With the official release of IFRS S2 “Climate-related Disclosures,” companies are no longer just expected to report on ESG initiatives—they are now required to specifically disclose the impacts of climate change on their financial statements.
Two key disclosure obligations closely tied to finance and accounting teams are: the impact of climate risk scenarios on asset impairments, and the integration of carbon costs and policy risk factors into cash flow forecasts. However, many companies have yet to realize that conducting this level of financial risk analysis hinges on having institutionalized carbon footprint data. Without credible emissions data and climate parameters, it becomes impossible to build impairment models or support the disclosures in financial statement notes, ultimately leading to trust risks and audit challenges.
Two key disclosure obligations closely tied to finance and accounting teams are: the impact of climate risk scenarios on asset impairments, and the integration of carbon costs and policy risk factors into cash flow forecasts. However, many companies have yet to realize that conducting this level of financial risk analysis hinges on having institutionalized carbon footprint data. Without credible emissions data and climate parameters, it becomes impossible to build impairment models or support the disclosures in financial statement notes, ultimately leading to trust risks and audit challenges.
1. Carbon Footprint Data as a Critical Foundation for IFRS S2 Impairment Disclosures
1.1 IFRS S2 Requirements on “Asset Impairment” and “Cash Flow Risk” Disclosures
According to IFRS S2, companies are required to explain how material climate-related risks impact their asset and liability structures in their sustainability disclosures. This goes beyond simply describing risks—it requires integrating climate risks into financial models for analysis and disclosure.
Specifically, companies need to assess the potential impact of policy changes, such as carbon taxes or emissions caps, on asset values, and also review their cash flow forecasting models to ensure that carbon costs or the substitution costs of transitioning to green energy are properly reflected.
Furthermore, IFRS S2 places strong emphasis on the importance of scenario analysis. Companies are expected to proactively analyze the financial impacts under various climate pathways and clearly disclose the key assumptions and reference data used in their financial reports. Vague descriptions without concrete data and calculation bases will not only struggle to pass audits but will also fall short of disclosure standards for consistency and credibility.
Specifically, companies need to assess the potential impact of policy changes, such as carbon taxes or emissions caps, on asset values, and also review their cash flow forecasting models to ensure that carbon costs or the substitution costs of transitioning to green energy are properly reflected.
Furthermore, IFRS S2 places strong emphasis on the importance of scenario analysis. Companies are expected to proactively analyze the financial impacts under various climate pathways and clearly disclose the key assumptions and reference data used in their financial reports. Vague descriptions without concrete data and calculation bases will not only struggle to pass audits but will also fall short of disclosure standards for consistency and credibility.
1.2 Without Institutionalized Carbon Accounting, Disclosures Become Hollow
Many companies have sustainability reports and carbon footprint reports, but their data sources are not managed in an institutionalized manner, leading to the following issues:
- Annual data lacks logical consistency, carbon emission factors are not fixed, and thus cannot serve as a basis for cash flow models
- There is no data traceability or approval record, making it impossible to prove data reliability
- Climate risk disclosures in financial statements conflict with ESG report content
When investors, auditors, or third-party assurance providers request supporting evidence, such data fails to provide a reasonable financial narrative.
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2.How Finance and Accounting Teams Can Integrate Carbon Footprint Results into Financial Reporting Frameworks
2.1 Incorporating Climate Risk Factors into Cash Flow Forecasts and Impairment Models
When performing asset impairment testing, companies must forecast future cash flows. If climate policies are expected to impact a company’s cost structure, the following items need to be included in the model parameters:
- Estimated carbon-related expenditures and their effect on gross margins
- Costs of transitioning to renewable energy in compliance with regulations
- Risk of declining recoverability of high-carbon assets
For example, if a factory’s main production line relies heavily on high-carbon energy, the introduction of a carbon tax could significantly impact its profitability. The finance team should reflect this factor when selecting the discount rate and calculating the asset’s recoverable amount.
2.2 Disclosing Climate Risk Assumptions and Bases in Financial Statement Notes
IFRS S2 not only requires companies to disclose the financial impacts of climate change, but also emphasizes the importance of transparency regarding the “logical basis” and “data sources” behind those disclosures. In the financial statement notes, companies should clearly explain the climate scenario models used in impairment testing, including the estimated carbon prices applied, the carbon accounting methodologies, and the versioning of the underlying data. This information should be jointly integrated and validated by the ESG and finance teams to ensure consistency and verifiability of the disclosures.
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3. How Small and Medium-Sized Enterprises Can Establish Data Reliability Systems at Low Cost
3.1 Establishing Activity Ledgers and Clear Role Assignments
Small and medium-sized enterprises (SMEs) can model their approach after accounting practices by creating dedicated ESG activity ledgers. The basic design should include:
- Classification, data source, and responsible person for each carbon-emitting activity (e.g., electricity, fuel, business travel)
- A three-tier system of data entry, review, and audit
- A reconciliation table linking carbon logic to actual expenses and supporting documents in the accounting system
This approach can start with simple Excel spreadsheets or configurations within existing ERP systems, eliminating the need for high-cost system implementation upfront.
3.2 Building Climate Risk Simulation and Version Control Processes
For carbon data and risk parameters, companies should establish a version control system that includes:
- Documentation of the carbon emission factors used for each reporting year (e.g., government publications or IEA data)
- Retention of assumption files for climate policy simulation scenarios
- Processes for sign-off, updates, and responsibility tagging when data changes
With such a system in place, companies can quickly adapt to various disclosure requirements (such as IFRS S2, CSRD, GRI) while ensuring consistency and auditability.
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4. Conclusion
IFRS S2 does not require companies to produce flawless impairment models, but it does require them to clearly explain “how you performed the assessment” and “where your data came from.” This is precisely where systems can deliver their greatest value. For finance and accounting teams, carbon accounting is no longer just an ESG reporting task—it has become an institutional issue that directly affects the credibility of financial reporting and the organization’s ability to anticipate risks.
Is your company ready to meet the new ESG challenges?
Hall Chadwick Taiwan has extensive experience in ESG financial consulting and can assist your company in building a sustainability reporting framework that aligns with the latest regulatory requirements.
If you have any questions regarding the 2025 ESG financial disclosure requirements, feel free to contact us.
If you have any questions regarding the 2025 ESG financial disclosure requirements, feel free to contact us.