Apr 3, 2025
Costa Rica adopted the International Sustainability Financial Reporting Standards (IFRS S1 and S2), with phased implementation between 2024 and 2028. These standards require companies to integrate detailed notes on environmental, social, and governance (ESG) risks and opportunities, especially related to climate, into their financial statements. For example, an agricultural company must report how climate change affects its crops (physical risk) or how a transition to renewable energy impacts its costs (transition risk). The goal is to standardize non-financial information, facilitating comparability and transparency for investors and regulators.
What is IFRS S1: General Sustainability Requirements?
This standard establishes a framework for disclosing ESG information. It includes four pillars:
· Governance: organizational structure for managing ESG risks, for example; in the notes, a construction company could describe its sustainability committee and how it oversees projects to reduce its carbon footprint.
Strategy: Plans to address risks and opportunities. For example, a bank would disclose its strategy for financing green projects and how this reduces its exposure to fossil fuels.
· Risk Management: processes to identify and mitigate impacts as follows: a multinational would show in its financial statements how it assesses labor risks in its supply chain.
· Metrics and Targets: Quantifiable indicators, for example, an industrial company would report Scope 1 (direct) and 2 (indirect energy) emissions, along with reduction targets by 2030.
IFRS S2: Focus on Climate
This standard is specific to climate risks and requires:
Physical risks: extreme events (hurricanes, droughts) in a tourist hotel; for example, an insurer would quantify assets in vulnerable coastal areas in its notes.
· Transition risks: regulatory or technological changes; for example, an oil company would explain how a carbon tax would affect its cash flows.
· GHG (Greenhouse Gas) Emissions: Scope 1 and 2 reporting (mandatory) and Scope 3 (voluntary, except in sectors such as banking).
Examples of content in financial statements and notes
EF (Income Statement): Inclusion of expenses for the purchase of fossil fuels vs. expenses for green or renewable energy.
· Notes to the financial statements. Examples:
· Governance: description of the board's role in ESG oversight.
· Strategy: climate scenarios, e.g. the impact of a 2°C increase on production
· Metrics: A comparative table of greenhouse gas emissions per year, assessing the reduction of greenhouse gas emissions and providing strategies to reduce these emissions.
Timeline and key steps for implementation
1. Companies regulated by CONASSIF: mandatory reporting in 2026 (2025 data).
2. Large taxpayers: report in 2027 (2026 data).
3. SMEs: voluntary adoption until it becomes mandatory.
IFRS S1 and S2 will transform the various types of existing reporting (indicators, KPIs, etc.) in Costa Rica, integrating sustainability into the financial core. Companies that act early can turn risks into competitive advantages, while those that delay adoption will face penalties and loss of market confidence.