The International Sustainability Standards Board (ISSB) announced on June 26, 2023, the launch of its new sustainability standards. These are referred to as IFRS S1, which covers the general guidelines for sharing sustainability-related financial details, and IFRS S2, which is specifically for climate-related disclosures. 

The need for a unified approach to integrate sustainability and financial reporting is becoming increasingly significant for regulators. In fact, in October 2023, Brazil led the way as the first nation to include IFRS S1 and S2 in its regulatory guidelines [1]. It’s expected that other countries and regulators pursuing TCFD will do the same. Thus, for businesses, it’s beneficial to start understanding and preparing for these standards as soon as they can. 

ISSB Brief Overview 

The IFRS Foundation introduced the ISSB during COP26 [2], seeking to enhance global sustainability reporting by equating its significance to existing financial report regulations. Positioning the ISSB parallel to the International Accounting Standards Board (IASB) emphasizes this. The IFRS Foundation Trustees and the Monitoring Board oversee them to ensure the quality and consistency. 

The ISSB’s mission is to achieve global comparability and reliability in sustainability reporting, thereby helping investors, regulators, and other stakeholders make informed decisions. The standards issued by the ISSB are designed to complement the financial statements prepared in accordance with IFRS Standards, providing a comprehensive view of an entity’s performance. This integration ensures that sustainability metrics are not viewed in isolation but are closely linked with financial performance, making it easier to assess the holistic impact of a company’s activities. Additionally, the ISSB focuses on materiality from the perspective of the investor, ensuring that the information disclosed is relevant and useful for decision-making purposes. 

IFRS S1: General Requirements For Disclosure Of Sustainability-Related Financial Information 

IFRS S1, or International Financial Reporting Standard S1, outlines the general requirements for the disclosure of sustainability-related financial information. It provides a standardized framework for businesses to report on significant sustainability factors affecting their operations and financial health. The goal of IFRS S1 is to create transparency and consistency in sustainability reporting, enabling stakeholders such as investors, regulators, and customers to make more informed and reliable comparisons across different organizations. 

The IFRS S1 outlines the guidelines on sharing details about a company’s sustainability-related risks and opportunities. Specifically, a company must disclose information on: 

• How it tracks, handles, and supervises risks and opportunities related to sustainability through its governance, control, and procedure systems. 
• The company’s plan to deal with sustainability-related risks and opportunities. 
• The procedures the company uses to identify, rank, monitor, and assess sustainability-related risks and opportunities. 
• The company’s achievements concerning sustainability-related risks and opportunities, including its progress towards achieving any set or legally required goals. 

IFRS S2: Climate-Related Disclosures 

Starting from 1st of January 2024, IFRS S2 comes into play for annual reports, but you can adopt it early if you’re also applying IFRS S1 which deals with the disclosure of sustainability-related financial information. The aim of IFRS S2 is essentially to make sure that a business reveals data about its climate-related risks and opportunities. This information is critical because it helps those reading general purpose financial reports make decisions about investing resources in the business. 

The IFRS S2 mandates that an organization must disclose any potential climate-related risks or opportunities that could noticeably influence the organization’s cash flow, its financial accessibility, or capital costs in the short, medium, or long-term. 

The IFRS S2 pertains to the different aspects of climate-related exposure for the entity. These include physical risks related to the climate, risks associated with transitioning in response to climate change, and also the opportunities that may arise due to climate change. 

The IFRS S2 lays out the guidelines for sharing details about a company’s climate-related threats and prospects. Specifically, it obliges a firm to provide details that allow people who read general purpose financial reports to comprehend: 

• The organizational measures, checks, and methods the company employs to track, handle, and supervise climate-related threats and opportunities. 
• The company’s tactical approach to dealing with climate-related threats and opportunities. 
• The methods the company uses to identify, evaluate, rank and monitor climate-related threats and opportunities, including if and how these methods are incorporated into and influence the firm’s overall risk management procedure. 
• The company’s performance regarding its climate-related threats and opportunities, including its progress towards any climate-related goals it has set, and any goals it is legally or regulationally obligated to fulfill. 

The Impact Of IFRS S1 And IFRS S2 

Implementing IFRS S1 and IFRS S2 significantly impacts businesses by setting a standardized framework for disclosing sustainability-related financial information and climate-related data. This framework ensures greater transparency and consistency in reporting, which is essential for investors, regulators, and other stakeholders. By complying with these standards, businesses can provide more reliable and comparable information, enhancing their reputation and potentially attracting more investment. Additionally, adherence to these standards fosters trust and confidence among stakeholders, as it demonstrates the company’s commitment to addressing sustainability and climate-related concerns. 

From an operational standpoint, the requirements of IFRS S1 and IFRS S2 compel businesses to integrate sustainability and climate-related risks and opportunities into their strategic planning and risk management processes. This integration necessitates the establishment of robust internal controls and governance structures to track, manage, and supervise these factors effectively. As a result, companies might need to invest in new technologies, training, and resources to comply with the standards, potentially leading to increased operational costs. However, in the long run, these investments can yield significant benefits by promoting more sustainable business practices, reducing risk exposure, and enhancing overall resilience. 

Furthermore, the adoption of IFRS S1 and IFRS S2 can influence a company’s long-term strategy and competitive positioning. By proactively identifying and addressing sustainability and climate-related risks and opportunities, businesses can gain a competitive advantage, as they might be better prepared to navigate regulatory changes and market shifts. This proactive approach can also lead to innovation, as companies seek new ways to reduce their environmental impact and develop sustainable products and services. Ultimately, the adherence to these standards not only aligns businesses with global sustainability objectives but also supports their growth and long-term success in an increasingly sustainability-conscious market. 

How We Can Help? 

At Seneca ESG, we offer expert guidance and tailored solutions to help you navigate the complexities of IFRS S1 and IFRS S2 compliance. Reach out to us today to ensure your business meets the highest standards in sustainability and climate-related disclosures. 

References: 

[1] https://www.ifrs.org/news-and-events/news/2023/10/brazil-adopts-issb-global-baseline/ 

[2] https://www.ifrs.org/news-and-events/news/2021/11/An-update-on-the-ISSB-at-COP26/