#1How to prepare a report in compliance with IFRS S1/S2? IFRS Session 3 August 2023 IM The better the question. The better the answer. The better the world works. EY Building a better working world#2What are IFRS S1/S2? Page 2 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#3Introducing the first two IFRS Sustainability Disclosure Standards Sustainability disclosure was developed in collaboration with Sustainability Accounting Standards Board (SASB), International Integrated Reporting Council (IIRC), Value Reporting Foundation (VRF), Climate Disclosure Standards Board (CDSB), Task Force on Climate-related Financial Disclosures (TCFD). Ⓡ $IFRS IFRS General Requirements Standard: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information - sets out the core content for a complete set of sustainability-related financial disclosures, establishing a comprehensive baseline of financial information. Sustainability Jun IFRS S1 IFRS Sustainability Disclosure Standard General Requirements for Disclosure of Sustainability-related Financial Information On 26 June 2023, the ISSB (International Sustainability Standards Board) of IFRS published its first two Standards, IFRS S1 and IFRS S2, which are effective for annual reporting periods beginning on or after 1 January 2024 (early adoption is permitted) First topic-based requirements: IFRS S2 Climate-related Disclosures - sets out requirements to provide material information about its significant climate-related risks and opportunities. Page 3 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? Internal $IFRS Sustainability IFRS S2 IFRS Sustainability Disclosure Standard Climate-related Disclosures International Sustainability Standards Board EY#4Core content of IFRS S1 and IFRS S2 disclosures Material information disclosed about sustainability-related (or climate-related) risks and opportunities, in IFRS S1 and IFRS S2, builds upon the four Task Force on Climate-Related Financial Disclosures (TCFD) pillars. Governance The entity's governance processes, controls and procedures used to monitor, manage and oversee sustainability-related (or climate-related for IFRS S2) risks and opportunities. Strategy The processes the entity uses to identify, assess, prioritize and monitor sustainability-related (or climate-related for IFRS S2) risks and opportunities. Risk Management The approach the entity uses to manage sustainability-related (or climate-related for IFRS S2) risks and opportunities. Metrics and Targets The entity's performance regarding sustainability-related (or climate-related for IFRS S2) risks and opportunities. Page 4 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#5Alignment of IFRS S1/S2 with other frameworks Page 5 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#6Differences between IFRS S1/S2 and other existing frameworks GRI (Global Reporting Initiative) IFRS S1/S2 determine disclosures about sustainability and climate risks influencing investor decisions. GRI focuses on the company's impacts on sustainable development and stakeholders' interests. The Standards can be used together to create comprehensive sustainability reporting. GRI ESRS (European Sustainability Reporting Standards) DEFRAG IFRS Sustainability Disclosure Standards $IFRS ISSB's limited coverage of sustainability issues does not meet the EU's needs. The European Commission aims to integrate ISSB standards into ESRS, aligning with the EU Green Deal. The Commission and EFRAG are actively engaging with ISSB to enhance interoperability between ESRS and ISSB standards. SASB (Sustainability Accounting Standards Board) TCFD (Task Force on Climate- Related Financial Disclosures) IFRS S2 integrates and builds on the recommendations of TCFD the TCFD. The key differences are: Different approaches to GHG emissions disclosure, transition plans and target setting. IFRS S2 requires disclosure of industry-based metrics, additional information on governance, resilience, identifying risks and opportunities. SASB STANDARDS Page 6 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? SUSTAINABILIT ACCOUNTING BOARD Climate-related topics and metrics of SASB Standards are included in IFRS S2 Industry- based Guidance. EY#7Alignment of GRI climate-related disclosure with IFRS S2 In March 2022, ISSB and GRI signed the Memorandum of Understanding (MoU) to align sustainability-related standards. This collaboration marks a tangible move towards achieving the global complementary suite of IFRS and GRI standards that meet the needs of broader stakeholders. There are two interconnected sustainability reporting approaches: Sustainability-related financial reporting focusing on disclosing information on sustainability- related risks and opportunities for investors and capital market participants through the IFRS Sustainability Disclosure Standards. Impact reporting designed to disclose multi-stakeholders information on an organization's most significant impacts on the economy, environment, and people, and how the organization manages these impacts, through the GRI Standards. GRI disclosure 201-2 Financial implications and other risks and opportunities due to climate change is compatible with the IFRS S2 that helps to minimize reporting burden. It is required to disclose the risk and opportunities posed by climate change, including their