How Climate Change can impact your Financial Reporting

What\'s New in the World of reporting?

At the UN Climate Change Conference (COP26) held in November 2021, the IFRS Foundation Trustees announced the creation of the ISSB, a new standard-setting board within the IFRS Foundation. The ISSB\'s role is to develop a comprehensive global baseline of high-quality sustainable and climate-related disclosures for businesses. The International Sustainability Standards Board (ISSB) issued two brand-new sustainability standards on June 26, 2023, which came into effect on January 1, 2024. These standards are:

• IFRS S1: General Requirements for the Disclosure of Sustainability-related Financial Information;
• IFRS S2: Climate-Related Disclosures.

Why is Sustainability such a Hot Topic of Conversation in Businesses Today?

A substantial shift has occurred among global investors who now wish to fund businesses that operate with environmental responsibility over those that prioritize short-term profits at the expense of the environment. ESG (Environmental, Social and Governance)-themed investments have gained significant traction in India, exemplified by funds such as the ICICI Prudential ESG Fund and Axis ESG Equity Fund.

Greenwashing and the Need for Regulation

A study conducted for the European Commission in 2020 discovered that over half (53%) of the environmental claims made by companies in EU about their products and services were vague, misleading, or baseless. Greenwashing, a deceptive tactic used by companies to exaggerate their environmental efforts, has drawn attention. The EU has proposed the Green Claims Directive, mandating independent verification and scientific support for green claims made by companies.

The real-world impact of climate change remains undisputable

In May 2022, the Bank of England conducted a financial stress test on UK-based banks, revealing that banks and insurers could face £340 billion worth of climate-related losses by 2050. Bank of England estimates that not considering adverse environmental scenarios can impact annual profits by 10-15%.

Climate change also impacts world trade; for example, the Panama Canal is experiencing one of its worst droughts, reducing the number of ships that can cross daily. In India, heatwaves are predicted to damage crops, increase water demand, and reduce outdoor working capacity by 15% by 2050, substantially reducing economic growth.

The Sustainability Disclosure Standards

These standards are designed to guide management to disclose information about a company\'s sustainability-related risks and opportunities. The impact of implementing these standards includes increased awareness of waste and greenhouse gases, investor preference for eco-conscious businesses, improved forecasting, better government policies, and potential higher interest rates for non-compliant businesses.

Key Terms

• Climate-related transition risks: Risks associated with transitioning to a low-carbon economy.
• Climate-related physical risks: Risks such as storms, floods, and wildfire damage.
• Scope 1, 2, and 3 emissions: Direct, indirect (energy purchased), and value-chain emissions respectively.

What to disclose?

IFRS S2 requires disclosures in four main areas: Governance, Strategy, Risk Management, and Metrics and Targets. Entities must report on greenhouse gas emissions, climate-related physical and transition risks, climate-related opportunities, capital deployment, and internal carbon pricing if applicable.

How does the Business Responsibility Sustainability Report (BRSR) compare to IFRS S2?

The BRSR, required for the top 1000 listed companies in India, covers aspects like projects reducing greenhouse gas emissions, adopted certifications, total energy consumption, sustainability sourcing procedures, and Extended Producer Responsibility (EPR) plans, but it is not as comprehensive as IFRS S2.

Opportunities for Chartered Accountants (CAs)

CAs have opportunities to assist in practical application of the standards, provide audit and assurance services, integrate sustainability assessment into investment matrices, advise on risk management, and collaborate with environmental specialists.