[co-author: Marcella Canteruccio]
In June 2023, The International Sustainability Standards Board (ISSB) issued its inaugural standards, IFRS S1 and IFRS S2. These standards are designed to help companies communicate more effectively with investors regarding their sustainability-related risks. The standards take effect beginning on January 1, 2025. The standards were developed with the benefit of extensive market feedback and in response to calls from the G20, the Financial Stability Board and the International Organization of Securities Commissions (IOSCO), as well as leaders in the business and investor community.
IFRS S1 provides a set of disclosure requirements to enable communication by companies with respect to their sustainability-related risk over the short, medium and long term, including information on the company's strategy, governance, risk management, and performance in relation to sustainability. IFRS S2 sets out specific climate-related disclosures and is designed to be used together with IFRS S1. Information to be included pursuant to IFRS S2 include the company's greenhouse gas emissions, climate-related risks and opportunities, and climate-related financial impacts.
Both standards fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), an independent international body established in 2015 to develop recommendations regarding the disclosure by businesses of climate-related information.
In addition to creating a global baseline suitable for application on various places and different jurisdictions around the world, the standards are also conceived to ensure that companies provide sustainability-related information alongside financial information in the same report, meaning that the new standards can be used in conjunction with accounting requirements. This could lead to a better understanding of how sustainability factors can affect a company’s prospects, which could ultimately support more informed investment decisions. The standards can also be viewed as a major step towards the integration of sustainability reporting into broader financial reporting requirements. The new standards also outline the procedures that should be followed for preparing the report on sustainability-related financial disclosures, establishing special requirements on content and presentation.
IFRS S1 requires entities to disclose all sustainability-related risks and opportunities that could reasonably impact the entity's cash flows, access to finance, or cost of capital over the short, medium, or long term. The standard provides guidelines on how entities should prepare and present these disclosures.
The main objective of IFRS S2 is to promote the disclosure of climate-related risks and opportunities in general financial reports, encompassing both physical and transition risks that the entity is exposed to, as well as climate-related opportunities available to reporting entities.