description, impacts, and financial implications before action is taken and methods used to manage it. Page 7 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#8GRI Sector Standards compatible with IFRS S2 The GRI Standards are continually reviewed, with current developments including new Sector Standards. Some Sector Standards contain material topics of climate adaptation, resilience, and transition. The standards require disclosing information on a given material topic that is compatible with the requirements of IFRS S2. Generally, topics of climate adaptation, resilience, and transition refer to how an organization adjusts to current and anticipated climate change-related risks, as well as how it contributes to climate change. STANDARDS STANDARDS STANDARDS GRI 11 GRI 12 GRI 13 GRI 11: Oil and Gas Sector GRI 12: Coal Sector GRI 13: Agriculture Aquaculture and Fishing Sectors Each Sector Standard lists the disclosures identified for each topic. For GRI disclosure 201-2, it is recommended to disclose internal carbon pricing that has informed the identification of climate-related risks and opportunities and their potential impacts on the company's operations and revenue. The recommendation to disclosure 3-3 Management of material topics comprises partially the same types of information IFRS requires to disclose regarding governance, strategy, metrics and targets and risk management. Also, the Sector Standard supplements GRI disclosure 305-5 Reduction of GHG emissions with additional information on climate goals and targets. Page 8 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#9Comparing Standards IFRS S1 and ESRS 1, ESRS 2 Elements of mapping IFRS S1 vs ESRS 1 and 2 Objective Scope Core content Approach to materiality General features ESRS approach to identify the stakeholders includes affected stakeholders and users of sustainability reporting/ stakeholders with an interest in the undertaking. The IFRS S1 refers to the term primary users included in the broader definition of stakeholders in ESRS 1. ESRS 1 refers to a list of sustainability matters to be covered. But IFRS S1 focuses on information necessary for its primary users to assess the enterprise value. Both standards provide disclosure requirements to cover the governance, risk management, strategy and metrics and targets. IFRS S1 allows to provide qualitative information if an entity is unable to provide quantitative information as ESRS doesn`t have this provision. Also, ESRS 1 doesn't require to disclose sustainability-related risks and opportunities for which there is a significant risk that there will be a material adjustment to the carrying amounts of assets and liabilities reported in the financial statements within the next financial year. Both standards consider financial materiality. Impacts are considered in IFRS S1, as source of potential financial effects. ESRS materiality explicitly encompasses impact materiality next to financial materiality. IFRS S1 refer to the SASB sector-specific guidance while ESRS sector-specific standards will be developed at a later stage. IFRS S1 states that the sustainability-related financial disclosures shall be for the same reporting period as the financial statements which is not covered in ESRS. IFRS S1 requires locating the information in the general purpose financial reporting. ESRS disclosures have to be presented as a part of the management report. Page 9 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#10Comparing Standards IFRS S2 and ESRS E1 All IFRS S2 disclosures are covered in ESRS E1 in relation to the core pillars: Governance, Strategy, Risk management, Metrics and targets. However, IFRS S2 has some differences and additions: Governance Strategy Risk management Metrics and targets ESRS identifies three levels of targets: general climate-related targets, GHG emission reduction targets, net zero targets and other neutrality claims. Fully covered; no significant differences IFRS S2 requires the disclosure of the effects of gross climate-related risks within the next year and of net climate-related risks over time whereas ESRS E1 requires the disclosure of the potential financial effects from material gross climate-related risks over time The future potential financial effects from climate-related risks cover gross risks (before mitigation/adaptation policies and actions) in ESRS E1 instead of net risks as in IFRS S2. ESRS has more detailed application guidance for physical and transition risks identification and assessment with the provision of detailed climate scenarios In IFRS S2 entity disclosing requirement shall refer to and consider the applicability of cross-industry metric categories and industry-based metrics defined in the Industry-based Guidance. In ESRS target values aligned with 2030 and 2050 and preferably set over five years rolling periods. IFRS S2 states that the entity shall disclose the quantitative and qualitative climate-related targets it has set to monitor progress towards achieving its strategic goals, and targets to meet by law or regulation. Page 10 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#11Materiality assessment for IFRS S1/S2 reporting Page 11 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#12How to determine material topics? IFRS Sustainability Disclosure Standards focus on meeting