects.’

Identification and understanding of all the sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects underpin Governance, Strategy, Risk Management and Metrics and Target disclosures. It is the beginning of IFRS S1 & S2 sustainability financial disclosure implementation. As such, let me shed light on how to identify the sustainability related risks and opportunities that could reasonably be expected to affect the prospects of an entity, drawing from IFRS S1.

As earlier stated, IFRS S1(3) appears to associate sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects to those that will affect its cash flows, and access to finance or the cost of capital over the short, medium, or long term. This somehow appears to limit the entity’s prospects to access financial capital. The entity’s prospect in IFRS S1 however expands beyond financial capital, because it shows that access to finance and cashflows is underpinned by dependencies on a wider consideration, going by IFRS1(2).

IFRS S1(2) recognises that information about sustainability-related risks and opportunities is useful to primary users, because an entity’s ability to generate cash flows over the short, medium, and long term is inextricably linked to the interactions between the entity and its stakeholders, society, the economy, and the natural environment throughout the entity’s value chain. It avers that together, the entity, resources and relationships throughout its value chain form an interdependent system in which the entity operates. The entity’s dependencies and impacts on those resources and relationships give rise to sustainability-related risks and opportunities.

Therefore, we should understand sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects under IFRS S1 (3), as those that affect its cash flows, its access to capital, or the cost of capital over the short, medium, or long term. IFRS S1 (2) helps us understand the capital as not only financial capital but the six capitals of integrated reporting, which are: (a) Financial Capital, (b) Manufactured Capital, (c) Natural Capital, (d) Human Capital, (e) Intellectual Capital, and (f) Social and Relationship Capital.

Identification and understanding of all the sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects extends to those that will affect these six capitals. This explains why IFRS S1(2) argues that the entity and the resources and relationships throughout its value chain form an interdependent system in which the entity operates, and that its dependencies and impacts on those resources and relationships give rise to sustainability-related risks and opportunities for the entity.

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Therefore, IFRS S1 (54) provides that in identifying sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects, an entity shall apply IFRS Sustainability Disclosure Standards. In addition to that, an entity: (a) shall refer to and consider the applicability of the disclosure topics in the SASB Standards, (b) may refer to and consider the applicability of: (i) the CDSB Framework Application Guidance for Water-related Disclosures and the CDSB Framework Application Guidance for Biodiversity-related Disclosures.

Reference can also be made to the most recent pronouncements of other standard‑setting bodies, whose requirements are designed to meet the information needs of users of general-purpose financial reports; and the sustainability-related risks and opportunities identified by entities that operate in the same industry(s) or geographical region(s). One typical example of identified industry sustainability related risks and opportunities are those inherent in the non-application of the Sustainable Banking Principles (SBP) in the banking industry in Nigeria.

To capture these resources, dependencies, and relationships throughout an entity’s value chain, IFRS S1(57) further provides that the entity, in the absence of an IFRS Sustainability Disclosure Standard that specifically applies to a sustainability related risk and opportunity, can apply judgement to identify relevant information. In making that judgement, an entity may consider the applicability of: (a) the Global Reporting Initiative (GRI) Standards, and (b) the European Sustainability Reporting Standards (ESRS), to the extent that these sources assist the entity in meeting the objectives of IFRS S1 & S2, and do not conflict with them.

Thus, the guidance in the identification of sustainability-related risks and opportunities is cast wide enough to capture an entity’s dependencies on resources and relationships, and its impacts on those resources and relationships as they affect access to the six capitals. It is cast wide to accommodate GRI and ESRS topics to the extent that they do not conflict with IFRS S1 & S2. Therein lies interoperability, which is a topic for another day. Identification of sustainability related risks and opportunities under IFRS Sustainability Standards considers both financial and impact materiality but from the perspective of impact on the entity’s prospect.

It is not enough to say “we care about social and environmental impact of our operation.” Rather you care because they impact on your prospect, and they do indeed impact. Then identify them and show us “how” through your sustainability financial disclosures.

TO BE CONTINUED.

Innocent Okwuosa is the chairman of Nigerian Integrated Reporting Committee (NIRC), 59^th president of the Institute of Chartered Accountants of Nigeria (ICAN); and an adjunct associate professor of Accounting at Pan Atlantic University, Lekki, Lagos. He can be reached on 08128131345.