What Is IFRS S1? ISSB Sustainability Standard

Key Takeaways 

• What is IFRS S1? IFRS S1 provides disclosure requirements related to sustainability risks and opportunities that are material from the investors’ point of view.
• How do IFRS S1 and S2 work together? The IFRS S1 standard deals with all sustainability-related risks and opportunities, while IFRS S2 covers climate-related ones.
• When does IFRS S1 apply? The ISSB standard IFRS S1 will become applicable from annual reporting periods beginning on or after January 1, 2024.

Comprehensive Summary on IFRS S1

1. IFRS S1 Basics

The IFRS S1 standard gives general disclosure requirements for sustainability-related risks and opportunities which are likely to impact an entity’s cash flows and access to financing and capital.

2. ISSB Framework

The IFRS S1 was created by the ISSB as part of a global disclosure framework for sustainability that will increase consistency and comparability in the reporting for investors.

3. IFRS S1 and S2

IFRS S1 lays down the general disclosure requirements, whereas IFRS S2 sets out the specific disclosure requirements for climate-related risks and opportunities.

4. Materiality

IFRS S1 uses an investor-orientated materiality concept that focuses on sustainability information that may reasonably affect the decision of the primary users of financial reports.

5. Disclosure Requirements

IFRS S1 requires the disclosure of information relating to governance, strategy, risk management and metrics and targets related to material sustainability-related risks and opportunities.

6. Implementation

Implementation of IFRS S1 requires companies to consider governance, identification of material issues, data management system creation, control and disclosures.

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Introduction: Why Is IFRS S1 Important for Sustainability Reporting?

An investor compares two companies from the same industry with good financial performance and profitability. One of them has substantial climate, supply chain and resource risks that may influence future cash flows.

The absence of consistent sustainability data makes it complicated for the investor to make a decision about which company is well-prepared for future challenges.

Here comes the role of IFRS S1: it has been created by the International Sustainability Standards Board (ISSB) and introduces general requirements for sustainability-related financial disclosures intended mainly for investors and other users of general-purpose financial reporting.

For accounting and finance professionals, knowledge of IFRS S1 and S2 standards becomes crucial since sustainability information is getting more relevant in the process of financial reporting and decision-making.

What Is IFRS S1 at a Glance?

IFRS S1 sets out general requirements for disclosing material sustainability-related risks and opportunities that are reasonably expected to impact an entity’s cash flows, ability to obtain financing or cost.

Core Purpose & Investor Focus

The primary goal of IFRS S1 is to deliver decision-useful financial information related to sustainability matters to investors.

• Focuses on financially relevant sustainability matters.
• Improves consistency between companies.
• Supports better assessment of future financial prospects.
• Connects sustainability information with financial reporting.

Effective Date & Applicability (January 1, 2024)

The effective date of IFRS S1 is January 1, 2024. However, the applicability of IFRS S1 depends on the adoption of IFRS S1 by the jurisdiction of the entity. Therefore, a company should differentiate between the effective date of the standard and the date from which its application becomes mandatory under the local legislation.

What Is the ISSB?

The International Sustainability Standards Board developed IFRS S1 and IFRS S2 to create a global baseline for investor-focused sustainability disclosures.

Formation (COP26 2021) & Governance

The ISSB was announced at COP26 in 2021 under the IFRS Foundation. The goal is to define a standard baseline of financial disclosure related to sustainability issues globally.

International Backing (G7, G20, IOSCO, FSB)

The establishment of the ISSB standards framework has drawn considerable interest and support from major finance and regulatory authorities. It demonstrates the need for greater consistency of sustainability-related information reported globally.

Merger of CDSB & Sustainability Accounting Standards Board

The process of developing the ISSB included contributions of established sustainability reporting frameworks, such as the Climate Disclosure Standards Board and the Sustainability Accounting Standards Board. It helped integrate existing expertise in sustainability reporting into the ISSB standards.

