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Identifying material risks and opportunities for sustainability reporting
Identifying material risks and opportunities for sustainability reporting
Sustainability reporting & assurance
Preparers implementing sustainability reporting under the IFRS Sustainability Disclosure Standards (IFRS SDS) face various challenges. While broadly similar to those faced using the European Sustainability Reporting Standards ESRS or the Global Reporting Initiative (GRI) standards, some variations will occur due to differences in the requirements under IFRS SDS.
An essential part of sustainability reporting under IFRS SDS is identifying risks and opportunities that could reasonably be expected to affect the entity’s cash flows, access to finance or cost of capital over the short, medium and long term.
Focus on key matters
When it comes to identifying material risks and opportunities materiality is critical, as only material risks and opportunities require disclosure. In the context of IFRS SDS, this refers to information material to primary users of the financial statements, such as investors and credit suppliers. Here, the focus is on financial impact.
A key feature of IFRS SDS is that the materiality assessment should be based on reasonable and supportable information. In reality, this means an exhaustive search for information isn’t required. This is because the information used should be available without undue cost or effort. For preparers, it means striking a balance between the cost of obtaining data and users’ needs. As a general rule, the more useful information is to investors, the more effort you should put into obtaining that information. It’s also important to remember that the information and data used may come from both internal and external sources.
A further consideration is that IFRS SDS requires reference to be made to the Sustainability Accounting Standards Board (SASB) standards when identifying risks and opportunities. Equally, preparers may also wish to refer to other standards such as the ESRS, GRI, and Climate Disclosure Standards Board.
Addressing the challenges of long-term risks and identifying opportunities
While the assessment needs to consider risks and opportunities across the short, medium and long term, preparers have highlighted that short-term risks are typically better understood given the focus of risk management over many years. Sustainability opportunities and long-term risks, on the other hand, are more challenging to assess and support with good data.
Again, assessing materiality in terms of what will have the most significant impact on your business and what is most important to users will help unlock any long-term risks and opportunities sustainability holds. For example, how will moving from fossil fuels to renewable energy impact production and processes in 10 or 20 years? Will the consumer shift to more sustainable products and services impact your business strategy in future? Can adopting a more sustainable business model improve access to talent or improve brand reputation? Asking such questions can help identify more long-term risks and opportunities that sustainability can offer.
Identifying the next steps
An initial step is to identify any processes, controls and data that do not comply with IFRS SDS. A complete gap analysis should include an initial materiality assessment to determine your exposure to drivers of risks and opportunities, including transition and physical climate risks. In addition, it’s essential to map the current and anticipated effects of sustainability, climate risks and opportunities on your business model and value chain.
Equally, it’s critical to perform scenario analyses to identify risks and opportunities in the short, medium and long term, and identify metrics, targets and the information available to report your performance.
Based on the outcome of the gap analysis, the next step is to develop an implementation plan and roadmap, focusing on the key areas for improvement to ensure compliance with IFRS SDS requirements.
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