The IFRS S1 and IFRS S2 standards were issued by the International Sustainability Standards Board (ISSB), a body that sets standards for sustainability-related financial reporting to meet the needs of investors. The ISSB was established by the International Financial Reporting Standards (IFRS), or simply the IFRS Foundation, to specifically address sustainability-related standards (IFRS, 2023).
The IFRS S1 and IFRS S2 disclosure standards were developed to facilitate consistent and comparable disclosures about sustainability and climate-related risks and opportunities. These standards address long-term reporting challenges, helping companies and investors better understand performance and comply with constantly evolving regulations.
The IFRS standards are expected to simplify the disclosure process for companies, allowing for benchmarking and cost and time savings. Investors will be able to use these standards to guide investment decisions, assist in due diligence related to sustainability and climate, and track and analyze the performance of companies in their portfolio (Cormac, Silva & Onabanjo, 2023).
The IFRS standards integrate certain existing standards, such as those from the Sustainability Accounting Standards Board (SASB), Task Force on Climate-Related Financial Disclosures (TCFD), and Climate Disclosure Standards Board (CDSB). Additionally, they are designed to be interoperable with other existing standards, such as the standards of the Global Reporting Initiative (GRI).
The main difference between the two standards is that IFRS S1 focuses on general requirements for the disclosure of sustainability-related financial information, while IFRS S2 specifically focuses on climate-related risks and opportunities.
The growing global interest in integrating Environmental, Social, and Governance (ESG) practices into corporate strategies reflects a paradigm shift in stakeholder expectations towards companies (Wolfe, 2020). In this context, accounting plays the role of providing transparency and communicating sustainability-related initiatives (Altin & Yilmaz, 2023). This role is demanded by investors, as companies with good ESG practices are seen as less risky (Kumar et al., 2016) and more sustainable in the long term (Singhania & Saini, 2021).
The complexity of global challenges, such as climate change, social inequalities, and corporate governance issues, requires companies to adopt a holistic approach in managing their impacts and seeking sustainable opportunities (Wilson, 2021). In this sense, as previously discussed, accounting provides a set of disclosure requirements that allows companies to communicate, transparently and accurately, the risks and opportunities associated with sustainability. However, the geographical diversity of companies imposes the need to consider the specific characteristics of each region to ensure that the proposed metrics and indicators are relevant and applicable, as advocated by Eccles, Krzus, Rogers & Serafeim (2012) in relation to the sector of operation of companies.
The urgency to adopt more sustainable practices is evident, not only due to investor pressure but also in response to society’s demands and constantly evolving regulations (Krishnamoorthy, 2021). Investors, increasingly aware of the impact of ESG on risk and return assessments, seek detailed information that goes beyond standardized metrics (Lucia, Pazienza & Bartlett, 2020). Thus, there is a need for a set of metrics and indicators that not only meet regulatory requirements but also provide meaningful and comparable insights into the sustainable performance of companies in different regions, as Chvátalová, Kocmanová & Dočekalová (2011) have warned .
In this scenario, this proposition is the development of specific metrics and indicators for explanatory notes in ESG disclosure, recognizing the need for regional context for a more complete and effective understanding by investors. This means not only adapting global measures to local contexts but also identifying relevant regional indicators that can enrich the assessment of companies’ ESG performance. For example, in regions prone to natural disasters, metrics related to resilience and crisis management can be included, while in areas with specific social challenges, metrics that assess the positive impact on local communities may be prioritized instead.
This regional approach not only strengthens the usefulness of the information disclosed to local investors but also contributes to a more comprehensive understanding of the global impact of sustainable practices adopted by companies. By aligning the proposed metrics and indicators with regional nuances, accounting can build bridges between corporate efforts and society’s expectations, reinforcing investor confidence and promoting the widespread adoption of sustainable practices.
The proposal of regional metrics and indicators for explanatory notes in ESG disclosure not only responds to the pressing need for more detailed and contextual information but also signals a commitment to a holistic understanding of the impacts and opportunities associated with sustainability in different parts of the world. By adopting this approach, accounting reinforces its role as a facilitator of business transformation towards a more sustainable and responsible future.
José María MOREIRA
Partner at TGS Brazil Compass