IFRS S1 and S2 Explained: Analysis of the New Sustainability Standards

In the dynamic world of the presentation of corporate reports, IFRS S1 and S2 standards emerge to promote progress towards transparency and responsibility in the way of sustainability. 

With the implementation of IFRS S1, focusing on general sustainability disclosures, and IFRS S2, centred on climate related disclosures, organisations are faced with the challenge of adapting their reporting strategies to comply with these emerging norms. 

This article looks to break down and explain the new standards, providing a deep analysis of the structure, objectives and impact that they will have on the presentation of global sustainability reports. 

Introduction to IFRS Sustainability Standards

The IFRS Sustainability Standards, specifically IFRS S1 and S2, mark a milestone for how organisations communicate their sustainability performance.

With the announcement of the creation of the International Sustainability Standards Board (ISSB) by the IFRS Foundation Trustees in COP26 on the 3rd of November 2021 and the subsequent emission of these standards on the 26th of June 2023, a new era of disclosures was opened related to sustainability in global capital markets. 

These standards reflect a growing commitment towards responsibility and transparency, offering a framework so that companies report on key aspects of sustainability in a coherent and comparable manner. 

General What is IFRS? A General View

The IFRS Foundation is a non-profit organisation that is dedicated to developing reliable standards and sustainability disclosures that are high quality, understandable, enforceable and globally accepted. 

Via its two norms establishing bodies, the International Accounting Standards Board (IASB) and the International Sustainability Standards Board, the IFRS foundation has played a crucial role in the harmonisation of financial reporting practices and global sustainability.

The Evolution of Sustainability Standards within the IFRS

The adoption of IFRS S1 and S2 is a reflection of the constant evolution in the environment of corporate sustainability. These standards not only address the increasing demand for relevant and trustworthy information regarding sustainability, but also establish a new precedent for the presentation of reports in this field. 

IFRS S1 establishes the general requirements for the disclosure of financial information related to sustainability, meanwhile IFRS S2 focuses on the specific disclosures related with the climate, tackling one of the most pressing challenges of our time.

IFRS S1: General Standards for Sustainability Disclosure

IFRS S1 introduces a band of essential norms for the disclosure of sustainability information, marking a significant advance in how companies report their activities and their sustainability impact. 

This standard responds to the increasing demand for transparent and reliable information regarding the management of sustainability related topics by organisations. 

General Description of IFRS S1

IFRS S1 is centred on general requirements for the disclosure of information related with financial sustainability, providing a framework for companies to report coherently on sustainable impacts and activities. 

This standard tackles a wide range of topics, from environmental considerations to social and governance, it’s designed to be applicable to all types of organisations, independent of their size or sector. 

The Principal Components and Objectives of the IFRS S1

The principal components of IFRS S1 include the identification and disclosure of material information related with sustainability, the evaluation of a company’s sustainability activities and their impacts, and the presentation of how sustainability affects strategies, business models, and a company’s decision making. 

The objectives of this standard are to ensure that companies provide relevant and comparable information on sustainability, easing, for investors and stakeholders, decision making based on a complete evaluation of a company’s sustainability.

The Impact of IFRS S1 on the Presentation of Reports

The impact of IFRS S1 on the presentation of reports is significant, since it establishes a new standard for the disclosure of sustainability information. With a focus on relevance and materiality, promoting companies to consider sustainability as an integral factor in their general strategy and daily operations. This not only improves the quality and transparency of the provided information, but also reinforces corporate responsibility, incentivising companies to adopt more sustainable and ethical practices.

IFRS S2: Disclosures Related to the Climate

IFRS S2 represents a step forward in the standardisation of disclosures related to the climate, providing companies with a detailed framework to report the impact and management of climate related risks and opportunities. 

This standard looks to improve the quality and consistency of information provided, facilitating for stakeholders, as well as investors and regulators, the comprehension of an organisation’s climate performance. 