the information needs of: Investors, lenders and creditors (primary users of general purpose financial reports). The company should consider the characteristics of those users and of the company's own circumstances. Sustainability-related financial information is disclosed only if it is material: Information is material when the decisions of primary users could be influenced if such information about a reporting entity is omitted, misstated or obscured*. Materiality judgements about sustainability-related financial information are expected to differ from those for general purpose financial statements: information about sustainability-related risks and opportunities is unconstrained by definitions of assets and liabilities and the criteria for recognition it is expected that preparers will have to consider financial implications over longer time periods than those considered in preparing general purpose financial statements preparers will also need to consider financial implications of interactions throughout their value chain. * The definition was based on those in the Conceptual Framework and IAS 1 Page 12 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#13Materiality assessment and its frequency 1 2 3 An entity is required to identify the significant sustainability-related risks and opportunities which could reasonably be expected to affect its business model, strategy or cash flows. In the absence of an IFRS Sustainability Disclosure Standard that specifically applies to a sustainability-related risk or opportunity, the company... The materiality of a specific sustainability-related financial disclosure is assessed in the context of an entity's general purpose financial reporting and is based on the nature or magnitude of the item to which the information relates, or both. Note - severity (scale, scope) is used by GRI Standards to determine significance of actual negative / positive impacts. The Standard requires disclosure of the process followed to determine sustainability-related risks and opportunities (IFRS S1, para 26). ..shall conside SASB Standards An entity would be required to use judgement to identify what is material, and materiality judgements are reassessed at each reporting date ..may consider: GRI Standards, European ESRS ▸ materials of investor- focused standard setters guidance industry practice Page 13 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#14Materiality of possible future events with uncertain outcomes The company shall disclose the processes it uses to identify, assess, prioritise and monitor risks, incl.; how the company assesses the nature, likelihood and magnitude of the effects of risks (whether the entity considers qualitative factors, quantitative thresholds or other criteria). In some cases, IFRS Sustainability Disclosure Standards require the disclosure of information about possible future events with uncertain outcomes. In judging whether information about such possible future events is material, the company shall consider: the potential effects of the events on the amount, timing and uncertainty of the entity's future cash flows over the short, medium and long term (the possible outcome); the range of possible outcomes and the likelihood of the possible outcomes within that range. An example of risk prioritisation Likelihood of occurrence 3 4 1 28 5 6 7 9 Impact level of the possible risks short-term ☐ medium-term ☐ long-term Page 14 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#15Scenario analysis of climate risks and opportunities 4 Page 15 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#16Climate-related risks and opportunities Paragraph 10 of IFRS S2 requires an entity to disclose information that enables users of general purpose financial reports to understand the climate-related risks and opportunities that could reasonably be expected to affect the entity's prospects. Physical Risks Transition Climate-related risks and opportunities Opportunities Acute Policy Resource efficiency Energy source Products/ Services Markets Resilience Chronic Technology Reputation More productivity from less energy, I water use, etc. Lower operating costs, increased I resiliency through renewables I Market competitive advantage New ventures and collaborations Improved security of supply Page 16 9 August 2023 Market How to prepare a report in compliance with IFRS S1/S2? EY#17The process of assessing and identifying material climate risks and opportunities The extent to which, and how, the processes for identifying, assessing, prioritizing and monitoring climate- related risks and opportunities are integrated into and inform the entity's overall risk management process Whether and how the entity has changed the processes it uses compared with the previous reporting period Stage V: Reporting and Improvement How the entity monitors climate-related risks Stage IV: Monitoring Stage I: Identification IFRS® Describe whether and how the entity uses climate scenario analysis to inform its identification of climate risks 501 Disclose the inputs and parameters the entity uses (data sources and the scope of operations covered in the processes) Stage II: Assessment How the entity assesses the nature, likelihood and magnitude of the effects of those risks (for example, whether the entity considers qualitative