Introduction to Sustainability Reporting Standards IFRS S1 and IFRS S2

Sustainability reporting is becoming increasingly essential for organizations across the globe. Companies are being asked to disclose their environmental, social, and governance (ESG) impacts as part of their overall transparency and accountability.

In response to these growing demands, the International Financial Reporting Standards (IFRS) Foundation has developed two key sustainability standards: IFRS S1 and IFRS S2. These standards aim to provide a global baseline for sustainability disclosures, helping investors and stakeholders better assess company performance in terms of sustainability risks and opportunities.

This article will give an overview of IFRS S1 and IFRS S2, their importance in sustainability reporting, and how they are applied worldwide. By the end of this guide, you will understand the key concepts of these standards and their significance in the evolving landscape of corporate reporting.

Table of Contents

1. What is the S1 IFRS Standard?
2. What is the S2 IFRS Standard?
3. Are IFRS S1 and S2 Mandatory?
4. The 4 Pillars of IFRS S1
5. Key Differences Between IFRS S1 and S2
6. Global Adoption: Are IFRS S1 and S2 Mandatory in Canada?
7. Why Are IFRS S1 and S2 Important for Investors?
8. Conclusion

What is the S1 IFRS Standard?

IFRS S1 is a global standard designed to provide a comprehensive framework for reporting on sustainability-related financial information. Its main goal is to enable businesses to disclose sustainability risks and opportunities that could materially affect their enterprise value. This standard covers a broad range of ESG topics, providing guidance for consistent and comparable reporting on non-financial information.

One of the primary purposes of IFRS S1 is to ensure that sustainability reporting becomes as integral as financial reporting. It emphasizes the need for organizations to disclose sustainability-related impacts that may influence their cash flows, liabilities, and overall business performance.

Key Requirements of IFRS S1:

• Disclosures must be based on materiality: Companies should focus on disclosing information that is material to investors.
• Integration with financial statements: IFRS S1 encourages alignment between sustainability disclosures and financial statements to provide a holistic view of the company’s performance.
• Cross-sector applicability: The standard is designed to be applied across various industries, enabling comparability for investors in different sectors.

What is the S2 IFRS Standard?

IFRS S2 is focused specifically on climate-related disclosures and aims to build on the existing frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD). Given the increasing pressure for companies to address climate risks, IFRS S2 provides a clear set of guidelines on how businesses should disclose their exposure to climate-related risks and opportunities.

Key Elements of IFRS S2:

• Physical Risks: Disclosures related to the physical impacts of climate change (e.g., extreme weather events).
• Transition Risks: How a company is adapting to policies and regulations geared towards a low-carbon economy.
• Metrics and Targets: Companies need to disclose the metrics they use to measure climate-related risks and their progress towards reducing greenhouse gas emissions.

By focusing specifically on climate risk, IFRS S2 ensures that organizations provide detailed, transparent information on how they are preparing for the transition to a more sustainable and resilient economy.

Are IFRS S1 and S2 Mandatory?

Currently, IFRS S1 and S2 are not universally mandatory, though they are increasingly being adopted by companies worldwide. The International Sustainability Standards Board (ISSB), which was established by the IFRS Foundation, has developed these standards to serve as a global baseline for sustainability reporting. As such, their adoption largely depends on national regulators and the level of pressure from stakeholders and investors for better sustainability disclosures.

In some regions, IFRS S1 and S2 may be voluntarily adopted by companies aiming to demonstrate leadership in sustainability reporting. However, investor demand for consistent and comparable sustainability data is likely to encourage wider adoption and potentially lead to regulatory mandates in certain jurisdictions.

The 4 Pillars of IFRS S1

IFRS S1 is structured around four foundational pillars that guide companies on what to report in their sustainability disclosures:

1. Governance – This pillar requires companies to disclose how their governance structures manage sustainability risks and opportunities. It includes oversight by the board of directors and any committees responsible for sustainability matters.

2. Strategy – The strategy pillar looks at how sustainability-related risks and opportunities impact the organization’s business model, strategy, and financial planning. Companies should disclose how sustainability issues are likely to impact long-term value creation.

3. Risk Management – Companies need to describe how they identify, assess, and manage sustainability-related risks. This includes processes for risk identification and how sustainability risks are integrated into the organization’s overall risk management framework.

4. Metrics and Targets – This pillar focuses on the quantitative and qualitative metrics that companies use to measure their sustainability performance. Companies should disclose any targets they have set and their progress toward achieving them.

Key Differences Between IFRS S1 and S2

While both IFRS S1 and S2 are designed to enhance sustainability reporting, they serve different purposes:

• IFRS S1 provides a broad framework that covers all sustainability risks and opportunities (e.g., social, environmental, and governance).
• IFRS S2 is specifically focused on climate-related risks and disclosures, aligning closely with the TCFD framework.
• IFRS S1 is meant to provide a comprehensive view of a company’s sustainability performance, while IFRS S2 delves deeper into climate-specific issues.

Understanding these differences is crucial for companies looking to implement both standards effectively.

Global Adoption: Are IFRS S1 and S2 Mandatory in Canada?

Currently, IFRS S1 and S2 are not mandatory in Canada, but the country is taking steps to align its reporting practices with these global standards. Canadian companies are increasingly facing pressure from investors and regulatory bodies to adopt more transparent and comparable sustainability disclosures.

Organizations listed on Canadian stock exchanges, particularly those in sectors with significant environmental impacts, such as energy and resources, are more likely to adopt voluntary sustainability reporting standards, including IFRS S1 and S2. With Canada’s commitment to climate-related financial disclosures, it is possible that in the future, these standards could become part of the regulatory framework.

Why Are IFRS S1 and S2 Important for Investors?

Investors are becoming increasingly concerned about sustainability risks, as these risks can have material impacts on the financial performance and long-term viability of the companies they invest in. IFRS S1 and S2 provide a standardized way for companies to report on these risks, allowing investors to compare organizations on a like-for-like basis.

By adopting these standards, companies can demonstrate their commitment to sustainability, which can help attract long-term investors who are focused on building resilient portfolios. Moreover, as sustainability issues, especially climate change, continue to influence financial markets, transparent reporting through IFRS S1 and S2 can help mitigate the risk of stranded assets and other sustainability-related financial challenges.

Conclusion

The introduction of IFRS S1 and IFRS S2 represents a significant advancement in the way companies report on sustainability. These standards help organizations disclose sustainability risks and opportunities in a consistent and comparable manner, which is crucial for investors and stakeholders. While IFRS S1 focuses on broader sustainability issues, IFRS S2 zeroes in on climate-related risks.

Although not yet mandatory in many regions, including Canada, the growing pressure for transparency in sustainability reporting is expected to drive wider adoption of these standards. By aligning with IFRS S1 and S2, companies can enhance their credibility, attract investors, and better manage the risks and opportunities associated with sustainability.

As sustainability becomes a core element of business strategy, adopting these standards can position organizations as leaders in ESG reporting, ultimately contributing to their long-term success.