IFRS S1 and IFRS S2 Explained

━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━

The International Sustainability Standards Board (ISSB) developed IFRS Sustainability Disclosure Standards as a global baseline for capital-market information. The phrase global baseline describes the Standards' function: they are intended to provide a consistent investor-focused foundation that jurisdictions can adopt or build upon. It does not mean that the Standards automatically have the force of law in every country. Mandatory status depends on the relevant jurisdiction, regulator, securities rule or listing requirement.

For reporting teams, the main change is not simply a new climate table. IFRS S1 and IFRS S2 connect sustainability information to general purpose financial reports and to the entity's prospects - its cash flows, access to finance and cost of capital over the short, medium and long term. This requires finance, risk, strategy, sustainability, legal and governance teams to work from one controlled reporting architecture rather than produce a separate ESG narrative after the financial statements are complete.

The ISSB is an independent standard-setting body within the IFRS Foundation. Its Standards focus on information needed by existing and potential investors, lenders and other creditors. These users make decisions about buying, selling or holding equity and debt instruments, providing or selling loans and other credit, and exercising voting or other influence over management's use of economic resources.

This user focus determines the reporting lens. IFRS S1 does not ask for every sustainability fact that may be important to every stakeholder. It asks for material information about sustainability-related risks and opportunities that could reasonably be expected to affect the entity's prospects. Dependencies and impacts can be important inputs because they can give rise to risks and opportunities, but the disclosure objective remains the information needs of primary users of general purpose financial reports.

IFRS S1 is the general requirements Standard. It applies when an entity prepares and reports sustainability-related financial disclosures in accordance with IFRS Sustainability Disclosure Standards. It covers all sustainability-related risks and opportunities that could reasonably be expected to affect the entity's cash flows, access to finance or cost of capital over the short, medium or long term. Matters that could not reasonably be expected to affect the entity's prospects are outside its scope.

IFRS S1 establishes the reporting architecture used across current and future ISSB Standards. It defines material information, requires fair presentation and connected information, aligns the reporting entity with the financial statements, governs the location and timing of disclosures, specifies how to use sources of guidance, requires disclosure of significant judgements and measurement uncertainty, and controls the statement of compliance.

IFRS S2 is the climate-specific Standard. It applies to climate-related physical risks, climate-related transition risks and climate-related opportunities that could reasonably be expected to affect the entity's prospects. It builds on IFRS S1 rather than replacing it. An entity applying IFRS S2 still uses IFRS S1 for materiality, fair presentation, reporting entity, connected information, location, timing, judgements, uncertainty and compliance.

IFRS S2 adds climate-specific depth. It requires classification of identified climate risks as physical or transition risks, information about climate-related transition plans if the entity has one, climate-related scenario analysis to assess resilience, cross-industry and industry-based metrics, Scope 1, Scope 2 and Scope 3 greenhouse gas emissions, and information about climate-related targets.

Figure 1. IFRS S1 provides the general architecture used by IFRS S2. Both Standards organise disclosures around governance, strategy, risk management, and metrics and targets.

Both Standards use four core content areas. The structure is familiar to organisations that used the TCFD recommendations, but the ISSB requirements are not merely a TCFD checklist. Each content area is connected to the others and to the financial statements.

Primary users are existing and potential investors, lenders and other creditors. IFRS S1 focuses on information that could influence their resource-provision decisions. The link to prospects is expressed through expected effects on cash flows, access to finance or cost of capital over short, medium or long time horizons.

Materiality is applied to information. Information is material when omitting, misstating or obscuring it could reasonably be expected to influence primary-user decisions. The judgement is entity-specific and depends on the nature or magnitude, or both, of the item to which the information relates. IFRS S1 does not prescribe a universal score or threshold. Information is assessed individually and in combination, using qualitative and quantitative factors.

Industry-specific information is an important part of ISSB reporting. In identifying sustainability-related risks and opportunities under IFRS S1, the entity refers to and considers the applicability of disclosure topics in the SASB Standards. When no ISSB Standard specifically applies to a risk or opportunity, the entity applies judgement to identify relevant, faithfully representative information and refers to and considers the applicability of SASB metrics. The entity can conclude that a topic or metric is not applicable to its circumstances.

For climate, IFRS S2 requires the entity to refer to and consider the applicability of the Industry-based Guidance on Implementing IFRS S2. This is not permission to copy every industry metric without assessment. The reporting team should document the entity's industries, the topics reviewed, applicability decisions, metrics selected or adapted, and the source of any entity-developed metric.

The sustainability-related financial disclosures use the same reporting entity as the related financial statements. They form part of general purpose financial reports and can be located in management commentary, a strategic report, an integrated report or another report that forms part of the general purpose financial reports, subject to local requirements. Required information can be incorporated by cross-reference if the referenced report is available on the same terms and at the same time and the cross-reference does not make the disclosures less understandable.

The disclosures cover the same reporting period as the related financial statements and are normally reported at the same time. IFRS S1 contains a first-year transition relief that can permit later publication within specified limits, but a jurisdiction may adopt a different timetable. Reporting teams should separate the Standard's transition relief from local filing deadlines.

