A Guide to the IFRS Sustainability Disclosure Standards for the Aviation Sector

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The aviation sector, being a significant contributor to greenhouse gas emissions, faces increasing pressure to disclose its sustainability-related risks and opportunities. These sustainability disclosures play a vital role for companies to communicate their Environmental, Social, and Governance (ESG) performance to investors, stakeholders, and the public.

The International Sustainability Standards Board (ISSB), operating under the IFRS Foundation’s oversight, has developed IFRS Sustainability Disclosure Standards (IFRS SDS) to create a global standard for disclosing sustainability-related financial data and climate-related information. The ISSB, who are committed to supporting the adoption of IRFS SDS will provide guidance and training materials, also have established a Transition Implementation Group (TIG).

Compliance with IFRS SDS enables aviation companies to provide transparent and comparable information on their sustainability performance, helping investors and stakeholders make informed decisions and promoting sustainable practices within the industry.

Reporting on IFRS SDS requires a comprehensive understanding of the standards, consideration of relevant frameworks like the CDSB and IR Frameworks, adherence to TCFD recommendations, and compliance with country-specific requirements. This will form a comprehensive approach to sustainability reporting, bolstering transparency and accountability in corporate reporting.

This guide covers:

 

What is IFRS?

IFRS stands for the International Financial Reporting Standards. It is a set of accounting rules for financial statements of public companies. It was issued by the IASB (International Accounting Standards Board). Its goal is to make financial statements coherent and consistent across different industries and countries.

ifrs foundation explained

What are the IFRS Sustainability Disclosure Standards?

The International Sustainability Standards Board (ISSB), created by the IFRS Foundation, is responsible for developing and maintaining IFRS SDS.

The IFRS SDS are a set of reporting requirements developed to address sustainability-related risks and opportunities in financial reporting.

Their development involved a consultative process, including exposure drafts, stakeholder feedback, and the issuance of final standards.

There are two initial standards from ISSB which focus on:

  • IFRS S1 (general sustainability disclosure requirements)
  • IFRS S2 (climate)

IFRS SDS standards overview

IRFS S1

  • It requires disclosure of material information about a company’s sustainability-related risks and opportunities.
  • It uses the same definition of material that is used in IFRS Accounting Standards – that is, companies must determine that information is material.
  • The objective of IRFS S1 is to provide transparency and enable stakeholders to assess a company’s sustainability performance.

Types of IRFS S1 disclosures:

  • Disclosures about the entity’s sustainability-related risks and opportunities that could affect the entity’s financial performance.
  • Disclosures about the entity’s governance around sustainability-related risks and opportunities, including the board’s oversight of sustainability-related risks and opportunities
  • Disclosures about the entity’s strategy for identifying and managing sustainability-related risks and opportunities
  • Disclosures about the entity’s risk management processes for sustainability-related risks.
  • Disclosures about the entity’s metrics and targets used to assess and manage relevant sustainability-related risks and opportunities.
  • Disclosures about the impact of sustainability-related risks and opportunities on the entity’s businesses, strategy, and financial planning.
  • Disclosures about the resilience of the entity’s business model to different sustainability-related scenarios.

IRFS S2

  • Materiality assessments are crucial to identify the most significant sustainability factors affecting the company’s performance.
  • It includes disclosure about physical risks (such as flood risk), transition risk (such as regulatory change) and climate-related opportunities (such as new technologies).

Types of IRFS S2 disclosures:

  • Disclosures about the entity’s governance around climate-related risks and opportunities, including the board’s oversight of climate-related risks and opportunities.
  • Disclosures about the entity’s strategy for identifying and managing climate-related risks and opportunities, including the entity’s approach to transitioning to a low-carbon economy.
  • Disclosures about the entity’s risk management processes for climate-related risks, including the identification, assessment, and management of physical and transition risks.
  • Disclosures about the entity’s metrics and targets used to assess and manage relevant climate-related risks and opportunities, including greenhouse gas emissions, energy consumption, and water usage.
  • Disclosures about the impact of climate-related risks and opportunities on the entity’s businesses, strategy, and financial planning, including the potential financial impact of different climate scenarios.
  • Disclosures about the resilience of the entity’s business model to different climate-related scenarios, including a 2°C or lower scenario.
  • Disclosures about the entity’s greenhouse gas emissions, including Scope 1, Scope 2, and Scope 3 emissions.
  • Disclosures about the entity’s climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance, or cost of capital over the short, medium, or long term.

For aviation companies, adopting these standards enhances transparency, builds trust with stakeholders, and aligns them with global best practices in sustainability reporting. As it aims to provide a clear understanding of an entity’s environmental, social, and governance (ESG) performance.

The Incorporation of TCFD Recommendations in IFRS SDS

IFRS S1 and IFRS S2 integrate the TCFD recommendations to ensure alignment with global climate reporting standards. By incorporating TCFD recommendations, IFRS S1 and IFRS S2 align with globally recognized climate reporting standards.

This allows aviation companies to assess and disclose climate-related risks and opportunities more effectively, enhancing their resilience, access to finance, and long-term sustainability.