factors, quantitative thresholds or other criteria), Stage III: Prioritising Whether and how the entity prioritises climate- related risks relative to other types of risk Page 17 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#18Financial position, financial performance and cash flows An entity shall disclose information that enables users of general purpose financial reports to understand: Page 18 9 August 2023 The effects of climate-related risks and opportunities on the entity's financial position, financial performance and cash flows for the reporting period (current financial effects); The anticipated effects of climate-related risks and opportunities on the entity's financial position, financial performance and cash flows over the short, medium and long term, taking into consideration how climate-related risks and opportunities are included in the entity's financial planning (anticipated financial effects). How to prepare a report in compliance with IFRS S1/S2? EY#19Impact of climate risks and opportunities on financial position An entity shall disclose quantitative and qualitative information about How climate risks and opportunities have affected its financial position, financial performance and cash flows; The climate-related risks and opportunities for which there is a significant risk of a material adjustment within the next annual reporting period to the carrying amounts of assets and liabilities reported in the related financial statements; How the entity expects its financial position to change over the short, medium and long term, given its strategy to manage climate risks and opportunities; How the entity expects its financial performance and cash flows to change over the short, medium and long term, given its strategy to manage climate-related risks and opportunities. An approach to the disclosure of quantitative information: A single amount or a range can be disclosed; No need to disclose if the financial effects of a climate-related risk or opportunity are not separately identifiable or if measurement uncertainty is too high. No need to disclose quantitative information about the financial effects of a climate- related risk or opportunity if the company does not have the skills, capabilities or resources. NW Page 19 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? E EY#20Climate Scenario and Scenario Analysis Paragraph 22 of IFRS S2 requires an entity to use climate-related scenario analysis to assess its climate resilience, using an approach that is commensurate with its circumstances What is Scenario? ✓ A scenario describes a path of development leading to a particular outcome ✓ A scenario describes a path of development leading to a particular outcome They are hypothetical constructs, not forecasts, predictions or sensitivity analyses What is Scenario analysis? ✓ Scenario analysis is a tool to enhance critical strategic thinking A key feature of scenarios is that they should challenge conventional wisdom about the future. A key feature of scenarios is that they should challenge conventional wisdom about the future. You should always take into consideration ✓ An entity shall assess its circumstances each time it carries out its climate-related scenario analysis. ✓ An entity shall consider its exposure to climate- related risks and opportunities in its assessment of its circumstances and when determining the approach to use for its climate-related scenario analysis. An entity shall consider the available skills, capabilities and resources when determining an appropriate approach to use for its climate- related scenario analysis. An entity shall determine an approach to climate- related scenario analysis that enables it to consider all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort Page 20 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#21Understanding transition and physical climate scenarios Transition scenarios - IEA transition scenarios Transition scenarios typically present plausible assumptions about the development of climate policies and the deployment of "climate-friendly" technologies to limit GHG emissions. Transition scenarios draw conclusions, often based on modelling, about how policy and technology regarding energy supply and GHG emissions interact with economic activity, energy consumption, and GDP among other key factors. Such scenarios may have material consequences for organisations in certain sectors of the economy in the short and medium term as well as longer term. These scenarios can reflect a faster or slower transition depending on different rates of change of key parameters. GT CO2 40 20 10 Physical climate scenarios - IPCC RCPS - physical climate scenarios Physical climate scenarios typically present the results of global climate models (referred to as "general circulation models") that show the response of the Earth's climate to changes in atmospheric GHG concentrations. IPCC scenarios based on "Representative Concentration Pathways" (RCPs) are examples of physical climate change scenarios adopted by the IPCC in its 5th Assessment Report (AR5). Model results are frequently "downscaled" to derive potential local-level changes in climate, which are then used to generate scenarios of impacts from climate change (first order impacts such as flooding or drought, second order impacts such as