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How to Navigate the New Era of Sustainability Reporting: IFRS S1 and S2 Requirements

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As sustainability professionals, we are standing at the precipice of a transformative era in corporate reporting. The recent introduction of the International Financial Reporting Standards (IFRS) S1 and S2 heralds a significant shift in how organizations will measure, report, and internalize environmental, social, and governance (ESG) factors. These new standards aim to embed sustainability into the core of financial reporting, enabling stakeholders to make more informed decisions. Here’s a comprehensive overview of what these changes mean for us and how we can prepare to meet these new requirements.

The Cornerstones of Transition: Innovation, Leadership, and Finance

Transitioning to a sustainable economy is no longer a distant goal but a pressing necessity. Innovation, leadership, and finance form the bedrock of this transition. While we are not yet at the point where we can price risks and opportunities (R&O) with precision, the journey towards accurate valuation is well underway. It’s essential to view the assessment of risks and opportunities not as a compliance exercise but as a value-creation endeavor. This mindset shift is crucial for fostering long-term sustainability and resilience.

Digital Taxonomy and Alignment with Investor Materiality

One of the significant challenges we face is ensuring that our disclosure services align with the evolving digital taxonomy. The IFRS and European Sustainability Reporting Standards (ESRS) are collaborating to harmonize the definition of investor materiality. This alignment is vital for providing clear and consistent information to investors. The International Sustainability Standards Board (ISSB) is also developing additional standards (S3 and S4) to further enhance this framework.

To support this transition, capacity building is paramount. This includes:

  • Education: Enhancing knowledge and skills within organizations.
  • Advocacy and Engagement: Promoting the importance of sustainable practices.
  • Technological Assistance: Leveraging technology to streamline reporting processes.
  • Policy Instruments: Developing policies that support sustainable reporting.

Assurance and Ethical Standards

The upcoming ISO 5000 standard, designed to apply to all sustainability assurance engagements, aims for approval in September 2024. This standard and the International Ethics Standards for Sustainability Assurance (IESSA) will ensure that sustainability assurance upholds the same ethical standards as financial assurance. Companies must be prepared for the possibility of receiving qualified opinions during the maturity period as these standards take hold.

Combating Greenwashing

With the rise of sustainability reporting, the risk of greenwashing—whether through omission, misrepresentation, cherry-picking, or exaggeration—has become a critical concern. It is imperative to maintain transparency and integrity in reporting to build trust among stakeholders and avoid any implications of fraud or incompetence. Listen to this podcast for tips and practical insights on navigating greenwashing.

Metrics and Industry-Specific Datasets

Developing a robust set of metrics that align with the ISSB standards is crucial. Establishing industry-specific datasets and default metrics as part of Corporate Reporting Management Systems (CRMS) will ensure consistency and comparability across sectors. This approach will help streamline reporting and provide a solid foundation for evaluating sustainability performance. Discover EcoStruxure Resource Advisor™ - an integrated software platform to digitize your data and manage your reporting.

Global Endorsement and Adoption

The global endorsement of IFRS standards is gaining momentum. Over 140 countries are considering adopting the standard, with more than 20 jurisdictions already committed. This represents nearly 55% of global GDP and over half of global greenhouse gas emissions. Brazil was the first country to adopt S1 and S2, demonstrating a strong commitment to sustainable finance. As more and more countries continue to develop their standards while aligning with ISSB, the challenge of harmonization becomes evident. Jurisdictional flexibility is essential to accommodate global footprints, even for domestic companies.

The ISSB has also published a preview of the inaugural jurisdictional guide, which will support the adoption of ISSB standards and enhance transparency in capital markets. This guide aims to assist local economies in resilient transition finance and effective communication of value creation.

Materiality and Reporting

Materiality remains a central theme in sustainability reporting. Incorporating threshold analysis for reporting and determining appropriate standards to use is critical. Investors value future sustainability data and seek consistent, comparable, and accurate information. The ESG Integrated Disclosure Project (IDP) offers a pathway for companies to disclose data in line with S2 and the Sustainability Accounting Standards Board (SASB).

The Task Force on Climate-Related Financial Disclosures (TCFD) has transitioned its responsibilities to the ISSB, yet companies can still utilize TCFD recommendations. The Integrated Reporting (IR) Framework continues to play a significant role, providing guidance for aligning transition plans and creating value through integrated reporting.

Enhancing Communication and Addressing Market Fragmentation

Capital markets are encouraging comparable and accurate reporting to ensure decision-useful disclosures. However, the Global Reporting Initiative (GRI) standards have not met the requirements of capital markets, prompting the ISSB to aim for an end to the ESG alphabet soup. The integration of frameworks such as IR, SASB, CDSB, and TCFD into IFRS S1 and S2 incorporates the TCFD framework and extends SASB's identification of sustainability R&Os beyond climate.

The ISSB also emphasizes the importance of forward-looking indicators, such as capital commitment and core business strategies, alongside traditional backward-looking indicators like greenhouse gas (GHG) emissions. This holistic approach ensures a comprehensive understanding of a company's sustainability performance.

Building Capacity and Breaking Down Silos

To effectively implement the new IFRS standards, organizations must focus on building capacity and breaking down silos within their operations. This involves fostering collaboration across departments and integrating sustainability into all aspects of business strategy. By doing so, companies can create value not only for shareholders but for all stakeholders.

The ISSB has established a capacity-building partnership framework with 35 global partners to support this transition. Partnerships with stock exchanges, such as those in Ireland, Singapore, and Saudi Arabia, further reinforce the global commitment to sustainable finance.

Conclusion

The adoption of IFRS S1 and S2 marks a pivotal moment in sustainability reporting. As sustainability professionals, it is our responsibility to lead this transition, leveraging innovation, leadership, and finance to build a sustainable economy. We can drive meaningful change and create lasting value by aligning our practices with the new standards, combating greenwashing, and focusing on consistent, comparable, and accurate reporting. The road ahead may be challenging, but with the right mindset and tools, we can navigate this new era of sustainability with confidence and purpose.

For more resources and updates on the IFRS sustainability standards, visit the IFRS Knowledge Hub.