Unpacking the ISSB new sustainability standards: IFRS S1 and IFRS S2

In this article, we’ll go through the ABCs of IFRS S1 and S2 to provide a framework for how impacted entities can prepare. 

In a landmark move this past June, the International Sustainability Standards Board (ISSB) released its first ESG standards, turning the page on a new chapter of IFRS requirements. IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures are the first of — what’s sure to be — many ESG-related IFRS requirements. 

IFRS S1 and S2 serve to create a comprehensive global baseline of sustainability disclosures for capital markets. The Standards strive to provide companies with a common language for disclosing sustainability risks and opportunities on their prospects. 

IFRS S1 and S2 are complex. In this article, we’ll breakdown IFRS S1 and S2 at a high-level and provide a framework for how impacted entities can prepare.

What you’ll learn:

• What are the new IFRS S1 and IFRS S2 standards
• What is the goal of ISSB’s new ESG standards
• Who will IFRS S1 and S2 apply to and what is the compliance deadline
• How to prepare your processes, people, tech, and data for S1 and S2  

First things first, what is the ISSB?

The IFRS Foundation established the ISSB in November 2021 as a response to the growing call for sustainability reporting by global capital markets. Their work received international support from investors, companies, policy makers, and regulators, including the International Organization of Securities Commissions, the Financial Stability Board, the G20, and G7 Leaders.

What is the goal of the ISSB new standards?

There is a widespread demand from consumers, investors, governments, and businesses alike to have a consistent understanding of the sustainability factors that impact a company’s outlook and prospects. Just as IFRS answered the call for universal accounting standards, these new standards do the same for ESG. 

A global baseline: Like IFRS, the goal of S1 and S2 is to create a global baseline for sustainability disclosure around the world. S1 and S2 lay a ground floor and ensure the basics are covered. Additional jurisdictional requirements can be added on them to address unique policy and stakeholder needs. By taking a baseline approach, these standards create comparable global metrics. They also reduce duplicate reporting for companies that are subject to multiple jurisdictional requirements.

Useful: Because of their focus on capital markets, the ISSB standards are built to be useful; they only require information that is “material, proportionate, and decision-useful” to investors. 

Streamline: In addition to valuable, standardized disclosures, S1 and S2 were built to consolidate and streamline other successful standards: the TCFD recommendations, SASB, CDSB framework, integrated reporting framework, and the World Economic Forum metrics. By doing so, the ISSB hopes to make reporting easier for companies because they will no longer have to comply with numerous disclosure frameworks and standards.

Proportionate: The ISSB wanted to make the standards “appropriate” for a company’s circumstances. In other words, they are built to be proportionate to capabilities on hand and preparedness of companies around the world, so that companies can comply without incurring egregious costs or substantial effort. 

How do IFRS S1 and IFRS S2 intersect with financial statements?

IFRS S1 and S2 require companies to provide sustainability-related information alongside financial statements in the same reporting package. 

As such, it makes sense they were built based on the same concepts that underpin IFRS — which has the same goal to provide a universal language for disclosures and a global reach of over 140 jurisdictions. They were also built to be used in conjunction with any other accounting requirements.

What are the new ISSB’s standards IFRS S1 and IFRS S2?

IFRS S1 sets out core requirements for the disclosure of sustainability-related financial information that is expected to affect the entity’s “prospects” — including cash flows, access to finance, and costs of capital over the short, medium, and long term. 

IFRS S2 is a topic-based standard. It requires an entity to provide disclosures related to the entity’s exposure to climate-specific risks and opportunities. It is designed to be used along with IFRS S1.

It’s worth noting that S1 and S2 both incorporate the recommendations of the Task force on Climate-related Financial Disclosures (TCFD).

What disclosure information is required by IFRS S1 and IFRS S2?

Both S1 and S2 involve similar disclosure requirements, but S1 focuses on sustainability at-large and S2 zooms in on climate-specific information. Both standards include the following disclosure topics:

Governance: Disclosure related to the controls and processes used to monitor and manage sustainability [S1] or climate related [S2] risks and opportunities.

Strategy: Disclosure related to the strategy entities use to address sustainability [S1] or climate related [S2] risks and opportunities that could affect the business model or strategy over the short, medium, and long term.

Risk management: Disclosure related to the processes the entity uses to identify, assess, and manage sustainability [S1] or climate related [S2] risks. 

Metrics and targets: Disclosure related to how entities assess, manage, and monitor the performance of sustainability [S1] or climate-related [S2} risks and opportunities and their progress towards its own targets and any targets required by law or regulation.

When do the new ISSB requirements come into effect?

January 1, 2024, is the go-live date for IFRS S1 and S2. Entities will have to apply the new ESG requirements to annual reporting periods after this date.

For sustainability go-getters: Organizations can apply the standards early. If they choose to do so, the company has to state this and also apply both standards at the same time. 

For organizations that need more time to prepare for S1: There is the option of transition relief. Qualifying organizations can take a “climate first” transition option where they only have to provide climate disclosures in their first year of applying S1 and S2.

Who do the new ISSB standards apply to? 

Although any private or public company can apply IFRS S1 and S2, the ISSB can’t mandate their application. Companies can voluntarily apply the standards or jurisdictional authorities can decide whether or not to require them.

What are the people, process, data, and technology requirements of the new ISSB requirements?

IFRS S1 and S2 will impact governance and data management practices. For some companies, this will be the first time they’ve had to pair sustainability information with financial reporting. 

As jurisdictions move forward with S1 and S2, companies should take care to re-evaluate their sustainability and performance management people, processes, data, and technology.

Processes:

• Perform a sustainability materiality assessment to understand what metrics are material and, thus, need to be measured and evaluated
• Evaluate internal controls to ensure tracking, consistency, and proper documentation processes for auditing

People: 

• Create a dialogue between finance, sustainability, and operational teams to understand all levels of sustainability performance
• Define governance and responsibilities

Data:

• Determine which data points need to be collected 
• Build and analyze KPIs 
• Connect finance, sustainability, and operational data sources in a central location

Technology:

• Assess your current reporting infrastructure
• Integrate data sources in a single platform to determine true materiality

Learn how CCH Tagetik can help you streamline your ESG reporting to facilitate compliance while improving your corporate performance, contact us.