Sustainability reporting has evolved significantly, moving from voluntary corporate social responsibility (CSR) reporting – often used to highlight ethical practices and community engagement – to a set of mandatory, investor-focused disclosures aligned with financial reporting standards.
Sustainability reporting, in its early stages, lacked consistency and comparability, limiting its usefulness to investors and stakeholders seeking to make informed decisions.
In recent years, global concerns such as climate change, social inequality, and environmental degradation have intensified the demand for more reliable, transparent, and standardized sustainability information. In response, globally recognized frameworks and standards have been developed to enhance the quality, consistency, and decision-usefulness of sustainability-related disclosures.
IFRS S1 & S2
In 2021, the IFRS Foundation established the International Sustainability Standards Board (ISSB) to create a global baseline for sustainability disclosures. In 2023, IFRS S1 and S2 were released to enhance the consistency, quality, and decision-usefulness of global sustainability reporting.
Both standards are effective for reporting periods starting on or after 1 January 2024 and can be used by any entity, regardless of whether they follow IFRS or GAAP.
To promote global adoption, regulators and ISSB partners across various jurisdictions are developing implementation roadmaps, prioritizing listed entities to ensure a smooth transition and consistent application across markets. Let us now explore these two IFRS sustainability standards.
IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information
IFRS S1 applies to all entities required or choosing to disclose sustainability-related financial information under ISSB standards. It serves two key functions:
- Defines reportable information: Sustainability-related risks and opportunities that could impact cash flow, access to finance, and cost of capital in the short, medium, and long term.
- Prescribes reporting requirements: General rules for preparing and presenting sustainability-related financial disclosures.
What information should an entity report?
Entities should report only material sustainability-related risks and opportunities – those that could reasonably affect their prospects.
IFRS S1 borrows from the financial reporting definition of materiality, meaning that materiality is judged based on whether omitting, misstating, or obscuring information could reasonably be expected to influence the decisions of primary users of general-purpose financial reports (typically decisions regarding resource allocation).
Specific Disclosure Requirements
For each material sustainability risk and opportunity, an entity must disclose information on:
- Governance: Structures, processes, and controls overseeing sustainability, including board and management roles.
- Strategy: Approach to managing risks and opportunities and embedding sustainability into overall business strategy.
- Risk Management: Methods for identifying, assessing, prioritizing, and monitoring sustainability risks.
- Metrics and Targets: Performance indicators, goals, and progress against sustainability targets.
Other general requirements
- Reporting Entity: The sustainability report must cover the same entities included in related financial statements.
- Timing: The sustainability report should be issued concurrently with financial statements for the same reporting period.
- Comparative Information:
Entities must include comparative data from previous periods to support meaningful analysis and understanding. However, as a transitional relief, first-time reporters applying the IFRS S1 standard are not required to provide comparative information in their initial reporting period. - Location of disclosures:
Sustainability-related financial disclosures should form part of the entity’s general-purpose financial reports, such as the management commentary.
It is important that these disclosures are clearly identifiable and not obscured by other information, ensuring accessibility and coherence for users. - Compliance Statement: An explicit statement confirming full compliance with IFRS Standards is mandatory. Partial compliance is not permitted.
IFRS S2: Climate-related Disclosures
IFRS S2 is a topic-based standard applied to climate-related risks and opportunities.
Climate-related Risks:
Climate-related risks are the potential negative effects of climate change on an entity. These are divided into:
- Physical Risks: Risks from extreme weather events like hurricanes, floods, wildfires, and long-term changes such as rising sea levels or droughts affecting critical sectors.
- Transition Risks: Risks arising from the shift to a low-carbon economy, including regulatory, market, technological, and reputational risks.
Climate-related Opportunities:
Climate-related opportunities refer to the potential positive effects arising from climate change for an entity, such as:
- Innovation and Technology: Investing in renewable energy like solar and wind, creating new market opportunities.
- Sustainable Practices: Implementing methods like regenerative agriculture to enhance resilience.
- New Markets: Engaging in carbon credit markets to gain financial incentives for reducing emissions.
Expected impact on organizations
As organizations prepare to adopt IFRS S1 and S2, it’s essential to understand how this shift impacts people, processes, and systems:
1. Impact on People
- Build Environmental, Social & Governance (ESG) reporting skills and and sustainability expertise across teams.
- Implement governance frameworks for compliance and accountability.
- Enhance collaboration among finance, sustainability, risk, and IT teams to integrate ESG data effectively.
2. Impact on Processes
- Improve data collection methods for accurate ESG reporting.
- Strengthen internal controls to uphold data integrity and ensure transparency.
3. Impact on Systems
- Integrate ESG metrics into existing ERP and BI platforms for real-time monitoring.
- Upgrade or invest in new systems to support transparent, standardized disclosures meeting sustainability standards.
Conclusion
Sustainability reporting is no longer just about compliance; it offers strategic advantages that drive growth and resilience.
Organizations can leverage ESG data to make better decisions, strengthen stakeholder trust, attract investment, and sharpen their competitive positioning.
By integrating automation and advanced analytics, companies can boost operational efficiency, gain deeper insights into sustainability performance, and enable real-time, informed decision-making – supporting long-term value creation.
By Stella W Chege,
Senior IFRS Consultant and Trainer, and Accounting Panel Expert, AARO
