Background
The ISSB issued the inaugural IFRS Sustainability Disclosure Standards (IFRS SDS) in June 2023:
- IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1); and
- IFRS S2 Climate-related Disclosures (IFRS S2).
The standards require an entity to provide information about the sustainability-related (including climate-related) risks and opportunities that could reasonably be expected to affect an entity’s cashflows, access to finance, and cost of capital.
In Australia, the AASB issued the inaugural Australian Sustainability Disclosure Standards (ASRS) in September 2024. AASB S2 Climate-related Disclosures is a mandatory standard for certain entities required by the Corporations Act to prepare an annual sustainability report.
The ASRS were developed using the IFRS SDS as a baseline, and AASB S2 retains close (though not complete) alignment with the IFRS SDS as it relates to climate-related financial disclosures.
ISSB proposed amendments to IFRS S2
As part of the ISSB’s activities to support the implementation of IFRS S1 & IFRS S2, the ISSB recently considered specific feedback about application challenges in implementing the standards. In response to this feedback, the ISSB decided it will propose amendments to the IFRS S2 standard, with a formal exposure draft of the amendments expected to be released in the near future.
There are in total four proposed amendments: two in relation to the application of jurisdictional relief in the measurement of absolute gross greenhouse gas (GHG) emissions; and two in relation to the disclosure of financed emissions for entities with activities in commercial banking, asset management or insurance.
Proposed Amendments
1. Application of Jurisdictional relief – Application “in whole or in part”
IFRS S2 requires an entity to measure its greenhouse gas emissions in accordance with the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004) unless required by a jurisdictional authority or an exchange on which the entity is listed to use a different method for measuring its greenhouse gas emissions (IFRS S2.29(a)(ii)).
In application, the ISSB received feedback that it is currently unclear whether this relief can be applied if only part of the entity (e.g. a subsidiary) is required by a jurisdictional authority to use a method other than the GHG Protocol Corporate Standard.
The proposed ISSB amendment clarifies that the relief so that if an entity, in whole or in part, is required by a jurisdictional authority or exchange on which it is listed to use a method other than the GHG Protocol Corporate Standard to measure GHG emissions, the entity would be permitted to use this method instead of the GHG Protocol Corporate Standard.
2. Application of Jurisdictional relief – Global Warming Potential values
In measuring the entity’s absolute gross GHG emissions, IFRS S2.B21-B22 requires an entity to use global warming potential (GWP) values from the latest Intergovernmental Panel on Climate Change (IPCC) assessment when converting greenhouse gases into carbon dioxide equivalent (CO2-e) values. The latest IPCC assessment available is currently the Panel’s Sixth Assessment Report.
This would result in entities that are required by their jurisdiction to use different GWP values (e.g. entities reporting under the National Greenhouse and Energy Reporting Act 2007) to recalculate their GHG emissions using two different GWP values; one for IFRS S2 compliance and another for local compliance.
The proposed ISSB amendment would extend the application of jurisdictional relief so that, if an entity, in whole or in part, is required by a jurisdictional authority or exchange on which it is listed to use GWP values that are not from the latest IPCC assessment, the entity would be permitted to use those GWP values instead of the GWP values from the latest IPCC assessment.
3. Financed emissions – Emissions required to be measured
IFRS S2 requires an entity that participates in financial activities associated with asset management, commercial banking or insurance to disclose additional information about its scope 3 emissions associated with its loans or investments, otherwise known as ‘financed emissions’. These additional disclosure requirements are contained in IFRS S2.B61-63.
In application, the ISSB received feedback there was diversity in interpretation of the scope of activities required to be measured as part of the financed emissions disclosures, including uncertainty as to whether derivatives, underwriting activities, and investment banking activities formed part of the disclosed financed emissions.
The proposed ISSB amendment will limit the requirement to disclose financed emissions by requiring an entity to only disclose financed emissions as defined in IFRS S2 (associated with loans and investments) and not requiring an entity to measure and disclose GHG emissions associated with derivatives.
The ISSB is additionally proposing to require an entity to disclose the amount of derivatives and specific financial activities it excluded, and to require an entity to explain the derivatives it excluded from the measurement and disclosure of financed emissions as a result of this limitation in scope.
4. Financed emissions – Industry Classification requirements
IFRS S2.B62(a) and IFRS S2.B63(a) requires an entity that participates in financial activities associated with commercial banking or insurance to disaggregate additional information about its financed emissions by industry. When doing so, the entity is required to use the Global Industry Classification Standard (GICS) 6-digit industry-level code for classifying the counterparties.
In application, the ISSB received feedback there are application challenges associated with this requirement, as entities must enter into a licensing agreement to use GICS if they are not already using GICS for other purposes.
The proposed amendment removes the requirement to use the GICS system and permits the use of an alternative industry-classification system in specific circumstances.
Implications for Australian entities
The ISSB plans to publish an exposure draft of the proposed amendments to IFRS S2 in the second quarter of 2025, followed by a 60 day comment period.
Changes to the IFRS SDS do not automatically apply to the Australian Sustainability Reporting Standards. Any proposed amendments to AASB S2 will be undertaken by the AASB, and subject to due process, including an exposure draft and public consultation period. Group 1 entities should be conscious that the Corporations Act requires the annual sustainability report is prepared in compliance with AASB S2 as currently issued.
However, we observe the majority of feedback the AASB received in the development of the ASRS emphasised the importance of alignment to the IFRS SDS. AASB S2 is very closely aligned to IFRS S2 other than the removal of the requirement to report industry-based disclosures. Therefore it is likely the AASB will, subject to feedback received, propose similar amendments to AASB S2.
How we can help
Grant Thornton has a team of sustainability reporting specialists who understand the intricacies of the ASRS reporting requirements. Our team can work closely with you to navigate through the process of getting ready for ASRS reporting and IFRS SDS reporting, including:
- sustainability-related and climate-related risk and opportunity guidance;
- reporting gap identification;
- greenhouse gas emissions guidance;
- assurance readiness;
- sustainability and climate reporting support; and
- training and education.
Further information
If you wish to discuss any of the information included in this Sustainability Reporting Alert, please get in touch with your local Grant Thornton Australia contact or a member of the Sustainability Reporting team at sustainability.reporting@au.gt.com.
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