Interoperability of IFRS S1 and S2 sustainability disclosures

The global sustainability reporting landscape is rapidly evolving as organizations recognise the growing importance of transparent and standardised disclosures on environmental, social, and governance (ESG) issues. Sustainability reporting is no longer a voluntary exercise but a critical component of corporate accountability and stakeholder engagement. However, the coexistence of numerous standards and frameworks creates complexity and fragmentation for organisations and stakeholders alike. Existing standards such as the Global Reporting Initiative (GRI), Task Force on Climate-related Financial Disclosures (TCFD), and regional regulations like the European Sustainability Reporting Standards (ESRS) have entrenched positions and distinct focuses. This diversity often reflects regional priorities, stakeholder expectations, and sector-specific needs, but it also introduces significant challenges.

One major complication is the lack of alignment between these frameworks, leading to inconsistencies in reported data. For example, while some frameworks emphasise financial materiality (e.g. TCFD), others prioritise broader impacts on society and the environment (e.g., GRI). This divergence can make it difficult for stakeholders including investors, regulators, and organizations to compare and analyse sustainability performance across companies and regions. Moreover, the coexistence of multiple standards often results in reporting redundancies and inefficiencies for organisations. Companies may need to prepare disclosures aligned with multiple frameworks to satisfy diverse stakeholder requirements, increasing the reporting burden and administrative costs. Further, these challenges are exacerbated for multinational corporations that must navigate complex web of regional and national regulations, each with unique disclosure requirements.

In this context, as a landmark move to streamline global sustainability reporting, the International Sustainability Standards Board (ISSB), under the International Financial Reporting Standards (IFRS) Foundation, in June 2023 introduced two foundational sustainability standards: IFRS S1 and IFRS S2. IFRS S1, titled ‘General Requirements for Disclosure of Sustainability-related Financial Information’, serves as a foundational standard, providing overarching requirements for organisations to disclose sustainability-related risks and opportunities. IFRS S2, titled ‘Climate-related Disclosures’, builds on the principles of IFRS S1 but focuses specifically on climate-related risks and opportunities. Together, IFRS S1 and S2 aim to create a unified and globally applicable framework for sustainability reporting, bridging gaps between existing standards and fostering greater alignment in the reporting ecosystem. Below are key aspects of this alignment:

1. Alignment with TCFD recommendations
IFRS S1 and S2 standards emphasise governance, strategy, risk management, metrics, targets, and scenario analysis, ensuring alignment with TCFD’s widely adopted recommendations. IFRS S2 builds on TCFD’s structure by focusing on financial materiality, requiring disclosures on climate-related risks, emissions, and adaptation strategies. By integrating TCFD principles, IFRS provides a unified approach to climate disclosures by improving transparency, comparability, and decision-usefulness for investors and stakeholders worldwide.

2. Complementarity with the GRI standards
GRI emphasises a broad stakeholder perspective, focusing on an organisation’s impact on society and the environment. In contrast, IFRS S1 and S2 centre on disclosures of sustainability and climate related risks and opportunities. These frameworks are complementary, as organizations can use GRI to report impacts on society and the environment and IFRS standards to connect those impacts to financial performance.

3. Integration with regional standards (ESRS)
Regional frameworks like the ESRS under the EU’s Corporate Sustainability Reporting Directive (CSRD) share common objectives with IFRS S1 and S2 but may have additional requirements reflecting regional priorities. The IFRS Foundation and European Financial Reporting Advisory Group (EFRAG) have published guidance highlighting the alignment between the IFRS Sustainability Disclosure Standards and the ESRS. Focused on harmonised climate-related disclosures, the guidance would help companies to implement both frameworks efficiently.

4. Bridging the gap with industry-specific standards
Sustainability Accounting Standards Board (SASB) provide industry-specific metrics that can complement IFRS S1 and S2 disclosures. By leveraging SASB’s granular guidance within the overarching structure of IFRS standards, organisations can provide more tailored and detailed insights into sector-specific sustainability risks and opportunities. In addition to this, ISSB provides requirements for identifying, measuring, and disclosing significant climate-related risks and opportunities specific to industries. These requirements are primarily adapted from SASB Standards with minimal changes.

5. Fostering collaboration initiatives
Recognising the need for greater interoperability, the ISSB is actively working with global and regional standard-setters to create a unified reporting ecosystem. Collaborative efforts, such as the Value Reporting Foundation’s merger into the IFRS Foundation and ongoing discussions with GRI, ESRS, and other entities, highlight the commitment to reducing redundancies and fostering alignment.

ISSB indicated that the effective date for applying IFRS S1 and S2 is set for annual reporting periods beginning on or after January 1, 2024, but specific application dates may differ as jurisdictions adopt these standards. The International Organization of Securities Commissions (IOSCO) endorsed the ISSB standards just one month after their release, demonstrating strong support for adoption across the 130 jurisdictions (oversee more than 95% of the world’s financial markets) it represents.

As of April 2024, IFRS S1 and S2 standards have seen robust international acceptance, with over ten countries either fully adopting or adapting their disclosure requirements to align with IFRS S1 and S2. For instance, Brazil became the first country to officially incorporate IFRS S1 and S2 into its regulatory framework, signalling a significant step towards global adoption.

Financial institutions (FIs) have shown a positive response to the introduction of IFRS S1 and S2 standards, recognising their potential to enhance transparency and comparability in sustainability reporting. Many FIs are transitioning to these standards as part of their commitment to align with global best practices and meet the increasing demands from investors for reliable ESG disclosures. Banks such as HSBC and BNP Paribas are actively preparing to align their reporting practices with IFRS S1 and S2. Additionally, the central bank of Bangladesh (Bangladesh Bank) has published a ‘Guideline on Sustainability and Climate-related Financial Disclosure for Banks and Financial Institutions’ based on IFRS S1 and S2 standards, further supporting the integration of these standards within the financial sector.

In conclusion, IFRS S1 and S2 provide a cohesive framework for sustainability reporting, aligning with TCFD, complementing GRI, and integrating seamlessly with regional standards like ESRS. Moving forward, the focus will likely shift towards capacity-building, fostering cross-sector collaborations, and addressing implementation challenges. As adoption expands, these standards are expected to drive more consistent, actionable, and impactful sustainability reporting worldwide.

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