The International Sustainability Standards Board (ISSB) has issued two landmark standards – IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) – which become effective for annual reporting periods beginning on or after 1 January 2024. These standards aim to provide investors and other capital market participants with consistent, comparable, and decision-useful information about companies' sustainability-related risks and opportunities.
Overview of IFRS S1 and S2
IFRS S1 sets out general requirements for a company to disclose information about its sustainability-related risks and opportunities that could reasonably be expected to affect its cash flows, access to finance, or cost of capital over the short, medium, or long term. It requires disclosures across four pillars: governance, strategy, risk management, and metrics and targets. IFRS S2, meanwhile, focuses specifically on climate-related risks and opportunities, requiring detailed disclosure of physical risks, transition risks, and climate-related opportunities.
Governance Disclosures
Under IFRS S1, companies must describe the governance body(s) or individual(s) responsible for overseeing sustainability-related risks and opportunities. This includes information about how responsibilities are delegated, how the body is informed about these matters, and how it considers them when setting strategy, major transactions, and risk management policies. IFRS S2 similarly requires disclosure of the governance around climate-related risks and opportunities, including the role of management and the board in assessing and managing these issues.
Strategy Disclosures
IFRS S1 requires a company to disclose its strategy for managing sustainability-related risks and opportunities, including how they are integrated into the company's overall business model and value chain. The company must also disclose the time horizons (short, medium, long term) over which these risks and opportunities could materialize. IFRS S2 adds climate-specific strategy disclosures, such as the resilience of the company's strategy to different climate scenarios, including a 2°C or lower scenario, and the identification of climate-related physical and transition risks.
Risk Management Disclosures
Both standards require companies to describe their processes for identifying, assessing, and managing sustainability-related risks. This includes how risks are prioritized relative to each other and to other types of risks, and how these processes are integrated into the company's overall risk management framework. For climate, IFRS S2 specifically requires disclosure of how physical and transition risks are identified and managed.
Metrics and Targets
IFRS S1 requires disclosure of metrics used to measure and monitor sustainability-related risks and opportunities, as well as targets set by the company and performance against those targets. Cross-industry metric categories include greenhouse gas emissions, workforce turnover, and revenue from sustainable products. IFRS S2 mandates disclosure of Scope 1, 2, and 3 greenhouse gas emissions, as well as climate-related transition risks, physical risks, and opportunities. Companies must also disclose any climate-related targets, such as net-zero commitments, and the progress towards them.
Implementation Challenges
According to Innocent Okwuosa, a chartered accountant and sustainability reporting expert, implementing IFRS S1 and S2 poses significant challenges for companies, particularly in developing countries. “Many organizations lack the data systems, internal expertise, and governance structures needed to produce high-quality sustainability disclosures,” Okwuosa stated. He emphasized the need for capacity building, including training for finance and sustainability teams, and investment in data collection and management systems. The standards require companies to look beyond financial data and integrate non-financial information, which can be resource-intensive.
Impact on Stakeholders
The adoption of IFRS S1 and S2 is expected to enhance transparency and accountability, enabling investors to make more informed decisions. For companies, the standards provide a framework to identify and manage sustainability-related risks, potentially improving access to capital and reducing the cost of capital. However, the initial implementation phase may lead to increased compliance costs and require significant changes to internal processes. Regulators and stock exchanges in many jurisdictions are moving to mandate the use of these standards, which could accelerate adoption globally.
Conclusion
IFRS S1 and S2 represent a major step forward in sustainability reporting, aligning it with the rigor of financial reporting. Companies should start preparing now by assessing their current reporting capabilities, engaging with stakeholders, and developing a roadmap for compliance. The standards are designed to be applied in conjunction with other ISSB standards and can be used alongside national reporting frameworks. As Okwuosa noted, “The journey to full implementation will be gradual, but the benefits of improved transparency and risk management are substantial.”
