How the new IFRS S1 and S2 standards work

At the turn of the year, two new sustainability reporting standards were introduced, IFRS S1 and S2, both developed by the ISSB to facilitate sustainability reporting. At the same time, the transition to the CSRD and the ESRS standards for sustainability reporting in the EU is also under way.

AVA explains how to approach the two new standards from the ISSB and how they work together with the CSRD.

 

What do the new ISSB standards mean?

The International Sustainability Standards Board (ISSB) has developed two new standards IFRS S1 and S2 to facilitate reporting on climate-related risks and opportunities on a company's future prospects. They aim to simplify how companies report on climate-related risks and opportunities, which in turn should strengthen investor confidence and trust. These standards introduce a universal language describing how climate change affects companies' long-term prospects.

The new ISSB standards replace the former Taskforce on Climate-related Financial Disclosure (TCFD) framework, which is being discontinued. By applying IFRS S1 and IFRS S2, companies will fulfil the requirements of the TCFD. Although companies have the option of continuing to use the TCFD's recommendations, the new standards from the ISSB offer more consistent reporting;

IFRS S1 and S2 are effective for the financial year 2024 and for annual reports published in 2025, with the possibility of earlier application. IFRS S1 covers disclosure requirements for companies to effectively communicate with investors about sustainability challenges and opportunities, while IFRS S2 focuses specifically on climate-related reporting and complements IFRS S1.

IFRS S1 - General Requirements for Disclosure of Sustainability

IFRS S1 addresses the disclosure of information about all sustainability-related risks and opportunities that can reasonably be expected to affect the entity's cash flows, access to finance or cost of capital in the short, medium or long term. IFRS S1 prescribes how an entity prepares and reports its sustainability-related financial information. It sets out general requirements for the content and presentation of those disclosures so that the information is useful to users and investors.

IFRS S2 - Climate-related Disclosures

IFRS S2 contains a number of climate-related reporting requirements that are designed to be used in conjunction with IFRS S1. IFRS S2 requires a reporting entity to disclose information about climate-related risks and opportunities that can reasonably be expected to affect the entity's cash flows, access to finance or cost of capital in the short, medium or long term (collectively referred to as 'climate-related risks and opportunities that can reasonably be expected to affect the entity's prospects').

IFRS vs CSRD

The new EU legislation, CSRD, requires companies to perform a double materiality analysis, covering both the perspectives of impact materiality and financial materiality. This means that companies need to report on their impact on the environment and society as well as report on how external changes may affect the company's financial position. IFRS S1 and S2 only cover the financial perspective, where the company's sustainability-related risks and opportunities must be reported.

ESRS, which are the standards developed to report in accordance with the CSRD, are compatible with IFRS S1 and S2, making it easier for companies to implement both. EFRAG, the ESRS standard-setting organisation, has worked with the ISSB to improve the coordination and interoperability between the frameworks. This joint work has led to a high degree of consistency and reduced complexity, facilitating the application of both the ESRS and the two new ISSB standards. This means that entities subject to the CSRD that want to use the two new IFRS S1 and S2 will have an efficient implementation and reduced duplication. EFRAG and the ISSB are also working on developing guidance material and digital labelling to further facilitate navigation and interoperability between the standards.

Who is affected by IFRS standards?

IFRS S1 and S2 became effective on 1 January 2024 and it is currently possible for companies and organisations to voluntarily adopt them until national legislation requires reporting. Despite sharing a name with the mainstream IFRS accounting standards, sustainability reporting under IFRS S1 and S2 is not required by law, in the same way as IFRS for financial reporting. For non-EU companies, IFRS S1 and S2 are more relevant as they are not affected by the CSRD. Among the countries that have flagged potential legislative adoption are, for example, both the UK and the US.

The future of sustainability reporting?

During the COP28 meeting in December 2023, the Declaration of Support was presented, with more than 400 organisations from 64 jurisdictions committing to promote the IFRS standards of the ISSB. This development, together with the global endorsement by the International Organisation of Securities Commissions (IOSCO), marks an important milestone for sustainability reporting worldwide.

With the growing attention around IFRS S1 and S2 and their compatibility with the EU's CSRD, it is crucial for companies to remain up-to-date. At AVA, we specialise in sustainability reporting and we are ready to help you navigate the current legislation and how best to integrate sustainability reporting into your daily operations. Contact us to find out how we can help your company.

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