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1.1 Overview
Publication date: 31 Jul 2023
ca In depth INT2023-05
IFRS S1 requires an entity to disclose information about its sustainability-related risks and opportunities that is useful to the primary users of general purpose financial reporting (referred to as the ‘primary users’) in making decisions relating to providing resources to the entity. [IFRS S1 para 1]. The primary users are existing and potential investors, lenders and other creditors of the entity. [IFRS S1 App A].
To effectively identify sustainability-related risks and opportunities, and to meet the objective of IFRS S1, an entity needs to have an understanding of the resources that it relies on, and relationships along its value chain. Paragraph 2 of IFRS S1 explains that an entity and the resources and relationships throughout its value chain form an interdependent system in which the entity operates. That is, an entity’s relationships and interactions with stakeholders, society, the economy and the natural environment throughout its value chain are inextricably linked to the ability of the entity to generate, amongst other things, cash flows over the short, medium and long term.
An entity’s dependencies and impacts on resources and relationships give rise to sustainability-related risks and opportunities. These risks and opportunities might influence an entity’s cash flows, access to finance or cost of capital over the short, medium or long term. [IFRS S1 para 3]. These are collectively referred to as ‘sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects’. [IFRS S1 para 3]. The analysis performed to identify sustainability-related risks and opportunities is the first step a reporting entity would take in determining which information to include in its sustainability reporting.
The application guidance explains that resources and relationships are a source of value for an entity. The ability of an entity to create, preserve or erode value for itself is inextricably linked to the value that it creates, preserves or erodes for others. [IFRS S1 App B para B3]. Therefore, an understanding of an entity’s resources and relationships, and the value that an entity derives, facilitates the identification of sustainability-related risks and opportunities.
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PwC observation: Identifying value |
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The application guidance explains that the resources that an entity depends on and impacts can vary and take different forms. These resources include, but are not limited to, financial, manufactured, intellectual, human, relationship, and natural. [IFRS S1 App B para B4]. These are similar to the capitals within the Integrated Reporting Framework (IRF). Paragraph BC41 of IFRS S1 clarifies that, even though the objective of IFRS S1 builds on the IRF, IFRS S1 does not use identical terms.
Understanding the concept of ‘value’, as explained in the IRF, helps to focus on the areas of a business which lead to value preservation, regeneration, development or deterioration and depletion. For example, an increase in training would develop the value of the human aspect of the business but would deplete the financial side, although not necessarily by the same amount.
Value created, eroded or preserved for others
Paragraph B3 of IFRS S1 references the close relationship between an entity’s ability to create value for itself and the value it creates, preserves or erodes for other parties. This could be misinterpreted by preparers as a reference to impact materiality
. To clarify the close relationship between the value that the entity creates, preserves or erodes for others and the entity’s own ability to succeed and achieve its goals, refer to the following example.
The pesticides used to protect an entity’s crops from disease today might affect the surrounding bee populations responsible for the pollination of the crops. The entity’s ability to generate future cash flows from the sale of the crops is inextricably linked to the health of the bee population. If the pesticides used inadvertently kill the bee population, the crops won’t be pollinated and, as a result, the entity’s use of pesticides today might impact the entity’s ability to sell the crops in the future. Consequently, the health of the bee population impacts the entity’s ability to generate value for itself.
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1 See PwC’s In depth, ‘Worldwide impact of CSRD – are you ready?’ for more detail regarding impact materiality.
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