What Are the Key Differences Between IFRS S1 and IFRS S2?

IFRS S1 and S2 should work hand-in-hand; however, they are different in their scope.

IFRS S1: General Framework for All Sustainability Issues

IFRS S1 sets out general requirements for sustainability-related risks and opportunities other than climate.

Examples can include:

• Water resources.
• Biodiversity.
• Human capital.
• Supply-chain resilience.
• Resource availability.

IFRS S2: Climate-Specific Requirements

IFRS S2 focuses specifically on climate-related risks and opportunities.

It addresses areas such as:

• Physical climate risks.
• Climate transition risks.
• Scope 1, 2 and 3 greenhouse gas emissions.
• Climate-related targets.
• Transition plans.

How They Work Together

IFRS S1 sets the overall sustainability standards, while IFRS S2 sets the climate-related requirements.

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What Are the Four TCFD Pillars in IFRS S1?

IFRS S1 adopts a structure that corresponds to the four main TCFD pillars historically used: governance, strategy, risk management, and metrics and targets.

Governance (board oversight, accountability)

Disclosure of how governance entities oversee material sustainability-related risks and opportunities is required.

Strategy (business impact, risk resilience)

Disclosure of how sustainability-related risks and opportunities could impact the business model, strategy and financial prospects is required.

Risk Management (Identification, monitoring processes)

Disclosure by the organisation of how it identifies, assesses, prioritises, and monitors sustainability risks and opportunities.

Metrics & Targets (KPIs, progress tracking)

Disclosure of relevant metrics and targets that will help the users understand performance and progress.

What Is Materiality Under IFRS S1?

Materiality under IFRS S1 focuses on information that could reasonably be expected to influence decisions made by primary users of general-purpose financial reports.

Single Materiality (Investor-Focused, Not Stakeholder Impact)

IFRS S1 follows a financial-materiality approach rather than the double-materiality approach used in some other reporting frameworks.

The question is whether a sustainability-related risk or opportunity could reasonably be expected to affect the company’s prospects.

How to Assess Material Issues

Companies should consider:

• Potential effects on cash flows.
• Access to finance.
• Cost of capital.
• Business strategy.
• Risk exposure.
• Time horizons.

SASB Standards Integration

Disclosure of the industry-based disclosure topics and metrics based on the SASB Standards is required in IFRS S1. It helps companies to identify industry-specific sustainability matters which could be relevant to investors.

How Does IFRS S1 Differ From CSRD?

IFRS S1 and the European Union Corporate Sustainability Reporting Directive (CSRD) are similar in many ways, but they still have differences due to their objectives and different materiality criteria.

Single vs Double Materiality

IFRS S1 is focused on sustainability matters that might impact the financial prospects of the entity, while CSRD employs a double-materiality approach.

CSRD considers both:

• Financial materiality.
• Impact materiality.

Proportionality Mechanisms (IFRS flexibility vs CSRD uniformity)

IFRS S1 is developed as a global baseline that could be incorporated in different jurisdictions, while CSRD operates within the framework of the European regulatory system.

Investor Focus vs Stakeholder Impact Focus

Information for investors and other primary users of general-purpose financial reporting is considered in IFRS S1. Stakeholder and impact perspectives are considered in CSRD.

What Are the Key Disclosure Requirements Under IFRS S1?

Disclosure requirements in accordance with IFRS S1 relate to the four pillars of the standard.

Governance Disclosures (Board structure, strategy integration)

Disclosures related to processes of governance of sustainability-related risks and opportunities are made by companies.

Strategy & Risk Management (business model impact, enterprise risk)

Companies make disclosures of how material sustainability-related items impact their strategy, business models, risk management and financial prospects.

Metrics & Targets (Climate emissions Scope 1, 2, 3; net-zero targets)

Disclosures of metrics and targets that are relevant for the measurement of sustainability-related performance are provided. Climate-specific emissions disclosure requirements are covered in more detail in IFRS S2.

