This article introduces the relationship between corporate climate disclosure and financial statements.
The Task Force on Climate related Financial Disclosures (TCFD) believes that companies disclosing climate information based on TCFD recommendations can help investors gain a deeper understanding of climate related risks and opportunities. As companies transition from TCFD recommendations to International Sustainability Standards Board (ISSB) standards, the relationship between corporate climate disclosure and financial statements will become even closer.
Climate Disclosure Requirements in ISSB Standard
The ISSB has released the IFRS S2 Climate Disclosure Requirements, requiring companies to provide sustainability related financial information along with their financial statements. Specifically, the IFRS S2 Climate Disclosure Requirements are as follows:
- Disclose material climate related information.
- Disclose sustainable financial information.
- Disclosing the current and expected impact of climate and sustainability related risks and opportunities on financial statements.
Investors and other stakeholders need to understand the impact of climate change on a company’s business model, cash flow, financial condition, and financial performance. Although IFRS Accounting Standards do not explicitly mention climate issues, companies need to disclose material climate information. In July 2023, the IFRS Foundation released the impact of climate related issues on financial statements to help businesses understand how to disclose climate related information.
In March 2023, the International Accounting Standards Board (IASB) launched a project aimed at improving the disclosure of climate related risk impacts in financial statements. This project mainly responds to stakeholders’ demand for climate disclosure, such as some companies that have made net zero commitments not recognizing related liabilities, and companies not incorporating long-term uncertainty into the measurement of financial statements. In July 2024, the International Accounting Standards Board proposed some cases to provide companies with methods for recognizing significant climate impacts and disclosing these impacts.
ISSB’s Actions on Climate Disclosure and Financial Statements
The ISSB has taken action to ensure the link between climate disclosure and financial statements.
In terms of material information definition, ISSB and IASB adopt consistent definitions to ensure that companies can provide investors with the information needed for decision-making. If there are omissions, incorrect statements, or ambiguous information that could reasonably be expected to affect investors’ decisions, then such information is considered material.
In terms of reasonable and supportable information, IFRS 9 (Financial Instruments) and IFRS 17 (Insurance Contracts) believe that companies can disclose information with lower acquisition costs, as long as the information is reasonable and well founded. IFRS S1 and IFRS S2 also have the concept of reasonable and supportable information that can be obtained without excessive cost or effort.
In terms of related information, ISSB has introduced the concept of Integrated Reporting Framework (IRF) into IFRS S1, requiring companies that adopt ISSB standards to prepare and publish climate reports based on the same reporting period, and to include sustainability related financial disclosures in their general financial reports, as well as financial data and assumptions in their sustainability related financial disclosures. Enterprises also need to disclose the differences between the assumptions used to prepare the two reports.
In terms of current and expected impacts, IFRS S1 and IFRS S2 require companies to link sustainability related financial disclosures with information in financial statements. Therefore, companies adopting ISSB standards can disclose the current and expected impacts of sustainability related risks and opportunities.
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