Disclosing judgements, assumptions and estimates

Under the standards¹, companies will:

• apply judgement – e.g. when identifying relevant disclosures and material sustainability-related financial information;
• use estimates – e.g. when metrics cannot be measured directly and measurement uncertainty arises; and
• make assumptions – e.g. when considering whether information about possible future events that have uncertain outcomes is material. 

Companies need to make sure that sustainability-related data and assumptions are consistent with those used in the financial statements ‘to the extent possible’. For example, information disclosed as part of sustainability-related financial disclosures about a company’s plan to replace its existing machinery with a greener alternative – e.g. in the next five years – needs to be consistent with assumptions and estimates made in relation to that machinery in the financial statements.

Companies will need to do the following.

An amount disclosed that is subject to a high level of judgement or measurement uncertainty can provide useful information if the uncertainty is explained.

The general standard is clear that using reasonable estimates is essential in preparing sustainability-related financial disclosures, and these estimates do not undermine the usefulness of information. These disclosures aim to support investors to understand the information presented.

Generally, sustainability-related financial disclosures need to be based on the same set of facts and circumstances as the financial statements – and financial and sustainability reporting teams need to work together to ensure that this is the case.

However, in some circumstances, companies may need to use different data and assumptions to meet financial reporting and sustainability reporting requirements. For example, multiple sets of assumptions may be used as part of scenario analysis to inform the assessment of resilience, including assumptions that are inconsistent with those used to prepare impairment analysis. When this is the case, investors can still understand the connections if the differences are made clear.

• Read our guide for more on the requirements on using consistent data and assumptions.
• Identify reporting areas that involve judgements, assumptions and estimates, and document the key factors and decisions required.
• Make sure that financial reporting and sustainability reporting specialists work together so that sustainability-related financial disclosures are prepared based on the same set of facts and circumstances as the financial statements.
• Identify areas where financial reporting and sustainability reporting requirements may need different data and assumptions. Make sure that these differences can be explained.