Industry-Specific Metrics (SASB alignment)

Companies are expected to consider industry-based metrics to improve the relevance of sustainability disclosures.

What Is the Regulatory Adoption Status of IFRS S1?

Adoption of IFRS S1 depends on jurisdictions, and it is essential to consider that the adoption is not automatic in all of them.

United Kingdom (UK SRS, mandatory for listed companies)

The UK is currently working on its own sustainability reporting requirements in relation to the ISSB standards. It is important to stay up-to-date with regulatory development in the UK to identify specific requirements.

European Union (CSRD/ESRS overlap with IFRS S1)

The EU uses the CSRD and European Sustainability Reporting Standards, which overlap with several concepts found in IFRS S1 but operate under a different regulatory framework.

Australia, Canada, Singapore, Hong Kong (adoption pathways)

Several jurisdictions have developed or consulted on sustainability reporting frameworks based on or aligned with the ISSB standards.

The precise scope and mandatory dates vary by jurisdiction.

Switzerland (Climate ordinance for PIEs; January 2024)

Switzerland has implemented climate-related reporting requirements for certain large public-interest entities, with requirements that have evolved alongside international sustainability reporting developments.

Voluntary application permitted until local mandate

Where local rules have not yet made IFRS S1 mandatory, companies may be able to apply ISSB standards voluntarily, subject to applicable reporting and regulatory conditions.

What Is the IFRS S1 Implementation Roadmap?

Implementation of IFRS S1 is not only about sustainability information being added to an annual report.

Phase 1: Governance Assessment & Materiality Definition

The company needs to identify the relevant bodies in terms of governance and what the sustainability-related topics can be material to.

Phase 2: Data Collection & Systems Infrastructure

An organisation needs to have the reliable infrastructure for data gathering, validation and storage.

Phase 3: Process Build & Control Implementation

Companies need to create the processes and internal controls to enhance the quality of reported information.

Phase 4: Draft Disclosure & Internal Review

Draft disclosures must be checked by the relevant functions, such as finance, sustainability, risk, legal, etc.

Phase 5: External Assurance & Publication

In case of required or voluntary assurance, a company needs to make sure it has the proper controls and supporting evidence for the reported information before publication.

What Are the Future IFRS Standards Beyond S1 and S2?

While IFRS S1 and S2 deal with sustainability and climate-related disclosures, future standard-setting priorities can cover a bigger area.

IFRS S3 (Nature-Related) – In Development

Nature-related risks and opportunities have received increasing attention in sustainability reporting discussions and standard-setting work.

IFRS S4 & S5 (Human Rights, Health & Safety, Diversity) – Planned

Potential future standards covering additional sustainability topics should be distinguished from standards that have been formally issued.

Timeline: Full Suite by 2027-2028

The schedule for developing future standards can shift; thus, companies need to look at current ISSB publications to get the most accurate information on requirements.

What Are the Common IFRS S1 Pitfalls to Avoid?

During implementation of IFRS standards, there can be a few practical challenges.

Scope 3 Emissions Complexity Underestimation

Scope 3 emissions can require a huge amount of data to be gathered from suppliers and other parties involved in the value chain.

Weak Governance Disclosures & Board Oversight

When sustainability responsibilities are not assigned to boards, committees or senior management, companies might face certain difficulties.

Greenwashing Risks (Unsubstantiated Claims)

There is a need to make sure that all sustainability claims are properly substantiated by the relevant evidence.

Inadequate Supply Chain Data & Financed Emissions (for financials)

Financial institutions face serious challenges in terms of measuring financed emissions and obtaining reliable data across investment and lending portfolios.

Failing to Link Sustainability Risks to Financial Statements

There is a need to ensure the connection of sustainability disclosures to the overall financial reporting of the company.

What Are the Benefits and Challenges of IFRS S1?

IFRS S1 can improve the usefulness of sustainability information, while implementation can also require significant organisational changes.

