New educational materials available on IFRS S2 Climate-related Disclosures

The International Sustainability Standards Board (ISSB) recently published educational materials to support entities applying the international sustainability standards, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.

While this follows the launch of the IFRS Foundation’s sustainability knowledge hub at COP28, these new educational materials are not currently included in the knowledge hub.

Example 1 - Disclosing disaggregated information about a climate-related risk (nature aspect)

The fact pattern in Example 1 relates to an entity that grows wheat in two regions, Region 1 and Region 2, and also buys wheat from a supplier that grows wheat in Region 1. The entity mills the wheat and sell it to customers. Region 1 currently has high baseline water stress which is expected to worsen over the medium term. Climate change drives water scarcity in Region 1 through increasing temperatures and changing precipitation patterns.

The entity identifies water scarcity as a climate risk because reduced water availability can disrupt the entity’s own wheat production and increase the price of purchased wheat. The entity identifies water scarcity as a climate risk because growing wheat relies on rainfall and irrigation from other water sources.

As water scarcity is a location-based risk that could affect future prospects, it discloses information separately about the total amount of wheat grown and purchased, disaggregated by region.

Example 2 – Disclosing information about a company’s response to a climate-related opportunity (nature aspect)

In Example 2, the entity grows and harvests trees and sells the timber to companies that manufacture wood-based products for the building sector. The building sector generates high levels of greenhouse gas (GHG) emissions, which are a primary driver of climate change.

New regulations in the building industry have been introduced to reduce GHG emissions. As trees absorb and store carbon, growing trees to generate wood-based building products generates fewer GHG emissions than other building materials. This presents a climate-related opportunity for the entity to increase revenue as demand for wood-based building products grows.

In disclosing information about climate-related opportunities, the entity explains how revenue is expected to grow, including that:

• The entity’s forestry-management practices have been certified to a third-party forest management standard, including that it harvests its forests in a sustainable way
• Decarbonisation goals in the building sector means customers are prepared to pay more for certified sustainable timber.

Example 3 – Disclosing information about a company’s response to a climate-related risk (social aspect)

Example 3 illustrates how social aspects can also result in a climate-related risk. In this fact pattern, the entity generates electricity from both renewable and fossil fuel sources and sells it to customers in its jurisdiction. The jurisdiction has set a GHG emissions reduction target for 2030, and the entity plans to phase out its coal-based plant by 2028 and increase renewable production by 20 per cent.

The entity currently has 100 employees working in its coal-based plant. The coal-based plant operates next to the only remaining coal mine in the jurisdiction, which currently employs more than 1,000 people. The jurisdiction’s GHG emissions reduction target requires a ‘just transition’ to a lower carbon economy. As such, the entity anticipates that regulation will be passed to force them to transition in a way that is as inclusive as possible to everyone concerned, maximising opportunities for decent work amongst communities, workers, and social groups.

Climate-related risk includes this social aspect, being the risk that regulation will force a ‘just transition’. The entity must disclose details about how this risk arises, and how it plans to respond in its strategy and decision-making, including:

• Its plans for its workforce such as retraining to deploy them in the renewable energy business (i.e. type and scope of programmes to redeploy employees to other parts of the business)
• How it plans to work with trade unions to support employees for onward transition to roles outside the entity (e.g. retirement plans, voluntary resignation packages, etc.).

The entity also discloses quantitative climate-related targets to monitor progress towards achieving its goal to redeploy as many coal-based employees as possible. For example, a target to redeploy X per cent of the 100 employees in its coal-based plants to other parts of the entity by 2028 and how it plans to achieve that target.

Lastly, the entity must also explain how it plans to cooperate with trade unions and local authorities. This is because phasing out its coal-based plant will accelerate the decline of the local coal mine and directly cause the loss of 1,000 coal mining jobs in an area where the coal mine has been the major employer.

More information

Please refer to the educational materials for a full discussion of the above fact patterns and analyses.