The IFRS sustainability disclosure standards, IFRS S1 (General Requirement for Disclosure of Sustainability-related Financial Information), require organisations to disclose sustainability-related financial information for the same reporting entity as the related financial statements.
Therefore, for an organisation that prepares a group set of financial statements that includes the parent and its subsidiaries, the related sustainability report should cover the exact scope of entities included in the group financial statements.
The reporting entity boundary is the first level of application of the reporting boundary principles of the IFRS sustainability disclosure standards.
Therefore, as organisations prepare for the mandatory adoption of the IFRS disclosure standards, there is a need to ensure that sustainability practices have been adopted across the entire group, not just for selected companies within a group or by the parent entity alone.
Failure to cascade the sustainability strategy, metrics and targets across the entire group can result in significant challenges when reporting.
For example, some organisations have identified data gaps when preparing their sustainability reports due to specific entities within their groups not capturing the required data, which results in failing to meet the reporting entity boundary definition of the standard.
The other level of the application of the reporting boundary commonly encountered is the reporting boundary for greenhouse gas (GHG) emissions. IFRS S2 (Climate-Related Disclosures) requires organisations to measure their emissions using the GHG Protocol Corporate Standard.
The protocol provides two ways —equity share approach and control approach—to determine organisational boundaries. Organisations are required to select one of the two approaches and apply them consistently.
Under the equity share approach, organisations include their share of GHG emissions in proportion to their share of equity, reflecting the economic interest of the organisation in the risks and rewards associated with an operation.
Under the control approach, organisations account for 100 percent of the emissions from operations they control. Organisations will have to apply either the financial control or operational control criteria.
The financial control criteria refer to an organisation having the right to the majority of the economic benefits from an operation, which is not always aligned with the ownership percentage. Operational control is where an organisation has full authority to introduce and implement operational policies.