Some key TCFD-related disclosures incorporated in IFRS SDS include:

  • Scenario Analysis: Aviation companies must assess the impact of different climate scenarios on their business models and disclose the results.
  • Climate-related Targets: Disclosing emission reduction targets and their progress towards achieving them.
  • Climate-related Risk Management: Detailing the measures taken to mitigate climate-related risks and capitalize on opportunities.

How can the CDSB Framework help companies comply with IFRS?

The Climate Disclosure Standards Board (CDSB) is a global consortium of business and environmental organizations that works to promote the disclosure of environmental information in mainstream financial reporting.

Until IFRS SDS provide its own reporting framework and guidance, the CDSB Framework can be used to comply with IFRS in the absence of ISSB standards by providing a reporting framework, technical guidance, and an evidence base.

  • Reporting framework: The CDSB Framework provides a reporting framework for environmental and social information that can be used in conjunction with existing financial reporting frameworks, such as IFRS. This framework can help companies comply with IFRS requirements for environmental and social disclosures.
  • Technical guidance: The CDSB provides technical guidance on environmental and social disclosures that can be used in conjunction with IFRS. This guidance can help companies comply with IFRS requirements for sustainability-related financial disclosures.
  • Evidence base: The CDSB Framework and technical guidance on climate, water, biodiversity, and social disclosures can be used as part of the evidence base as the ISSB develops its IFRS Sustainability Disclosure Standards.

The consolidation of the CDSB into the IFRS Foundation is expected to further promote the integration of sustainability reporting into mainstream financial reporting.

How can the IR Framework help companies to comply with IFRS?

 

The IR Framework helps IFRS Sustainability disclosures by providing a reporting structure, a common language for sustainability reporting, and guidance on considering relevant standards. It assists companies with integrating sustainability-related information into their financial reporting, enhancing the quality and relevance of disclosures.

  • IFRS Sustainability Disclosure Taxonomy: The International Sustainability Standards Board (ISSB) proposes creating an IFRS Sustainability Disclosure Taxonomy to reflect disclosure requirements. The taxonomy is based on the proposals in the exposure drafts of IFRS S1 and IFRS S2, which are the IFRS Sustainability Disclosure Standards
  • Common language and alignment: The IR Framework and IFRS Sustainability Disclosure Standards create a common language for disclosing sustainability-related risks and opportunities. The IR Framework provides a broader context for reporting on sustainability matters, while IFRS S1 and S2 specifically focus on sustainability-related financial disclosures
  • Consideration of SASB Standards: In applying IFRS S1, companies are required to consider the SASB (Sustainability Accounting Standards Board) Standards to identify risks and opportunities. The SASB Standards can provide guidance on specific sustainability-related topics
  • Encouragement of adoption: The IFRS Foundation, which oversees the ISSB, actively encourages the adoption of the IR Framework by preparers. This drives a connection between sustainability-related disclosures and financial reporting, promoting the integration of sustainability information into financial statements

IFRS Timeline:

The timeline for adoption of the IFRS Sustainability Disclosure Standards (SDS) is as follows:

  • June 2023: IFRS S1 and IFRS S2 were issued by the International Sustainability Standards Board (ISSB)
  • January 2024: Both IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024

It is important to note that mandatory application of IFRS Sustainability Disclosure Standards depends on each jurisdiction’s endorsement or regulatory processes.

Ensure IFRS SDS compliance with PACE today

PACE, a global software platform and customer success program, aids aviation stakeholders in carbon reduction, including IFRS SDS compliance. This compliance facilitates providing comparable sustainability performance information, attracting investments. We assist in transforming carbon insights into effective strategies for growth, risk mitigation, and CO2 reduction.

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How to prepare for IFRS?

To prepare for IFRS Sustainability Disclosure Standards (IFRS S1 and IFRS S2) adoption, aviation companies should consider the following steps:

  • Conduct materiality assessments: while it is not mandatory to conduct materiality assessments for IFRS SDS, it is recommended. As it will help companies to identify relevant sustainability factors that may impact their business operations and financial performance.
  • Update accounting systems: Companies should update their accounting systems to capture sustainability-related information and ensure that it is integrated into their financial reporting.
  • Provide staff training: Companies should provide staff training on sustainability reporting principles, including the TCFD recommendations, CDSB Framework, and IR Framework.
  • Engage with auditors and regulators: Companies should engage with auditors and regulators to ensure compliance with the new sustainability disclosure requirements and obtain assurance on their sustainability-related disclosures.
  • Stay up to date with developments: Companies should stay up-to-date with developments related to IFRS Sustainability disclosures, including the consolidation of the CDSB into the IFRS Foundation and the establishment of the ISSB.

Conclusion

In conclusion, the adoption of IFRS S1 and IFRS S2 marks a significant stride towards enhancing transparency and accountability, providing stakeholders with comprehensive insights into an entity’s environmental, social, and governance (ESG) performance.

By integrating TCFD recommendations and leveraging frameworks such as CDSB and the IR Framework in conjunction with IFRS SDS, companies can effectively assess and disclose climate-related risks and opportunities, thereby promoting long-term sustainability and resilience.

As the timeline for IFRS adoption approaches in various jurisdictions, it is essential for companies to prepare by conducting materiality assessments, updating accounting systems, and collaborating with auditors and regulators to ensure compliance. Embracing the IFRS SDS will foster responsible decision-making, build trust with stakeholders, and contribute to a more sustainable future.

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