IFRS S1: Conditions for not disclosing information

IFRS S1 provides certain conditions where an entity need not disclose quantitative information about the current or anticipated financial effects of a sustainability-related risk or opportunity. These conditions are mentioned in the paragraphs 38-40.

I would like to describe paragraph 38 in more detail. Below is the description of paragraph 38.

An entity need not provide quantitative information about the current or  anticipated financial effects of a sustainability-related risk or opportunity if:

the entity determines that:

(a) those effects are not separately identifiable; or

(b) the level of measurement uncertainty involved in estimating those effects is so high that the resulting quantitative information would not be useful.

Let me elaborate on point (a) and (b).

The provision under IFRS S1 regarding the disclosure of quantitative information about the financial effects of sustainability-related risks and opportunities can be broken down as follows:

 (a) "Those effects are not separately identifiable"

This means that an entity is not required to provide specific numerical data on how a sustainability-related risk or opportunity impacts its financial performance if the effects cannot be clearly isolated from other factors. In many cases, sustainability-related risks and opportunities may influence multiple areas of a company's operations, making it difficult to determine their individual financial impact. 

For example:

1. Integrated Effects: A company’s revenue may be influenced by both sustainability initiatives (like reducing carbon emissions) and other strategic factors (such as cost-cutting measures or market expansion). If these effects are deeply intertwined, it may not be feasible to isolate the financial impact attributable solely to the sustainability-related initiative.

2. Complex Interdependencies: In industries like agriculture or manufacturing, sustainability-related risks (e.g., water scarcity or supply chain disruptions) can affect operations in ways that are interconnected with other operational challenges. If a company cannot distinguish the financial impact of sustainability factors from other influencing variables, it is not required to quantify those effects separately.

 (b) "The level of measurement uncertainty involved in estimating those effects is so high that the resulting quantitative information would not be useful"

This point addresses situations where there is a significant degree of uncertainty in estimating the financial effects of a sustainability-related risk or opportunity, to the extent that any quantitative information provided would be unreliable or misleading. High measurement uncertainty can arise due to:

1) Lack of Reliable Data: For emerging risks like climate change, there may be insufficient data to make accurate financial estimates. For instance, predicting the long-term financial impact of potential regulatory changes or shifts in consumer behavior related to sustainability can be challenging.

2) Long-Term Projections: Sustainability-related risks and opportunities often involve long-term time horizons, making it difficult to forecast their financial impact with precision. For example, estimating the financial effects of transitioning to a net-zero business model over the next 20 years may involve so many assumptions and variables that the resulting figures are speculative at best.

3) High Variability: The financial impacts of certain sustainability-related factors (like the effects of extreme weather events) may vary significantly based on unpredictable conditions, leading to a high level of estimation uncertainty. In such cases, any quantitative disclosures might not provide meaningful insights to stakeholders

Together, these provisions acknowledge the complexities involved in quantifying sustainability-related financial effects, especially when data is limited or projections are uncertain. However, even if quantitative disclosures are not possible, entities are still encouraged to provide qualitative information that helps users of financial reports understand the nature of these risks and opportunities.

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