The Standardisation of Standards: IFRS’ S1 and S2 Disclosures

AUTHORS – Palita Timm and Jessica Di Bartolomeo

The Standardisation of Standards: IFRS’ S1 and S2 Disclosures

On June 26th, 2023, the IFRS (International Financial Reporting Standards) Foundation issued their inaugural Sustainability Standards in two parts: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and S2 Climate-related Disclosures. Both standards are to come into effect for annual reporting periods beginning on or after January 1st, 2024. Their development marks a concerted effort to help standardise and consolidate the commonly nicknamed “alphabet soup” of sustainability standards, with new ones being announced, released, and proposed at a remarkable pace. In developing the Sustainability Disclosure Standards, the IFRS is aiming to establish a global baseline for capital markets.

Breaking Down IFRS S1 and S2

IFRS S1’s General Requirements for Disclosure of Sustainability-related Financial Information will require reporting companies to disclose information about any sustainability-related risks and opportunities that are deemed pertinent to users of general purpose financial reports, such as investors. IFRS S2’s General Requirements are the same and also pertain to users of general purpose financial reports, but require disclosure of climate-related risks and opportunities.

Companies will be able to disclose only their climate-related risks and opportunities (S2) in the first year of applying the standards, and report their full sustainability-related risks and opportunities (S1) starting in year 2, as part of a set of reliefs the ISSB (International Sustainability Standards Board), who is overseeing the development of the IFRS standards, put in place.

Both the S1 and S2 standards are intended to assist users of general purpose financial reports in making decisions about providing resources to the entity.

IFRS S1

IFRS S1 outlines how entities should prepare and present their sustainability-related financial disclosures, setting out general requirements for the content and presentation of the information. The goal is to provide investors with meaningful data for decision-making regarding resource allocation to / investment in the entity.

IFRS S1 mandates the disclosure of the following aspects:

• All sustainability-related risks and opportunities that could reasonably impact the entity’s cash flows, access to finance, or cost of capital in the short, medium, or long term
• The entity’s governance processes, controls, and procedures for monitoring and managing sustainability-related risks and opportunities
• The entity’s strategy for managing said risks and opportunities
• The entity’s processes for identifying, assessing, prioritising and monitoring said risks and opportunities
• The entity’s performance in relation to sustainability-related targets or mandatory regulatory/legal requirements

IFRS S2

IFRS S2 applies to any climate-related risks to which an entity is exposed to and includes climate-related physical risks, climate-related transitions risks, and climate-related opportunities available to the entity.

IFRS S2 mandates the disclosure of the following aspects:

• All climate-related risks and opportunities that could reasonably impact the entity’s cash flows, access to finance, or cost of capital in the short, medium, or long term
• The entity’s governance processes, controls, and procedures for monitoring and managing climate-related risks and opportunities
• The entity’s strategy for managing said risks and opportunities
• The entity’s processes for identifying, assessing, prioritising and monitoring said risks and opportunities
• The entity’s performance in relation to climate-related targets and any targets that are mandatory, including regulatory/legal requirements

In the first year of application, companies will be exempt from disclosing their scope 3 greenhouse gas emissions as a transition period.

A Global Baseline

The IFRS Standards are robust, having been built upon many existing initiatives in an effort to create the ultimate global sustainability reporting baseline. Their aim is to reduce the need for multiple frameworks and potential duplication of reporting. IFRS S1 and S2 have integrated and consolidated the TCFD recommendations, SASB standards, the CDSB framework, and more, all of which have helped inform what is included in the requirements. Both S1 and S2 are to be provided alongside financial statements and will additionally be interoperable with Global Reporting Initiative (GRI) standards for those companies who currently report to both SASB and GRI, eliminating the need to file multiple times. Finally, the standards are designed so as to allow any additional jurisdictional requirements, such as the upcoming mandatory climate reporting requirements in Australia, to be built on top of this global baseline. Not only does all of this allow for easier communication between companies, their stakeholders and potential investors, but it enables organisations to be more efficient in their reporting process and to minimise the use of internal resources.

Before the final IFRS standards were announced, they went through a rigorous due diligence process and consultation period, receiving more than 1,400 responses during the proposal stage. The ISSB’s work has received international support from policy makers, market regulators, investors, and organisations such as the Financial Stability Board (FSB) and the International Organisation of Securities Commissions (IOSCO). This process is a testament to the dedication and importance that the IFRS has placed on ensuring inclusivity and transparency when creating this new global baseline for sustainability reporting.

IFRS Takes Responsibility of TCFD Disclosure

On July 10th, 2023, hot on the heels of the release of the new Standards, the IFRS announced that they would be taking over responsibility for monitoring organisations’ TCFD climate-related disclosures as of 2024. For the FSB, the creators of the TCFD, this was a logical next step in the move towards international standardisation of sustainability and climate reporting, as both IFRS S1 and S2 have fully integrated the recommendations of the TCFD framework. This new responsibility coincides with the implementation date of the IFRS standards.

These major strides towards the consolidation of sustainability standards have been a long time coming, as reporting companies are increasingly inundated with legislation, regulations and frameworks. A global baseline for sustainability and climate disclosure facilitates greater reporting efficiency and robustness for organisations, allowing for greater transparency and helping to ease investors’ and stakeholders’ decision-making processes. It is a sign that regulators are listening to reporting companies’ as well as investors’ needs, and that the sustainability reporting landscape is moving in the right direction.

How can Ecometrica help?

The implementation of the S1 and S2 standards will require robust reporting of a much wider breadth and deeper requirements of sustainability and climate-related information. Ecometrica’s platform already covers a wide range of solutions including geospatial biodiversity, water, deforestation and physical climate-risk monitoring and reporting, as well as audit-ready greenhouse gas emissions accounting. This means that everything is already in place to assist with reporting to these standards.

Ecometrica are accredited experts in climate metrics and since 2008, and have been enabling organisations and public sectors across the globe to effectively and transparently disclose their climate impact in accordance with the most up to date standards. Thanks to our Sustainability Reporting Platform and the guidance and expertise of our Sustainability Analysts, we will make sure your data is robust and accurate, ensuring it is ready to be audited and meet the reporting and disclosure criteria. Our sustainability experts closely monitor changes to regulation requirements, enabling our clients to stay ahead of the curve in an ever-evolving sustainability disclosure requirement landscape.