IFRS S1 and S2: the new era of ESG reporting

First ever set of global reporting standards for ESG investors

To meet the growing demand for ethical and environmentally responsible business practices, earlier this year the International Sustainability Standards Board (ISSB) published its first two sustainability standards, IFRS S1 and IFRS S2. Together, they usher in a new era of ESG – environmental, social and governance – reporting and disclosures.

IFRS S1 and IFRS S2 are firmly grounded in delivering on the innovative aims of the ISSB. These objectives outline a visionary trio: the formulation of universal standards for sustainable disclosures, driven by the information needs of global investors; facilitating companies in providing clear and decisive information essential for sustainability-focused decision-making across capital markets; and offering a common language for sustainability disclosures, with the flexibility to integrate regional ‘building blocks’ – at the regulators’ discretion – to meet the demands of both local information requirements and multifaceted stakeholders.

IFRS S1 embraces a comprehensive approach, encompassing general requirements for disclosing sustainability-related information. It lays a crucial foundation, not only for the specific requirements of IFRS S2 but also for future standards that will address sustainability areas beyond the climate sphere. By adopting the well-known structure of the Task Force on Climate-related Financial Disclosures (TCFD), the standard requires entities to disclose relevant information about risks and opportunities associated with sustainability. This information must be connected to financial reports, observing the same reporting period and publication date.

From its effective date, the standard will mandate that entities promote the disclosure of all sustainability-related risks and opportunities that could reasonably influence the entity. This implies establishing guidelines for the preparation and disclosure of this information, by setting formal requirements for defining content and presentation, with the intrinsic purpose of making them useful to users of this information. The standard requires companies to provide disclosures on four aspects:

• Governance: governance processes, controls and procedures used to oversee sustainability-related risks and opportunities
• Strategy: the strategy for managing these risks and opportunities
• Risk management: the processes employed for identifying, assessing, prioritising and monitoring these elements
• Metrics and indicators: the company’s overall performance regarding sustainable risks and opportunities, including progress towards any established objectives or legal requirements.

IFRS S2 focuses exclusively focuses on the climate risks faced by the entity, whether physical, transitional, or the opportunities arising from these climate challenges. It also relies on the recommendations and guidance of the TCFD, including the requirement for specific sectoral disclosures, incorporating sector-specific metrics as illustrative guidelines, drawn from standards established by the Sustainability Accounting Standards Board (SASB).

The standard stipulates that companies must provide the disclosures prescribed in IFRS S1, but with a particular focus on climate-related issues that are shaping a new landscape of risks across a wide range of sectors. As extreme climate events intensify – from devastating heatwaves to catastrophic floods – the focus on climate risks has shifted beyond the traditional financial impact of decarbonisation, now encompassing the direct effects of climate change.

Assessing these risks has become a vital part of business and investment decision-making, driving the imperative need for adaptation and the implementation of resilient approaches to safeguard both assets and financial prospects of organisations. This new climate dynamic also raises complex questions about risk pricing. Traditional financial metrics are increasingly being challenged, especially with the growing need to evaluate the physical risks stemming from climate change.

This new reality necessitates a strategic reallocation of resources and investments, placing the effective management of these emerging risks at the heart of business strategies and underscoring the importance of a deep analysis of the impacts of climate issues. In a period when climate change not only reshapes challenges faced by companies but also reconfigures asset assessment itself, adapting to this new reality emerges as an essential premise for establishing solid foundations for investment decisions and ensuring the sustainability of businesses in an ever-evolving world.

IFRS S1 and IFRS S2 are scheduled to come into effect for reporting periods beginning on or after 1 January 2024. Early adoption is possible, with the simultaneous adoption of both standards.

In summary, the launch of these standards represents a significant step towards more transparent corporate disclosure, enabling investors and stakeholders to access crucial information related to sustainability. The standards not only reflect the growing recognition of the importance of these topics but also reflect the collective commitment to shaping a more sustainable and resilient future for global businesses.

This article was first published on www. bakertillybr.com.br and has been republished with the author’s permission.

Gabriel Buzzi

Advisory partner and ESG expert at Baker Tilly in Rio de Janeiro, Brazil.