loss of crop production, and third order impacts such as famine). Page 21 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? Current Trends Stated Policies Scenario Electric motors efficiency Building efficiency Power efficiency Light industry efficiency Cars & trucks efficiency Ar sondooners efficeny Aviation & shipping efficiency Wed Solar PV Biofuels transport Other renewables in power Other renewables in end-uses Hydro Now Sustainable Development Scenario Electric vehicles CCUS power COUS non-power Behavioural change Resource efficiency 2010 2020 2030 2040 2050 100 80 60 Scenario categories >1000 ppm CO₂eq 720-1000 ppm 580-720 ppm Emissions from fossil fuels and cement (GtCO₂/yr) 60 60 40 20 480-580 ppm 430-480 ppm 2014 Estimate- Historical emissions 0 net-negative global emissions RCP8.5 3.2-5.4°C relative to 1850-1900 RCP6 2.0-3.7°C RCP4.5 1.7-3.2°C RCP2.6 0.9-2.3°C -20 1980 2000 2020 2040 2060 2080 2100 EY#22Providers of Transition and Physical climate Scenarios Publicly available scenarios are typically developed by international research or policy groups. Such scenarios include useful information about plausible pathways for emissions, physical climate change, environmental impacts, and socioeconomic conditions. At the same time, entity may choose to develop its own set of climate-related scenarios or can used customized (mix of different) climate scenario. -Providers of Transition climate Scenarios: International Energy Agency (IEA) The Network for Greening the Financial System (NGFS) The Principles for Responsible Investment -Provider of Physical climate Scenarios: The Intergovernmental Panel on Climate Change World Energy Outlook 2022 Network for Greening the Financial System Technical document Guide to climate scenario analysis for central banks and supervisors June 2020 ipcc UNEP FINANCE INITIATIVE INTERGOVERNMENTAL PANEL ON climate change Climate Change 2022 Impacts, Adaptation and Vulnerability Summary for Policymakers CHANGING COURSE A comprehensive investor guide to sceratio-based methods for climate risk assessment, in response to the TCFD The World Energy Outlook (WEO) is the energy world's most authoritative source of analysis and projections. NGFS The NGFS scenarios have been with latest economic and climate data, model versions and policy commitments. PRI were developed by an international group of institutional investors reflecting the increasing relevance of ESG issues. WGH Working Group comibution to the Seth Asement Report of the intergovernmental and in Cleate Changs WHO UNEP Physical climate-related risks and opportunities are defined by RCP scenarios. Page 22 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#23Assess materiality of climate-related risks 2 What are the current and anticipated organizational exposures to climate-related risks and opportunities? ▸ Do these have the potential to be material in the future? Are organizational stakeholders concerned? Evaluate business impacts 4 Evaluate the potential effects on the organization's strategic and financial position under each of the defined scenarios. Identify key sensitivities. Process for applying climate-related scenario analysis 1 Ensure governance is in place Integrate scenario analysis into strategic planning and/or enterprise risk management processes. Assign oversight to relevant board committees/sub- committees. Identify which internal (and external) stakeholders to involve and how 3 Identify and define range of Scenarios ▸ What scenarios (and narratives) are appropriate, given the exposures? Consider input parameters, assumptions, and analytical choices. What reference scenario(s) should be used? 5 Identify potential responses Use the results to identify applicable, realistic decisions to manage the identified risks and opportunities. What adjustments to strategic/financial plans would be needed? ハハノ Page 23 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? Document and disclose 6 Document the process; communicate to relevant parties; be prepared to disclose key inputs, assumptions, analytical methods, outputs, and potential management responses EY#24Simpler approach to climate-related scenario analysis An entity might use a simpler approach to climate-related scenario analysis The entity might initially use a simpler approach to climate-related scenario analysis, but would build its capabilities through experience and, therefore, would apply a more advanced quantitative approach to climate-related scenario analysis over time. However, an entity with a high degree of exposure to climate-related risks and opportunities, and with access to the necessary skills, capabilities or resources, is required to apply a more advanced quantitative An entity are required to disclose information about its climate resilience at each reporting date An assessment of the entity's resilience is required to be carried out annually. As such, an entity's disclosure in accordance with paragraph 22(a)- that is, the results of the entity's resilience assessment-shall be updated at each reporting period. In some reporting periods the entity's disclosures in accordance with paragraph 22(b) could remain unchanged from the previous reporting period if the entity does not conduct a scenario analysis annually. Page 24 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#25The