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IFRS S1 and S2: A new language to pave the way to a sustainable future

In a world of constant change, where economies have evolved and technology has surged forward, the importance of sustainability metrics has never been clearer. On 26 June 2023, we attended the IFRS conference, during which the International Sustainability Standards Board (ISSB) chair, Emmanual Faber, presented a compelling vision of our current world and emphasised the significant role of its first two IFRS Sustainability Disclosure Standards – IFRS S1 and S2 – in shaping our future. These standards are designed to provide centralised assistance to listed companies in their sustainability-related disclosures. These standards will apply to entities that prepare general-purpose financial statements and build upon existing frameworks such as the TCFD and SASB.

The global capital markets have witnessed a remarkable transformation, driven by market-based systems that have fostered economic growth and reduced poverty worldwide. While celebrating these achievements, we must also recognise the rise of sustainability metrics over the past decade. Environmental, social and governance (ESG) factors have gained significant traction, providing a more comprehensive understanding of sustainable development than offered by traditional economic models.

A pressing challenge we face today is the inadequacy of conventional economics in assessing the true value of nature's contributions. From undervaluing natural resources to neglecting the role of vital elements, such as bee pollination in ecosystems, traditional economic models often fall short in acknowledging the essentials for sustainable growth.

To bridge the gap between financial reporting and sustainability concerns, a new accounting-based language for sustainability has been introduced. This framework aims to establish connections between financial statements and sustainability considerations, allowing organisations to incorporate sustainability metrics into their financial reporting.

IFRS S1 outlines the objective of sustainability reporting, emphasising the interdependence of various capitals, such as human, natural and social, in the value creation process of a company. However, IFRS S2 focuses on disclosing the impact of sustainability risks and opportunities on financial statements, offering a more comprehensive approach to decision making.

These standards are not isolated initiatives, but rather mark the beginning of a transformative journey towards a sustainable future. To ensure a seamless transition, active involvement from organisations, investors and regulators is paramount. Collaborative efforts and capacity building will play a pivotal role in embracing this new language and effectively implementing the IFRS S1 and S2 standards.

The world is moving towards integrating sustainability into global economics and the IFRS S1 and S2 standards are paving the way for this transformative shift. By adopting this new language of sustainability, organisations can equip themselves to tackle the challenges posed by climate change and societal demands. The journey towards a sustainable future requires collective action and a commitment to innovative practices that harmonise economic growth with environmental and social wellbeing. 

IFRS S1 sets out the general requirements for a company to disclose sustainability-related financial information regarding its sustainability-related risks and opportunities over the short, medium, and long term. It mandates the entity to disclose information regarding the governance processes, strategies and monitoring in place to manage and oversee those risks and opportunities.

IFRS S2 requires companies to provide disclosures, regarding their climate-related risks and opportunities, along with the associated activities to manage and oversee them. The information disclosed needs to encompass both physical climate-related risks, such as extreme weather events, and transitional risks, such as the fallout of stricter regulations on greenhouse gas emissions. Additionally, S2 provides guidance on including the impact of climate-related factors on a company’s valuation.

The two standards are intended to be applied together and companies will need to be already adhering to the existing TCFD framework, as the ISSB has been requested to take over the monitoring of TCFD next year.

Some core benefits of these standards include:

• Global disclosure standards – the standards allow for companies and investors to standardise on a single, globally recognised framework.

• Consolidation of existing frameworks – IFRS S1 and S2 are built on and consolidate multiple other frameworks, including the TCFD, SASB, CDSB, Integrated Reporting Framework and World Economic Forum metrics.

• Streamlined reporting – The information required is designed to be provided in tandem with financial statements as part of the same reporting suite.