5 Reasons Why the IFRS S1 and S2 Sustainability Disclosures Are Important

The International Financial Reporting Standards (IFRS) S1 and S2, announced in June 2023, are an important new global standard for sustainability reporting. They aim to replace the old guidelines for financial reporting on environmental matters. The new standards encourage companies to move away from voluntary disclosure and towards mandatory disclosures that provide consistent industry information.

IFRS S1 and S2 were developed by the International Accounting Standards Board (IASB) and the International Federation of Accountants (IFAC), who collaborated with investors, companies, governments, regulators, and other stakeholders to develop these guidelines.

Why do companies report on sustainability performance?

Many companies report on sustainability performance because they want to be transparent, responsible and ethical. The IFRS S1 and S2 disclosures demonstrate that they are good corporate citizens who care about the environment, society and people.

From January 1, 2024, an organization must implement both IFRS S1 and IFRS S2 for annual financial reporting periods. However, the exact implementation date may differ across jurisdictions as they gradually adopt these standards. Early adoption of these new standards is allowed.

What are IFRS S1 and S2?

• IFRS S1 and IFRS S2 require an entity to disclose information on all material sustainability-related and climate-related risks and opportunities that may affect the entity’s cash flows, access to financing, or cost of capital over the short, medium, or long term. 
• IFRS 2 outlines climate-related disclosures and is intended to be seamlessly integrated with the requirements of IFRS 1.

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Why are the IFRS sustainability Disclosures So Important?

Here are 5 reasons highlighting the crucial nature of sustainability disclosures:

• Clarity: until now, sustainability reporting frameworks have been fragmented, ever-evolving and challenging for companies to apply in practice.

• Risk Management: IFRS 1 and IFRS 2 disclosures aid in identifying and managing environmental and social risks. Integrating sustainability into decision-making enables organizations to address challenges proactively and seize growth opportunities.

• Competitive Advantage: Embracing sustainability as a core principle is vital for long-term success. Implementing the standards differentiates organizations, attracting top talent, fostering customer loyalty, and ensuring a competitive edge.

• Investor Confidence: With sustainable investing on the rise, investors seek reliable ESG information. Standardized sustainability disclosures build investor confidence and attract capital aligned with sustainability goals.

• Transparency: IFRS 1 and IFRS 2 establish clear guidelines for reporting on various sustainability topics, fostering transparency. This empowers stakeholders to make informed decisions and hold organizations accountable for their environmental and social impact.

The Importance of Good Sustainability Communications

The launch of the new standards also emphasized the importance of accurate sustainability communications, exemplified in this quote from Mary Schapiro, Head of the Task Force on Climate-related Financial Disclosures (TCFD) Secretariat and Vice Chair for Global Public Policy at Bloomberg L.P.:

“High-quality data is necessary to support price discovery and capital formation, and facilitates efficient capital markets. ISSB Standards will equally support preparers in communicating sustainability information to their investors and other providers of capital.“

How Do The New Standards Work In Practice?

The new standards are not just about reporting and how companies manage their business. They require companies to demonstrate that they manage their business sustainably and ethically.

The IFRS S1 standard requires disclosure from all entities that have issued securities under an IFRS or US GAAP financial report (which includes everyone). The disclosure requirements are based on what the entity believes are key factors for investors to assess when deciding whether or not to buy its shares or other securities: sustainability risks and opportunities; materiality thresholds; impacts of climate change; governance policies related specifically towards sustainability issues such as human rights abuses.

IFRS S2 mandates that companies disclose material information about climate-related risks and opportunities. This standard incorporates the TCFD Recommendations and includes industry-specific metrics based on the SASB Standards. It complements IFRS S1 by adding specific disclosure requirements for climate-related risks and opportunities. Companies must apply IFRS S2 to provide information about climate-related risks and opportunities that may impact their prospects when meeting the general requirements of IFRS S1 for disclosing sustainability-related risks and opportunities.

Conclusion

The ISSB introduced IFRS S1 and S2 to address the challenges of the current fragmented sustainability reporting standards. These conflicting standards lead to added costs, complexity, and risk for businesses and investors, making obtaining reliable and comparable sustainability-related information challenging. By implementing IFRS S1 and S2, companies can provide a global disclosure baseline that aligns with other sustainability reporting frameworks, streamlining reporting processes and increasing transparency for access to capital and governance.

Further Information

ISSB issues inaugural global sustainability disclosure standards. (2023, June 28). IFRS. Retrieved from https://www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2/

IFRS Foundation. (n.d.). Effects Analysis: General Sustainability-Related Disclosures. IFRS. Retrieved from https://www.ifrs.org/content/dam/ifrs/project/general-sustainability-related-disclosures/effects-analysis.pdf

Deloitte. (2023). Global ESG disclosure standard coverage: ISSB finalizes IFRS S1 & S2. Deloitte. Retrieved from https://dart.deloitte.com/USDART/home/publications/deloitte/heads-up/2023/global-esg-disclosure-standard-coverage-issb-finalizes-ifrs-s1-s2

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