General Vision of IFRS S2

IFRS S2 establishes specific guidelines for companies to report on how the climate affects their operations and strategies, as well as how their activities impact the climate. 

This standard includes physical risks, like extreme meteorological events, as well as transitory risks, that include changes of legislation, technology and market preferences in response to climate change. 

Upon providing a structured framework for these disclosures, IFRS S2 helps companies to integrate climate considerations into their financial planning and reporting.

Key Elements of the IFRS S2 Standard

The key elements of IFRS S2 include the identification and evaluation of climate risks and opportunities, the estimation of their financial impact, and the disclosure of strategies and actions to manage these risks and take advantage of opportunities. 

Furthermore, the standard emphasises the importance of governance and the management of climate risk, as well as the necessity for a clear and sustained commitment from top management to climate sustainability.

These provisions ensure disclosures are more than a mere list of risks, converting them into an integral component of corporate strategy and operations.  

How IFRS S2 Transforms Information about the Climate

IFRS S2 not only increases the transparency and consistency of climate disclosures, but also promotes companies to adopt a more proactive and strategic focus on climate change. 

Requiring a detailed evaluation of the climatic impact and the responses of a company, this standard motivates organisations to integrate sustainability into their operative and strategic nucleus. This, therefore, creates for investors and other stakeholders the fulfilment of more informed opinions and decisions based on a deep understanding of a company’s sustainability practices. 

Benefits and Challenges of Implementing IFRS S1 and S2

The adoption of the standards IFRS S1 and S2 bring with them both significant benefits but also unique challenges for organisations. 

These standards represent a big step forward in the standardisation of sustainability and climate disclosures, but their implementation requires careful and strategic consideration. 

Pros of IFRS S1 and S2 Adoption

The implementation of IFRS S1 and S2 brings with it various benefits, for example:

• Improve the transparency and comparability of sustainability information, which permits investors and other stakeholders to make more informed decisions.
• These standards help companies to identify and manage risks related with sustainability and the climate, improving in this way long term resilience.
• Upon adopting IFRS S1 and S2, organisations can also strengthen their reputation and credibility within the market, demonstrating a genuine commitment to sustainable and responsible practices. 

Challenges for the Implementation of IFRS Sustainability Standards

However, the implementation of IFRS S1 and S2 aren’t exempt from challenges.

One of the main challenges is the need to adapt existing information and reporting systems to the new requirements. This can require significant investment in technology and labour.

Furthermore, companies should navigate the complexity of integrating sustainability and climate considerations into their commercial strategies and operations, which can be a time and resource consuming process.

Finally, there’s an inherent challenge in the interpretation and application of the standards, especially in areas where guidance may be less prescriptive, which requires careful judgement by the company. 

Conclusion

The standards IFRS S1 and S2 have introduced a significant change for the way in which companies tackle the reportability of sustainability and climate disclosures.

IFRS S1 has established a robust framework for general disclosures of sustainability, emphasising the importance of transparency and the relevance of reported information.

On its part, IFRS S2 has delved specifically into disclosures related to the climate, highlighting the urgency of tackling climate risks and opportunities within corporate strategy.

Together, these standards have not only elevated the standard of reportability in sustainability, but also strengthened corporate responsibility and the management of risks, benefiting companies, investors and society in general. 

Looking to the future, it’s evident that sustainable reportability continues to evolve under the umbrella of IFRS standards. With the growing focus on sustainability and climate change, it’s probable that we’ll see a greater integration of these considerations in all areas of business reporting. 

Furthermore, the general adoption of these standards on a global level could bring with it greater harmonisation of reporting practices, creating precise comparisons and more informed decisions by stakeholders. 

Finally, IFRS S1 and S2 standards are only the start of a path towards greater responsibility and corporate transparency in the sustainability environment, marking the direction for future innovations and improvements in this essential field. 

If you want to explore how our sustainability software at APLANET can help you comply effectively with the most relevant international standards, we invite you to speak to our specialists and discover personalised solutions that adapt to your company’s needs. 

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