Inside the IFRS S1 and S2 Sustainability Disclosure Standards

Susan H. Mac Cormac and Alfredo B. D. Silva are Partners  and Oluwabamise Onabanjo is an ESG Analyst at Morrison & Foerster LLP. This post is based on their Morrison & Foerster memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto TallaritaFor Whom Corporate Leaders Bargain (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.

The International Sustainability Standards Board (ISSB), established by the IFRS Foundation (IFRS), issued a comprehensive global baseline of disclosure standards to facilitate consistent and comparable disclosures on risks and opportunities related to sustainability and climate, referred to as IFRS S1 and IFRS S2, respectively. The standards address longstanding reporting challenges, equipping companies and investors to better understand performance and comply with ever‑evolving regulations. We believe the standards will prove particularly valuable for businesses and investors operating in jurisdictions like the United States, where regulations are anticipated but not yet adopted; because the standards are structured to apply for both voluntary and mandatory disclosures and integrate well with other established standards and standards under review, reporting entities can use these standards as a “roadmap” for eventual compliance.

For businesses, the IFRS standards will not only simplify the disclosure process, but also enable benchmarking and cost- and time-savings. Investors will benefit from these norms as a resource to guide investment decisions, assist in sustainability- and climate-related due diligence, and enable tracking and analysis of portfolio companies’ performance against peers.

The standards, helpfully, are not entirely new. They integrate certain existing standards, such as those of the Sustainability Accounting Standards Board (SASB), Task Force on Climate-Related Financial Disclosures (TCFD), and Climate Disclosure Standards Board (CDSB), among others, and are designed for interoperability with existing standards, such as the Global Reporting Initiative (GRI) standards[1].

Accordingly, businesses and investors will not need to fully revamp their reporting and tracking procedures to comply with the IFRS standards. Since 2020, 2,839 companies have made sustainability-related disclosures using the SASB standards[2]; given the fact that the newly introduced standards integrate the SASB standards, this development will require minimal adjustments in established reporting procedures. Notably, IFRS S1 and S2 are focused on financially material environmental, social, and governance (ESG) risks and opportunities that affect the overall bottom line, as opposed to GRI, CSRD, and other reporting standards that are double materiality-based, that is, also requiring consideration and disclosure of how a company’s operations impact its ecosystem.

The standards’ utility is also not just theoretical. Jurisdictions such as the United Kingdom, Japan, Canada, and Australia have signaled their intent to incorporate the standards into required reporting regimes. The International Organization of Securities Commissions (IOSCO), an organization comprised of 130 capital market authorities, including the U.S. Securities and Exchange Commission (SEC), has endorsed the standards as an effective and proportionate global framework of investor-focused disclosures in relation to climate-related matters and sustainability‑related information, concluding that the ISSB Standards are appropriate to help globally integrated financial markets accurately assess relevant sustainability risks and opportunities.[3]

Summary: IFRS S1 and S2 Standards – General Requirements for Disclosure of Sustainability- and Climate-Related Risks and Opportunities

IFRS S1 standards are designed to facilitate disclosures from entities, as part of their general‑purpose financial reports, about sustainability risks and opportunities, while IFRS S2 standards encourage companies to disclose information about how an entity manages potential negative effects of climate change, including physical risks—for example, extreme weather events—transition risks—for example, policy changes—and opportunities refer to positive effects of climate change. Both standards encourage disclosures on how risks and opportunities impact an entity’s prospects over the short, medium, and long term. In particular, the standards are designed to elicit entity-specific information about how these risks and opportunities will affect overall corporate value and should influence investment decisions.

Scope of Disclosure

Disclosures under both IFRS S1 and S2 mirror the framework established by the TCFD and are broadly categorized under four core considerations: governance, strategy, risk management, and information on metrics and targets. Disclosures under S1 and S2 slightly differ with respect to metrics and targets, with S2 encouraging disclosures on cross-industry metrics,[4] industry-based metrics,[5] and qualitative and quantitative targets and metrics set by the entity or required by law.

