The Sustainability Disclosure Standards

NARRATIVE REPORT
MODULE 43
THE SUSTAINABILITY DISCLOSURE STANDARDS

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OVERVIEW OF ACCOUNTING
MODULE 1

Learning Objectives:

 Explain the need for sustainability-related financial information.

 Identify the Sustainability Disclosure Standards and explain their scope and
applicability.
 State the major disclosure requirements of the sustainability standards.

INTRODUCTION
In addition to the PFRS Accounting Standards, entities also need to apply the PFRS
Sustainability Disclosure Standards with regard to the disclosure of the entity’s
sustainability-related risks and opportunities.
Sustainability is the ability to maintain and support a process over time.
Sustainability according to the United Nations Brundtland Commission, 1987, is the
meeting the needs of the present without compromising the ability of future
generations to meet their own needs.
Sustainability in business context, is the prevention of depletion of natural or physical
resources needed to carry on the business operations.
Environmental, societal and governmental problems and issues may cause risks to
an entity’s sustainability.
 Environmental problems are those relating to the natural environment such as
pollution, climate change, depletion of raw materials, deforestation,
biodiversity loss, and ecosystem disruption.
 Societal problems are those relating to the rights, wellbeing and interests of
employees and societies such as human rights violation, racial discrimination,
gender inequality, child labor, and poverty.
 Governmental problems are those relating to corporate practice such as
corruption, ethics violation, transparency, responsible tax, bribery, and
diversity.
It is believed that addressing sustainability-related risks can lead to the discovery of
new business opportunities.
Sustainability-related risks affect an entity’s going concern. Therefore, entities are
required to provide information regarding these risks and the related opportunities to
enable companies to be more transparent about the risks and opportunities they
have faced and to give the primary users greater insights into the company’s
performance and enable them to make great decisions relating to providing
resources to the company.

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THE SUSTAINABILITY DISCLOSURE STANDARDS

The International Financial Reporting Standards (IFRS) Sustainability Disclosure
Standards are issued by the International Sustainability Standards Board (ISSB)
These days, knowledge on sustainability-related information or the information about
the risks and opportunities emerging from a company's interactions with its
stakeholders, the economy, society, and the environment is far more significant when
making investment and economic decisions. Thus, in November 2021, the IFRS
Foundation established the ISSB in response to the need for such data.
The ISSB exists to provide capital market participants with the necessary data to
facilitate more informed economic and investment decisions. The ISSB employs a
transparent, stringent due process to create market-informed standards that: (1)
allow businesses to disclose comparable, decision-useful information; and (2)
combine the variety of voluntary sustainability reporting programs into one cohesive
platform.

The ISSB has combined and built on the work of market leading reporting initiatives
comprising the Value Reporting Foundation’s Integrated Reporting Framework and
the Sustainability Accounting Standards Board (SASB), the Climate Disclosure
Standards Board (CDSB) and the Task Force for Climate-related Financial
Disclosures (TCFD).
The ISSB Standards issued the IFRS Sustainability Disclosure Standards that
consist of IFRS S1 and IFRS S2 which provide the general requirement for all the
entities and the SASB Standards which provide the specific requirement for particular
industries.
The ISSB Standards will include general (e.g. governance), thematic (e.g. climate)
and industry- specific requirements, while the SASB Standards will provide the
starting point for the ISSB industry specific requirements.
In the Philippines, the ISSB standards are adopted by the FSRSC through the
Philippine Sustainability Reporting Committee (PSRC).

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IFRS S1 General Requirement for Disclosure of Sustainability-related Financial

Information
Objective
The objective of IFRS S1 is to require an entity to disclose information regarding its
sustainability-related risks and opportunities that might potentially be anticipated to
have an impact on the company's cash flows, financing availability, or cost of capital
over the short, medium, or long term.
IFRS S1 prescribes how an entity prepares and reports its sustainability-related
financial disclosures. It sets out general requirements for the content and
presentation of those disclosures so that the information disclosed is useful to users
of general-purpose financial reports to make decisions about allocating resources to
the company.
“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.” - IFRS S1.2
Value Chain is “the full range of interactions, resources and relationships related to a
reporting entity’s business model and the external environment in which it operates.”-
IFRS S1. Appendix A

Scope
IFRS S1 applies to all entities, regardless of whether their financial statements are
prepared in accordance with the IFRS Accounting Standards or other GAAP. The
terminology used in IFRS S1 is suitable for profit-oriented entities, including public-
sector business entities.