process of assessing and identifying material climate risks and opportunities Transition risks Policy and legal Technology Market Reputation Physical risks Acute Chronic Risks Opportunities Strategic planning Risk Management Climate Scenario 1 Climate Scenario 2, 3... Likelihood assessment Qualitative impact Revenues Expenditures Impact assessment Financial impact Opportunities Resource efficiency Energy source Products or services Time horizons Markets Resilience Market Income statement Cash flow statement Balance sheet Reputation Prioritization of risks and determination of material climate risks Page 25 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#26Perform asset impairment testing (1/2) 1. Indication of impairment* 2. Determining the recoverable amount 3. Inclusion of future investments Identification of one or more signs of impairment; Use of the external sources of information, internal sources of information, dividend from a subsidiary, joint venture or associate Need to determine the recoverable amount of an asset or a cash-generating unit (CGU) and compare it with its carrying amount; Need to take into account both direct and indirect effects of environmental change (Impairment of intangible assets, including goodwill, and tangible assets). Need to take into account various elements and aspects of risk, which may be dealt with either as adjustments to the discount rate or to the cash flows. Variations in amount or timing of cash flows When taking into account changes in the environment, more importance is attached to external evidence (Impairment and impairment reversal indicator modelling). It is key to understand whether the investment is required to continue operating assets and, therefore, would be akin to maintenance; Use of multiple scenarios (1. Impairment methodology - Value in use 2. Impairment of non-financial assets). *Impairment indicators include significant changes in the technological, market, economic or legal environment that have an adverse effect on the entity, evidence of an asset's obsolescence and observable indications that the asset's value has declined. **effects-of-climate-related-matters-on-financial-statements.pdf (ifrs.org) Page 26 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? $1 EY#27Perform asset impairment testing (2/2) ✓ Cash flow projections for value in use must cover a maximum period of five years; 4. Period of reliable cash flow projections 5. Terminal value 6. Disclosures ✓ Entities significantly exposed to climate change risk will have to assess the impact on the growth rate applied and might even need to consider negative growth rates (1. Goodwill 2. Judgements and estimates made in assessing the impact of climate change and the transition to a lower carbon economy). ✓ Entities should disclose how climate change and climate- related goals have been translated into assumptions and are reflected in the impairment test; Consideration of disclosing how this is translated into assumptions on pricing commodities, levies, forced decommissioning of assets, divestments of businesses, etc. (Forecast future cash flows). Page 27 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? (SA) $1 EY#28Climate-related metrics and targets for IFRS S2 reporting Page 28 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#29Overview of climate-related metrics The objective of climate-related financial disclosures on metrics and targets is to enable users of general purpose financial reports to understand an entity's performance in relation to its climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation. To achieve this objective, an entity shall disclose: Cross-industry metrics Metrics that are relevant for all companies: greenhouse gases; climate-related transition risks; climate-related physical risks; climate-related opportunities; capital deployment; internal carbon prices; remuneration. Industry-based metrics An entity shall disclose industry-based metrics that are associated with one or more particular business models, activities or other common features that characterize participation in an industry. In determining the industry-based metrics that the entity discloses, the entity shall refer to and consider the applicability of the industry-based metrics associated with disclosure topics described in the Industry-based Guidance on Implementing IFRS S2 Climate-related targets For each target, the entity shall disclose: related metric; timeframe; base period; interim targets; performance; revision. Page 29 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#30Cross-industry metrics (1) Metric category Greenhouse gases Climate-related transition risks Climate-related physical risks Disclosures Scope 1 greenhouse gas emissions Scope 2 greenhouse gas emissions Scope 3 greenhouse gas emissions Approach used to measure Scope 1 and 2 GHG emissions for consolidated accounting group, associates, joint ventures and unconsolidated subsidiaries List of the categories included within the entity's measure of Scope 3 GHG emissions Additional information about the entity's greenhouse gas. emissions associated with its investments, if the entity's activities include asset management, commercial banking or insurance The amount and percentage of assets or business activities vulnerable to climate-related