Using the conceptual foundations for reporting—including fair presentation, materiality, and disclosure of connected information—companies are encouraged to consider direct and indirect dependencies and impact of stakeholder, society, and natural resource interactions throughout value chains, as well as how these interactions increase or erode overall corporate value from an investor-focused perspective.

Location of Disclosures

For an issuer either required to or electing to adhere to IFRS S1 and S2, disclosures are encouraged to be included in general financial reports, including, for example, annual reports on Form 10-K and quarterly reports on Form 10-Q, for U.S. issuers, or in the annual accounts for premium-listed UK companies. The standards allow for flexibility, however, in that entities may instead cross‑reference another regulatory required report or standalone voluntary report containing the disclosures.

Flexibility in Disclosures

IFRS S1 and S2 are designed to elicit comparable information regardless of accounting standards applicable in different jurisdictions, meaning they can be utilized even by companies applying U.S. Generally Accepted Accounting Principles (GAAP), while also allowing companies to make disclosures without undue cost or effect, thereby catering to small- and large-resourced companies. These flexibilities afford reporting entities cost- and time-saving efficiencies, reducing duplicative and onerous reporting, which have been significant concerns for companies and investors about sustainability reporting.

Timing and Effective Date

Reporting timing under the new standards is the same as applies to the related financial statements covering the same reporting period. To the extent the standards are applied to an entity, they are to be adopted on or after January 1, 2024, with transitional reliefs such as limiting reporting in the first year only to climate-related matters.

Relationships Between IFRS S1 and S2 Standards and Other Reporting Regimes

Currently, leading jurisdictions such as the EU, UK, and Australia have mandated disclosures on diverse ESG risks and opportunities to some degree, with the European Commission adopting the European Sustainability Reporting Standards (ESRS) in July 2023 as required to be developed under CSRD.[6] These regulatory standards are in some cases complemented by, and in others, in conflict with, various voluntary sustainability-related reporting regimes that have to a large extent consolidated under the ISSB.

Helpfully, the ISSB’s new standards on balance work with, rather than against, mandated and voluntary standards. For example, IFRS S1 and S2 prescribe what sustainability-related matters a company must disclose and refer companies to SASB standards to inform a company’s disclosure topics. With respect to the new ISSB standards, reporting entities are encouraged to consider industry-specific metrics set out in the ISSB’s draft Industry-based Guidance on Implementing IFRS S2, which are derived from SASB standards.

Interoperability with CSRD and the ESRS

The ESRS regime promulgated under CSRD share similar high-level goals as the IFRS S1 and S2 standards to the extent that they are baseline standards that will apply across diverse jurisdictions, are suited for small and large companies, require reporting over the short, long, or medium term, and are designed to elicit sustainability- and climate-related information for stakeholders, especially investors. Throughout the development of the ESRS, the EU has sought to ensure some level of alignment and interoperability with global standards, including TCFD, GRI, and IFRS S1 and S2, including holding ongoing discussions with the ISSB on the subject. An example of such alignment and interoperability is reflected in the overall TCFD-based architecture (governance, strategy, risk management and metrics and targets) of the ESRS that is also used in the ISSB standards. The goal of alignment and interoperability across global sustainability standards is critical to ease the reporting burden that the differences in jurisdictional disclosure requirements may pose.

A marked difference between each regime is what counts as material information. Under the ESRS (as with GRI), material information includes both financially material items and information on the company’s impacts on its ecosystem (double materiality), while the ISSB standards focus on financially material disclosures. Large multinationals have expressed concerns about the cost implications of reporting under ESRS, with EFRAG estimating costs at 0.004 – 0.008% of reporting companies’ revenue. Since the newly adopted ESRS has introduced a certain level of flexibility in terms of disclosures, we are keen to see if or how this will impact compliance costs under the regulation.

We are observing the regulatory landscape to see how the U.S. SEC will view these standards, but it is worthwhile to note that the proposed SEC climate rules are already largely aligned with the core architecture of the new ISSB standards for financial materiality and TCFD consolidation.

