IFRS S1 and IFRS S2 explained

The ISSB or International Sustainability Standards Board — set up on November 3, 2021, alongside UN Conference of Parties COP26 at Glasgow — develops and approves IFRS Sustainability Disclosure Standards (IFRS SDS).

Its contributions, IFRS S1 and IFRS S2 help businesses report on sustainability and climate-related issues.

These standards are crafted to enhance the transparency and consistency of sustainability reporting worldwide while responding to increasing investor demand for reliable, comparable, and relevant information on different dimensions of sustainability.

In this article, we will explore these standards and offer practical advice for companies to disclose effectively.

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

IFRS S1 serves as a foundational framework for comprehensive sustainability disclosures.

It hinges on the principle that sustainability-related information is increasingly pertinent to understanding a company’s financial performance and prospects.

The standard mandates disclosures of sustainability-related risks and opportunities that influence financial condition, performance, or cash flows.

IFRS S1 becomes effective for annual reporting periods starting January 1, 2024.

Essential Aspects of IFRS S1

Comprehensive materiality

It mandates the inclusion of all pertinent sustainability-related information alongside financial statements.

Industry-specific guidance

The standard advocates for industry-tailored disclosures, as per SASB standards for identifying sustainability risks and opportunities.

Broad applicability

IFRS S1 transcends specific accounting principles, making it universally applicable and adaptable across various accounting frameworks.

Interconnectivity of disclosures

It emphasises the need to articulate the relationship between sustainability risks, opportunities, and their financial implications, offering a holistic view of the company’s position.

Understanding IFRS S2: Climate-Related Disclosures

Inspired by the Task Force on Climate-related Financial Disclosures (TCFD) framework, IFRS S2 emphasises transparency in climate-related risks and opportunities.

Key Elements of IFRS S2

Strategy differentiation

It requires companies to clearly distinguish between physical and transitional risks related to climate change.

Action Plans and targets

Firms must disclose their strategies to address climate risks and opportunities, including legally mandated or self-imposed climate-related targets.

Scenario analysis

Businesses are encouraged to conduct scenario analyses to better understand how different climate events could influence their future operations and value chain.

Comprehensive Metrics and Targets

Disclosures should encompass:

• Universal metrics such as greenhouse gas emissions apply to all industries.
• Industry-specific metrics tailored to particular sectors.
• Custom metrics developed internally for tracking progress towards climate-related targets.

Preparing for the Disclosure Journey

1. Building a Sustainability Framework

Start by establishing a sustainability framework aligned with IFRS S1 and S2. This involves:

• Materiality assessment to pinpoint sustainability and climate-related topics that are significant to your business’ stakeholders and financial performance.
• Ensuring that sustainability is woven into the fabric of corporate strategy and decision-making processes.

2. Strengthening Governance

Robust governance is key to credible disclosures:

• Form committees focusing on sustainability and climate risks, ensuring board-level oversight.
• Implement policies and protocols for sustainability management and reporting.

3. Enhancing Data Collection and Management

Accurate data is the backbone of effective reporting:

• Use technology to gather, manage, and analyse sustainability and climate-related data.
• Implement processes for data verification and validation to enhance the credibility of disclosures.

4. Conducting Scenario Analysis

Scenario analysis is key for IFRS S2 compliance. It requires a business to:

• Assess the business impact under different climate-related scenarios.
• Record how these scenarios could affect business and strategic responses.

5. Reporting and Disclosure

• Create a structured format for sustainability and climate-related disclosures.
• Involve key stakeholders in reviewing and providing feedback on disclosures.

6. Continuous Improvement and Updating

Sustainability is a journey, not a destination:

• Regularly update your disclosures to reflect new data and insights.
• Stay updated on IFRS S1 and S2 and other relevant sustainability reporting standards.

To conclude…

These standards elevate the level of transparency and accountability in environmental and social practices and align corporate strategies with global sustainability goals.

As organisations gear up to implement these standards, the journey ahead requires meticulous planning, robust data management, and strategic alignment.

And this is where Apiday’s suite of solutions will help you and your business better and effectively manage and report data according to IFRS S1 and IFRS S2 disclosures.

Apiday is committed to being your partner in this journey, providing the tools and expertise needed to turn these reporting procedures into an opportunity for growth and sustainable development.

Try Apiday for free today!