IFRS S2 applies the four core content areas to climate and adds specific information. Reporting teams should plan at least six linked climate workstreams.

Identify climate-related physical risks, transition risks and opportunities that could reasonably be expected to affect prospects, with defined time horizons and value-chain concentration.

Explain effects on the business model and value chain, strategy and decision-making, including any climate-related transition plan the entity has and how it is resourced.

Analyse current and anticipated financial effects and connect them to financial planning and the related financial statements.

Use climate-related scenario analysis, commensurate with the entity's circumstances, to assess and disclose climate resilience.

Prepare cross-industry metrics, including Scope 1, Scope 2 and Scope 3 GHG emissions, transition-risk, physical-risk, opportunity, capital-deployment, carbon-price and remuneration information as applicable and material.

Identify industry-based metrics and disclose climate targets, methodologies, baselines, progress, revisions and any planned use of carbon credits for net targets.

IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024. Earlier application is permitted only when the two Standards are applied at the same time and the fact of early application is disclosed. This effective date governs application of the Standards; it does not itself impose a legal obligation on entities in every jurisdiction.

An entity can make an explicit and unreserved statement of compliance only when its sustainability-related financial disclosures comply with all requirements of IFRS Sustainability Disclosure Standards. The statement is not a general description of direction of travel. An entity that applies selected requirements, uses the Standards as a reference or is building towards compliance should explain the extent of application without using the compliance statement.

The compliance conclusion should be a controlled output of the project. It requires a requirement-level disclosure map, evidence of materiality judgements, a record of transition reliefs and local modifications, review of all open gaps and confirmation that the reporting location, timing, comparatives and connected information requirements have been met.

They do not automatically become law worldwide merely because the ISSB has issued them or because their effective date has passed.

They do not require disclosure of every sustainability topic, every SASB metric or every fact requested by all stakeholder groups.

They do not prescribe a universal materiality score, threshold, survey, software platform or report template.

IFRS S2 does not require an entity to create a climate transition plan if it does not have one; it requires information about any plan the entity has and about its strategy and targets.

They do not themselves impose a universal external-assurance requirement, although local law, listing rules or the entity's chosen assurance arrangements may do so.

They do not replace the related financial statements or remove the need to explain connections, consistency and differences between sustainability disclosures and financial reporting.

A listed retailer operates stores, warehouses and an online marketplace in several countries. Its risk register identifies climate-related supply disruption, energy-price exposure, water stress in selected agricultural sourcing regions, labour-practice disruption in outsourced logistics, and an opportunity from lower-energy store formats. Management has already developed a climate transition plan but has not yet designed an organisation-wide IFRS S1 process.

The reporting team uses IFRS S2 for the climate workstream: it classifies physical and transition risks, performs scenario analysis, prepares Scope 1-3 emissions, evaluates financial effects and discloses the transition plan and targets. In parallel, IFRS S1 is used to identify other sustainability-related risks and opportunities that could affect prospects. The team refers to and considers the relevant SASB retail and e-commerce topics, reviews ERM, investor questions, supplier disruptions and financial planning, and assesses material information for each identified matter.

The final report uses one integrated governance disclosure because the board and management oversee sustainability-related risks and opportunities through the same structures. Strategy and metrics are disaggregated where the matters differ. The climate scenario analysis is not presented as evidence for labour or water risks. The compliance statement is released only after the requirement map and transition-relief decisions have been approved.

Figure 2. High-level roadmap from applicability and governance through risk/opportunity identification, materiality, data and publication.

Confirm the reporting basis. Identify the jurisdictional requirement or voluntary objective, reporting entity, reporting period, intended claim and applicable source edition.

Create programme governance. Assign a board sponsor, executive owner, technical lead and workstream owners across finance, sustainability, risk, strategy, legal and internal control.

Build the risk and opportunity universe. Use the value chain, ERM, strategy, dependencies and impacts, SASB topics, climate analysis and external evidence.

Assess material information. Apply the primary-user decision test, nature and magnitude, qualitative and quantitative factors, combined effects and obscuring test.

Complete climate-specific analysis. Develop GHG data, scenario analysis, resilience, transition-plan disclosures, climate metrics, targets and financial effects.

Build the disclosure and evidence system. Map requirements, owners, sources, methods, controls, judgements, estimates, limitations and approvals.

Draft connected disclosures. Organise the report by the four core content areas while showing the links between risks, strategy, metrics, financial effects and financial statements.

Run the compliance gate. Resolve gaps, validate transition reliefs, test location and timing, approve the statement and retain a complete review trail.

Primary users are existing and potential investors, lenders and other creditors. They use the disclosures when deciding whether to buy, sell or hold equity or debt, provide or sell credit, or exercise voting and other rights over management's use of economic resources.

IFRS S1 and IFRS S2 do not create a worldwide legal reporting obligation merely because their effective date has passed. They are effective for annual periods beginning on or after 1 January 2024, but each jurisdiction decides whether and when to mandate them for local entities.

IFRS S1 does not require every SASB metric. The entity refers to and considers relevant SASB topics and metrics, then applies entity-specific judgement and documents which metrics are selected, adapted or found inapplicable.