Understanding IFRS S1 and IFRS S2 for enhanced climate risk reporting

The standards aim to meet the growing need for reliable and comparable sustainability information.

In June 2023, the International Sustainability Standards Board (ISSB) introduced two new standards, IFRS S1 and IFRS S2, under the International Financial Reporting Standards (IFRS) Foundation. These standards represent a significant step forward in promoting transparency and consistency in sustainability and climate-related disclosures globally. Both IFRS S1 and S2 became effective for reporting periods beginning on or after January 1, 2024, fully integrating the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. These standards aim to meet the growing need for reliable and comparable sustainability information to help investors assess climate-related risks and opportunities.

What are IFRS S1 and IFRS S2?

IFRS S1: General requirements for disclosure of sustainability-related financial information

IFRS S1 establishes the general principles for reporting sustainability-related risks and opportunities that could materially impact a company’s financial performance. It emphasizes the need for comprehensive and industry-specific disclosures, ensuring that investors have access to meaningful data for decision-making.

Key elements of IFRS S1 include:

• Comprehensive materiality: All pertinent sustainability-related information must be included alongside financial statements.
• Industry-specific guidance: Disclosures should be tailored to industry-specific industry standards, as outlined by the Sustainability Accounting Standards Board (SASB).
• Interconnectivity of disclosures: Companies must articulate the relationship between sustainability risks and opportunities and their financial implications.

IFRS S2: Climate-related disclosures

IFRS S2 focuses specifically on climate-related risks and opportunities. It requires companies to report on its strategies for managing climate-related risks, including scenario analyses and metrics for tracking progress toward climate targets. The standard builds on the TCFD recommendations and incorporates industry-specific guidelines from SASB. IFRS S2 also aligns closely with the European Sustainability Reporting Standards (ESRS) E1, providing companies with a unified approach to climate disclosures.

The enhanced disclosure requirements under IFRS S2 include reporting on:

• Transition plans: How companies plan to transition to a lower-carbon economy, including short, medium, and long-term strategies.
• Industry-specific metrics: Detailed metrics tailored to each sector’s unique climate risks and opportunities.
• Scope 3 emissions: Companies must report on Scope 3 emissions, which cover indirect emissions in its value chain.
• Carbon credits: Information on carbon credits' use and intended use.

Global adoption and impact

IFRS S1 and S2 have the potential to transform sustainability reporting, with more than 140 countries considering adoption and over 20 already committed. By aligning with the TCFD, the IFRS standards ensure companies provide more detailed and comparable information on climate-related risks and opportunities. For companies already following TCFD recommendations, IFRS offers an opportunity to enhance existing disclosures. Since IFRS standards are built on the groundwork laid by TCFD and SASB, many companies will not start from scratch. Instead, they can leverage current reporting practices and build on them to meet the new IFRS requirements. This transition should be seamless for larger companies and those in developed markets, where TCFD and SASB standards are already widely applied.

Practical steps for implementing the IFRS standards

A strategic approach to climate risk reporting is essential as companies prepare to implement IFRS standards. Here are some practical steps to guide the process:

• Conduct a materiality assessment: Determine which climate-related risks and opportunities are most relevant to your business. Engage with stakeholders, analyze industry trends, and assess the potential financial impact of these climate-related risks.
• Develop a robust governance framework: Establish clear roles and responsibilities for climate risk management within your organization. Ensure that the board and senior management actively oversee climate-related risks and opportunities.
• Integrate climate considerations into strategy: Embed climate risk considerations into your strategic planning and decision-making processes. Evaluate how climate risks could impact your business model and identify opportunities for innovation and growth.
• Enhance risk management processes: Strengthen your risk management framework to effectively identify, assess, and manage climate-related risks. Integrate climate risk assessments into your overall risk management processes and regularly review and update these assessments.
• Set clear metrics and targets: Establish and disclose clear metrics and targets for managing climate-related risks and opportunities. Set science-based targets for reducing greenhouse gas emissions and track progress towards these goals.

Road ahead

The introduction of the IFRS standards is a significant milestone in global sustainability reporting. These standards not only improve the transparency and comparability of climate-related disclosures but also align with global efforts to shift towards a low-carbon economy. For organizations situated in jurisdictions where IFRS standards are adopted, it is imperative for them to prioritize the incorporation of S1 and S2 requirements into climate risk reporting to meet regulatory obligations.

Concurrently, for others, voluntary implementation is a proactive step towards future-proofing sustainability reporting and managing climate-related risks. As global climate risk reporting requirements continue to evolve, adherence to these standards will contribute to better decision-making, stronger risk management, and, ultimately, a more sustainable future.

Read more from other BSI sustainability experts in Task Force on Climate Related Disclosures. Follow along with more sustainability-focused content and other digital trust, EHS, and supply chain topics that should be at the top of your list at BSI's Experts Corner.

About the author

Gouri Ganbavale, PhD, Senior Consultant, specializing in climate science: Gouri has 10 years of experience in climate risk assessments, ESG analysis, carbon credits, energy policies, and GHG accounting.