transition risks The amount and percentage of assets or business activities vulnerable to climate-related physical risks Unit of measure Metric tons of CO2 equivalent Description The amount and percentage The amount and percentage Page 30 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#31Cross-industry metrics (2) Metric category Climate-related opportunities Capital deployment Internal carbon prices Remuneration Disclosures The amount and percentage of assets or business activities aligned with climate-related opportunities The amount of capital expenditure, financing or investment deployed towards climate-related risks and opportunities An explanation of whether and how the entity is applying a carbon price in decision-making (for example, investment decisions, transfer pricing and scenario analysis) The price for each metric tons of greenhouse gas emissions the entity uses to assess the costs of its greenhouse gas emissions Unit of measure The amount and percentage The amount of money Description and price Description of whether and how climate-related considerations Description and are factored into executive remuneration The percentage of executive management remuneration recognized in the current period that is linked to climate- related considerations. percentage Page 31 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#32Cross-industry metrics - Metals & Mining Metric category Climate-related transition risks Climate-related physical risks VALE Disclosures The amount and percentage of assets or business activities vulnerable to climate-related transition risks The amount and percentage of assets or business activities vulnerable to climate-related physical risks 4% of Vale's assets are currently highly exposed to transition risks - coal assets. 67% of Vale's assets were evaluated for climate change physical risks exposure using The Vale Climate Forecast Loss of 0.5% in shipment/production of iron ore and coal due to abnormal rain patterns - USD 138.8 million/year Physical impact of climate change - potential risks in Vale's Canada Operations CAUSES Heat Wildfire Precipitation Thunderstorms A Thompson A Sudbury Port Colborne Voisey's Bay Long Harbour 3 A Page 32 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? Wind www Flood EY#33Cross-industry metrics - Metals & Mining Metric category Internal carbon prices VALE Disclosures An explanation of whether and how the entity is applying a carbon price in decision-making (for example, investment decisions, transfer pricing and scenario analysis) The price for each metric tons of greenhouse gas emissions the entity uses to assess the costs of its greenhouse gas emissions The use of the shadow price of USD 50/tCO2e, established in accordance with the Carbon Pricing Leadership Coalition (CPLC), is integrated to the decision-making process to guide capital allocation enabling a faster and more effective transition to a zero-carbon economy. Comparison of Vale's internal shadow carbon price with IEA's scenarios USD/tCO₂e 50 50 40-80 8-34 43 Vale internal shadow price CPLC-2020 IEA STEPS scenario-2025 IEA SDS scenario-2025 45 IEA net zero scenario - BRICS ex India Page 33 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#34Cross-industry metrics - Metals & Mining Metric category Climate-related opportunities VALE Disclosures The amount and percentage of assets or business activities aligned with climate-related opportunities 68% of Vale's assets are currently highly exposed to climate opportunities. The assets considered highly exposed are the North Corridor assets, which represents around 54% of Vale's iron ore assets, and Vale's pellets, copper, and nickel assets. 1. Avoided costs of scope 2 emissions pricing by using RES = 0,4-0,6% avoided EBITDA decrease 2. Expand copper production to approx. 1 Mtpa = 117-132% gain in copper EBITDA Page 34 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#35Industry-based metrics Part B-Industry-based Guidance for IFRS S2 The company shall consider industry-based metrics and disclosure topics defined in the Industry-based Guidance on Implementing IFRS S2 in preparing the following disclosures: climate-related risks and opportunities, business model and value chain, strategy and decision-making, financial position, financial performance and cash flows, climate resilience, climate metrics and targets. Title Consumer Goods Sector Volume 1-Apparel, Accessories & Footwear Volume 2-Appliance Manufacturing Туре Industry Industry Volume 3-Building Products & Furnishings Industry Volume 4-E-Commerce Volume 5-Household & Personal Products Volume 6-Multiline and Specialty Retailers & Distributors + Extractives & Minerals Processing Sector Industry Industry Industry Page 35 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? + Financials Sector + Food & Beverage Sector + Health Care Sector + Infrastructure Sector EY#36Industry-based metrics - Common across Extractives & Minerals Processing Sector Topic Greenhouse Gas Emissions Water Management Metric Gross global Scope 1 emissions, percentage methane, percentage covered under emissions-limiting Regulations Discussion of long-term and short-term strategy or plan to manage Scope 1 emissions, emissions reduction targets, and an analysis of performance against those targets (1) Total fresh water withdrawn, (2) total