Understanding the General Sustainability Disclosure Strategy in IFRS S1 and S2

Understanding the General Sustainability Disclosure Strategy in IFRS S1 and S2

As global awareness of environmental, social, and governance (ESG) factors grows, investors and stakeholders increasingly demand transparent, consistent, and comparable sustainability information. Recognising this need, the International Financial Reporting Standards (IFRS) Foundation established the International Sustainability Standards Board (ISSB) to develop sustainability disclosure standards that align with global expectations. The IFRS Sustainability Disclosure Standards, specifically IFRS S1 and IFRS S2, were introduced to provide a structured framework for entities to report on sustainability-related risks and opportunities. These standards are designed to enhance the reliability of sustainability disclosures and ensure consistency across industries.

Overview of IFRS S1 and IFRS S2

IFRS S1: General Requirements for Disclosure of Sustainability-Related Financial Information

IFRS S1 focuses on establishing a comprehensive framework for entities to disclose information about their sustainability-related risks and opportunities that could reasonably influence the decisions of primary users of financial reports. The standard mandates that organisations provide a complete, accurate, and unbiased view of how sustainability factors impact their financial performance and position.

The primary objectives of IFRS S1 include:

• Consistency and Comparability: Ensuring that sustainability disclosures across different entities and industries follow a consistent format, enabling stakeholders to make informed decisions.
  
  

• Relevance and Reliability: Promoting the disclosure of material sustainability information that reflects the organisation’s financial risks and opportunities.
  
  

• Connectivity with Financial Reporting: Requiring organisations to integrate sustainability disclosures with financial information, providing a holistic view of the business.
  
  

IFRS S1 requires companies to report on governance structures, risk management processes, strategy development, and performance metrics related to sustainability risks and opportunities. The standard mandates the disclosure of forward-looking information to enable stakeholders to assess the potential long-term impacts of sustainability-related factors.

IFRS S2: Climate-Related Disclosures

IFRS S2 is a complementary standard to IFRS S1, focusing specifically on climate-related disclosures. It builds on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and sets out requirements for entities to disclose information about their exposure to climate-related risks and opportunities.

Key areas addressed in IFRS S2 include:

• Governance: How the entity’s governance processes oversee climate-related issues, including the role of the board and management.
  
  

• Strategy: The impact of climate-related risks and opportunities on the organisation’s business model, strategy, and financial planning.
  
  

• Risk Management: The processes used to identify, assess, and manage climate-related risks.
  
  

• Metrics and Targets: Disclosure of relevant quantitative and qualitative data, including performance indicators and targets related to climate impact.
  
  

IFRS S2 encourages organisations to disclose both qualitative and quantitative climate-related information, ensuring that investors and other stakeholders have access to consistent and comparable data.

Integration of IFRS S1 and S2 for Holistic Sustainability Reporting

The combination of IFRS S1 and IFRS S2 provides a unified framework that guides organisations in integrating sustainability-related risks and opportunities into their reporting processes. While IFRS S1 sets the overarching principles for sustainability disclosure, IFRS S2 offers more specific guidance on climate-related information. Together, these standards encourage companies to:

• Align their sustainability disclosures with financial information to enhance transparency.
  
  

• Provide information that is useful to investors, lenders, and other capital providers in making informed decisions.
  
  

• Adopt a comprehensive approach to sustainability disclosure that includes climate and non-climate-related risks and opportunities.

Key Challenges and Implementation Considerations

Implementing IFRS S1 and IFRS S2 may present challenges for organisations, particularly in terms of data collection, verification, and consistency. Organisations must ensure that they have robust systems and processes in place to gather accurate sustainability-related data. Additionally, entities may need to enhance their governance structures and integrate sustainability considerations into their decision-making processes.

Training and capacity-building will also be essential for organisations to comply effectively with IFRS S1 and IFRS S2. Companies will need to equip their boards, management teams, and sustainability professionals with the knowledge and skills required to meet the disclosure requirements.

The Importance of IFRS Sustainability Disclosure for Stakeholders

IFRS S1 and IFRS S2 are expected to play a critical role in improving transparency and accountability in corporate sustainability reporting. By aligning sustainability disclosures with globally recognised standards, organisations can enhance their credibility and demonstrate their commitment to sustainable business practices. Investors, regulators, and other stakeholders will benefit from more reliable and comparable sustainability information, enabling them to make better-informed decisions.

Conclusion

The introduction of IFRS S1 and IFRS S2 marks a significant step towards enhancing global sustainability reporting practices. These standards establish a clear framework for organisations to disclose material sustainability-related information, ensuring that investors and stakeholders have access to consistent and comparable data. By aligning with the IFRS sustainability disclosure standards, organisations can better manage sustainability risks and opportunities while demonstrating their commitment to long-term value creation. As the adoption of IFRS sustainability disclosure grows, it is expected to drive greater accountability and transparency in corporate sustainability practices, ultimately contributing to a more sustainable global economy.