Conceptual Foundation
For sustainability-related financial information to be useful, it must have qualitative
characteristics.
1. Fundamental qualitative characteristics - characteristics that make information
useful to users.
a. Relevance
b. Faithful representation
2. Enhancing qualitative characteristics - characteristics that enhance the
usefulness of information.
a. Comparability
b. Verifiability
c. Timeliness
d. Understandability

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Connected Information
Information should be presented in a manner that shows interconnection between
and among the various sustainability-related risks and opportunities, and between
the other disclosures in the financial statement. It should be identified, data and
assumption should be consistent with those used in the related financial statements,
including presentation currency.

Core Content
IFRS S1 requires an entity to disclose the following, unless another standard requires
otherwise:
A. Governance - enables users to understand the processes, controls and
procedures the entity uses to monitor, manage and oversee sustainability-
related risks and opportunities.
B. Strategy - enables users to understand the approach the entity uses to
manage sustainability-related risks and opportunities.
C. Risk Management - enables users to understand and assess the entity’s
overall risk profile and risk management process.
D. Metrics and targets - enables users to understand an entity’s performance in
relation to its sustainability-related risks and opportunities and the progress
towards any targets the entity has set and targets it is required to meet by law
or regulation.

General Requirements
Sources of Guidance
An entity is required to apply the IFRS Sustainability Disclosure Standards and
considers the applicability of the SASB Standards. In the absence of IFRS
Sustainability Disclosure Standards, the entity is required to apply its judgment to
identify information to disclose that has both relevance and faithful representation.
Making judgment requires consideration of the SASB Standards.

Location of disclosures
The entity is required to provide its sustainability disclosures as part of its general-
purpose financial reports. One possible location where sustainability disclosure can
be made is within the entity’s management commentary or the management’s report,
management's discussion and analysis, operating and financial review, integrated
report or strategic report. Another possible location is in the same location where
regulatory-required information is presented as long as the sustainability disclosures
are clearly distinguished.

Timing of reporting
The entity reports its sustainability-related financial disclosures at the same time, and
covering the same reporting period, as its related annual financial statements, and
updates those disclosures for events after the reporting period.

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Comparative information
The entity discloses comparative information for the prior year for all amounts
disclosed in the current year, unless another standard permits or requires otherwise.

Statement of compliance
The entity makes an explicit and unreserved statement of compliance with the IFRS
Sustainability Disclosure only if its sustainability-related financial disclosure complies
with all the requirements of those standards.

Judgments, Uncertainties and Errors

Judgments
The entity discloses information on the judgments it has made in identifying
sustainability-related risks and opportunities, sources of guidance to apply, and
material information to disclose.

Measurement uncertainty
This arises when an amount cannot be measured directly but only through
estimation. Estimation is an essential part of preparing sustainability-related financial
disclosures and does not undermine the usefulness of the information, if it is
accurately described and explained.
IFRS S1 requires an entity to identify the amounts it has disclosed that are subject to
a high level of measurement uncertainty, including the sources of measurement
uncertainty and the assumptions, approximations, and judgements the entity has
made in measuring the amount.

Errors
The entity corrects material prior errors by restating the comparative amounts for the
prior periods disclosed unless it is impracticable to do so.

IFRS S2 Climate-related Disclosures

Objective and Scope
IFRS S2 Climate-related Disclosures requires an entity to disclose information about
climate-related risks and opportunities that could reasonably be expected to affect
the entity’s prospects and that is useful to users of general-purpose financial reports
in making decisions relating to providing resources to the entity.
Climate-related risks - the potential negative effects of climate change on an entity.
Climate-related opportunities - the potential positive effects arising from climate
change for an entity.

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IFRS S2 applies to:

1. Climate-related risks to which an entity is expose:
a. Climate-related physical risks - risks resulting from climate change
that can be event-driven or from longer-term shifts in climate patterns.
b. Climate-related transition risks - risks that arise from efforts to
transition to a lower-carbon energy. This includes policy, legal,
technological, market and reputational risks.

Core Content
IFRS S2 requires an entity to disclose information regarding its Governance,
Strategy, Risk Management, and Metrics and targets in relation to its climate-related
risks and opportunities.
With regard to Strategy, an entity is required to disclose its climate-related transition
plan and climate resilience.
 Climate-related transition plan - an aspect of an entity’s overall strategy that
lays out the entity’s targets, actions or resources for its transition towards a
lower-carbon economy, including actions for reducing greenhouse gas
emissions.
 Climate resilience - The capacity of an entity to adjust to climate-related
changes, developments or uncertainties. It involves the capacity to manage
climate-related risks and benefit from climate-related opportunities, including
the ability to respond and adapt to climate-related transition risks and climate-
related physical risks.
With regard to Metrics and targets, an entity is required to disclose its absolute gross
greenhouse gas emissions generated during the reporting period, expressed as
metric tons of CO2 equivalent.