Integration of Voluntary Standards

As noted above, the IFRS S1 and S2 standards provide guidelines on what must be reported, but do not go into the granular details on metrics or key performance indicators for measuring performance. Companies already reporting under the SASB standards will only need minimal adjustments to tracking and reporting practices, since the industry metrics defined by the SASB standards take a financial materiality approach.[7] The ISSB’s additional recognition of the GRI reporting standards will help address the gaps caused by this single-materiality outlook, which will be especially helpful for companies and businesses subject to multijurisdictional reporting requirements or that may be otherwise required to report from a double-materiality perspective.

Conclusion – Are the S1 and S2 Standards Worth Considering?

Absolutely. Whether or not a company is currently subject to mandatory ESG reporting requirements, we believe that the ISSB’s IFRS S1 and S2 standards can be a roadmap for long‑term compliance for companies that either are operating in jurisdictions where regulations are still pending or being adopted incrementally or will become subject to CSRD and other regulations already adopted. This is particularly the case for U.S. companies that will be subject to the CSRD, either directly because they have global operations that bring them under the revenue scope of the regulation (from year 2028) or indirectly as counterparties or members of the supply chain of an EU reporting entity (from year 2024)[8], notwithstanding the delays in the SEC’s promulgation of its final climate rules. U.S. companies will also be affected indirectly by CSRD if they have subsidiaries in the EU which themselves meet CSRD’s threshold criteria for either a large undertaking (if listed from year 2024, if not from year 2025) or for a listed SME (from year 2026). Further, we view the standards as a foundational guide for all companies. Earlier this year, our GCs and ESG annual benchmark survey revealed that while companies are making ESG considerations, they have been making minimal adjustments to operations to drive change. Part of this may be due to lack of guidance and metrics for how to integrate ESG considerations into operations. The new ISSB standards are designed to elicit information on strategy and metrics necessary to bridge that gap.

Finally, we note that a prevalent misalignment between operations and strategy when it comes to sustainability and climate is one of the many reasons for the proliferation of greenwashing lawsuits in the present day, with companies making disclosures on metrics that are not backed by action or results. Whether or not disclosure is mandatory in the jurisdiction where you operate, it is important to take an all-hands-on-deck approach to understanding what ESG and sustainability mean for your company and how you want to accurately tell your company’s story to both consumers and investors. The IFRS S1 and S2 standards are good reference points to understand materiality, metrics, and targets, as well as strategy and governance around disclosure practices.


1In drafting the standards, the ISSB formed a working group comprising representatives engaged in sustainability disclosure standard-setting, including the Chinese Ministry of Finance, the European Commission, the European Financial Reporting Advisory Group, the Japanese Financial Services Authority, the Sustainability Standards Board of Japan Preparation Committee, the United Kingdom Financial Conduct Authority, and the U.S. Securities and Exchange Commission..(go back)

2Global Use of SASB Standards – SASB.(go back)

3IOSCOPD741.pdf.(go back)

4Including absolute scope 1, 2, and 3 greenhouse gas (GHG) emissions, climate-related transition and physical risks, climate-related opportunities and the amount of capital expenditure, financing, or investment deployed towards climate-related risks and opportunities, internal carbon prices, and remuneration. In addition, asset managers, commercial banks, and insurance companies are encouraged to disclose their financed emissions.(go back)

5Associated with business models, activities, or common features across an industry. In preparing this disclosure, entities are encouraged to examine the IFRS’s Industry-Based Guidance on Implementing IFRS S2, which is based on the SASB Standards.(go back)

6Separate reporting standards will be developed for listed SMEs and non-EU parent companies in the next years.(go back)

7The SASB standards are similarly great for compliance under the proposed SEC Climate rules since the standards align with the definition of materiality under U.S. securities laws.(go back)

8As an EU directive, CSRD does not apply automatically (unlike an EU regulation). Member States must first implement CSRD into national laws which they are required to do by July 6, 2024. Reporting obligations do not start before the Member State, in which the entity subject to reporting obligations is domiciled, has implemented CSRD into its national laws.(go back)

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