By Carlos Barahona, Audit Partner at CCL Auditores Consultores.
During this Financial Education Month, I believe it is important to discuss the scope and challenges brought by the new IFRS S1 and S2 standards, which will come into force as of January 1, 2024, related to sustainability and climate disclosures in global capital markets.
Let us start from the beginning: What are the IFRS S1 and S2 standards?
These standards, issued by the International Sustainability Standards Board (ISSB) — the second board of the IFRS Foundation — provide a set of disclosure requirements designed to enable companies to communicate to investors the sustainability-related risks and opportunities they face in the short, medium, and long term, as well as establish specific climate-related disclosures.
Although multiple frameworks related to sustainability and climate already existed, it was necessary to create a single, globally accepted framework to standardize the reporting of non-financial information to the market, investors, regulators, and other stakeholders.
It is important to note that an entity may apply these Sustainability Disclosure Standards regardless of whether its financial statements are prepared in accordance with IFRS, NIIF, or other accounting principles (GAAP).
In our view, the main challenge that entities applying these standards will face, beyond complying with the specific requirements they establish, is achieving a connection between the disclosed information, particularly for each identified significant sustainability risk and opportunity, and how these impact their financial statements. For example, if an entity must undertake a significant upgrade of its production plant by incorporating less polluting technology, it should disclose how this impacts its current assets, useful lives, decommissioning costs, impairment assessments, among others.
Finally, it is necessary for the management of entities adopting these standards to conduct an assessment of their capacity to meet the information requirements established therein and determine the main impacts on their financial reporting, understanding that this task is not the sole responsibility of the Accounting and Finance departments, but rather should be an interdisciplinary effort across different areas, in order to provide relevant, timely, and clear information to their stakeholders and the market in general.