fresh water consumed, percentage of each in regions with High or Extremely High Baseline Water Stress Page 36 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#37Industry-based metrics - Oil & Gas Topic Metric Greenhouse Gas Emissions Water Management Reserves Valuation & Capital Expenditures Amount of gross global Scope 1 emissions from: (1) flared hydrocarbons, (2) other combustion, (3) process emissions, (4) other vented emissions, and (5) fugitive emissions Volume of produced water and flowback generated; percentage (1) discharged, (2) injected, (3) recycled; hydrocarbon content in discharged water Percentage of hydraulically fractured wells for which there is public disclosure of all fracturing fluid chemicals used Percentage of hydraulic fracturing sites where ground or surface water quality deteriorated compared to a baseline Sensitivity of hydrocarbon reserve levels to future price projection scenarios that account for a price on carbon emissions Estimated carbon dioxide emissions embedded in proved hydrocarbon reserves Amount invested in renewable energy, revenue generated by renewable energy sales Discussion of how price and demand for hydrocarbons and/or climate regulation influence the capital expenditure strategy for exploration, acquisition, and development of assets Page 37 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#38Industry-based metrics - Metals & Mining, Iron & Steel Topic Energy Management Water Management Supply Chain Management Metric (1) Total energy consumed, (2) percentage grid electricity, (3) percentage renewable (1) Total fuel consumed, (2) percentage coal, (3) percentage natural gas, (4) percentage renewable Number of incidents of non-compliance associated with water quality permits, standards, and regulations Process for managing iron ore and/or coking coal sourcing risks arisingfrom environmental and social issues Page 38 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#39Industry-based metrics - Commercial Banks Topic Incorporation of ESG Factors in Credit Analysis Metric Description of approach to incorporation of environmental, social, and governance (ESG) factors in credit analysis Such ESG factors include: biodiversity loss; greenhouse gas (GHG) emissions, climate change, renewable energy, energy efficiency, air, water or resource depletion or pollution, waste management, human rights, labour standards in the supply chain, child, slave and bonded labour, workplace health and safety, freedom of association and freedom of expression, human capital management and employee relations, business ethics, bribery and corruption, internal controls and risk management, etc. Page 39 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#40Industry-based metrics - Agricultural Products Topic Greenhouse Gas Emissions Energy Management Water Management Ingredient Sourcing Metric Gross global Scope 1 emissions Discussion of long- and short-term strategy or plan to manage Scope 1 emissions, emissions reduction targets, and an analysis of performance against those targets Fleet fuel consumed, percentage renewable (1) Operational energy consumed, (2) percentage grid electricity and (3) percentage renewable (1) Total water withdrawn, (2) total water consumed; percentage of each in regions with High or Extremely High Baseline Water Stress Description of water management risks and discussion of strategies and practices to mitigate those risks Number of incidents of non-compliance associated with water quality permits, standards and regulations Identification of principal crops and description of risks and opportunities presented by climate change Percentage of agricultural products sourced from regions with High or Extremely High Baseline Water Stress Page 40 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? EY#41Take-home message 1 2 3 4 5 On June 2023, the ISSB of IFRS published IFRS S1 and IFRS S2 Standards, which are effective for reporting periods beginning on or after 1 January 2024. Each IFRS Sustainability Disclosure Standard includes Governance, Strategy, Risk Management, Metrics and Targets pillars. IFRS S1/S2 partially or fully merged with the SASB and TCFD standards, while complementing and partially matching with the provisions of GRI and ESRS standards. IFRS S1 requires companies to identify and disclose information on material sustainability- related risks and opportunities that could impact their business model, strategy, or cash flows. According to the provisions of IFRS S2, the company should: use climate-related scenario analysis to assess its climate resilience and consider climate opportunities, transition and physical climate risks. prioritise climate-related risks and integrate them into its overall risk management process. disclose information about the anticipated and current effects of climate-related risks and opportunities on its financial position, performance, and cash flows. perform asset impairment testing considering the effects of climate change disclose cross-industry, industry-based climate-related metrics and climate-related targets. Part of the leading companies worldwide are already disclosing information that comply with the requirements of IFRS S1/S2. 9 August 2023 How to prepare a report in compliance with IFRS S1/S2? 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