Insights

As sustainability risks increasingly impact business value, global markets are demanding more consistent, comparable, and decision-useful information on how companies manage environmental, social, and governance issues. In response, the International Sustainability Standards Board  (under the IFRS Foundation) released IFRS S1 and IFRS S2 in June 2023, marking a pivotal shift toward globally standardized sustainability disclosures.

What Are IFRS S1 and S2?

Contrary to initial assumptions, IFRS S1 and S2 are not financial reports. Instead, they are disclosure standards that guide how companies report sustainability-related risks and opportunities that could affect their financial position and performance over the short, medium, and long term.

• IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial InformationProvides a framework for companies to disclose material sustainability-related risks and opportunities across all topics (not limited to climate). It ensures that such disclosures are relevant, connected to financial statements, and grounded in investor decision-making needs.

• IFRS S2 – Climate-related DisclosuresFocuses specifically on climate-related risks and opportunities. It builds on the TCFD framework and incorporates detailed requirements for metrics, targets, greenhouse gas emissions (Scopes 1, 2, and 3), and climate resilience analysis through scenario planning.

Why Do They Matter?

1.Global Consistency and Investor Confidence

Until now, sustainability disclosures were fragmented—varying widely across jurisdictions and voluntary frameworks (e.g., GRI, SASB, CDP). IFRS S1 and S2 create a common global baseline, enabling comparability across markets, sectors, and borders.

2.Integrate with Financial Reporting

The ISSB standards are designed to be applied alongside financial statements, bridging the gap between ESG reporting and financial materiality. They promote connectivity between financial and sustainability-related information, ensuring that disclosures are not siloed but strategically linked.

3.Investor-Relevant Materiality

Both S1 and S2 focus on enterprise value—i.e., how sustainability-related issues may influence cash flows, access to finance, or cost of capital. This aligns with the needs of investors, analysts, and regulators seeking forward-looking, risk-adjusted insights.

Who Should Comply?

While initially voluntary, IFRS S1 and S2 are expected to be adopted or adapted into national regulations. Jurisdictions like the UK, Canada, Australia, and countries in the EU and Asia are exploring or piloting adoption.

Companies operating internationally or seeking capital in global markets will increasingly face stakeholder pressure to align with IFRS S1 and S2—even before they become mandatory.

What Should Companies Do Now?

1. Conduct a Gap Analysis:Evaluate existing sustainability disclosures against IFRS S1 and S2 requirements.

2. Integrate ESG and Finance Teams:Prepare for cross-functional collaboration—connecting sustainability metrics with financial planning and enterprise risk management.

3. Strengthen Climate Scenario Analysis:Under S2, companies must assess their resilience to physical and transition risks—requiring internal capacity building and credible data.

4. Engage with Investors and Stakeholders:Align disclosures with investor expectations and communicate how sustainability performance links to long-term value creation.

IFRS S1 and S2 signal a new era of sustainability reporting—not as a compliance checkbox, but as a strategic pillar of corporate disclosure. By embedding ESG risks and opportunities into financial narratives, these standards enable companies to present a more complete picture of value, resilience, and future performance.

For companies, the message is clear: sustainability is now part of the language of capital markets—spoken through the standards of IFRS S1 and S2.