Benefits: Investor confidence, ESG-focused capital access, regulatory ahead-of-curve positioning

Among potential benefits, the following can be distinguished:

• More consistent sustainability information.
• Improved investor confidence.
• Better integration of sustainability into business strategy.
• Greater preparedness for regulatory requirements.
• Potentially improved access to sustainability-focused capital.

Challenges: Data quality issues, cost of compliance, supply chain coordination, competing standards (CSRD, GRI, SASB)

The most common challenges are:

• Data availability and quality.
• Implementation costs.
• Supplier coordination.
• Internal control development.
• Managing multiple reporting frameworks.

Who Must Comply With IFRS S1?

The organisations required to apply IFRS S1 depend on the rules adopted by their jurisdiction.

Listed Companies (Mandatory by jurisdiction)

Listed companies are likely to be among the primary entities affected where jurisdictions introduce mandatory ISSB-aligned reporting.

Large Unlisted Entities (Jurisdictional Discretion)

Some jurisdictions can introduce sustainability reporting requirements for large unlisted companies.

SMEs & Emerging Markets (Proportionality mechanisms allow adjustment)

Proportionality and jurisdictional-specific requirements can impact the implementation of sustainability reporting in SMEs and emerging markets.

Financial Institutions (Special focus: financed emissions Scope 3)

Banks, insurers and asset managers may face significant sustainability reporting challenges because their material risks can extend across financed or invested activities.

What Are the Industry-Specific Examples of IFRS S1?

The sustainability matters that can be considered material can vary greatly based on the industry.

Energy & Utilities: Climate transition, stranded assets

The energy companies may have to deal with the risks related to the climate transition and potential stranded assets.

Financial Services: Financed emissions, TCFD leadership

The financial institutions can be faced with the issues of financed emissions and climate-related risks that may impact their lending and investment activities.

Manufacturing: Supply chain Scope 3, product lifecycle

The manufacturers may face sustainability risks involving the suppliers, energy consumption, raw material usage, emissions and product lifecycle.

Technology: Energy use, supply chain, data privacy nexus

The technology companies may need to take into account the energy consumption, supply chain resilience, human capital and data-related risks.

Conclusion

IFRS S1 is a big step forward in terms of global accounting IFRS standards and IFRS evolution, because it brings sustainability information closer to the corporate reporting.

The main idea here is that IFRS S1 is not an ESG reporting checklist and rather requires the identification of sustainability-related risks and opportunities that might affect the financial prospects of the company and disclosure of such matters via a disclosure framework.

When it comes to companies getting ready for IFRS S1 implementation, it is crucial to begin with governance and materiality and then move towards data systems, internal controls, disclosure preparation and assurance.

It is as important to understand the link between IFRS S1 and S2, where S1 sets the sustainability framework, while S2 provides climate-related details. Overall, the companies should analyse their jurisdiction, reporting requirements, industry-specific risks and available sustainability data in order to figure out how to implement IFRS S1.

FAQs on IFRS S1

What Is the Difference Between IFRS S1 and IFRS S2?

IFRS S1 includes all the sustainability-related matters, while IFRS S2 contains the specific disclosure requirements related to climate-related risks and opportunities.

Is IFRS S1 Mandatory for All Companies?

No, since the mandatory application of IFRS S1 depends on the rules adopted by the jurisdiction in question.

How Does IFRS S1 Differ From the TCFD Recommendations?

While IFRS S1 takes the four-pillar TCFD structure, it establishes the formal disclosure requirements as part of the ISSB sustainability reporting framework.

What Is Materiality Under IFRS S1?

The materiality under IFRS S1 means sustainability-related information that can reasonably affect the decisions of primary users of the general-purpose financial statements.

When Must Companies Start Reporting Under IFRS S1?

IFRS S1 is effective for annual reporting periods beginning on or after January 1, 2024, but the actual mandatory reporting date for a company depends on its jurisdiction’s adoption requirements.

Current Role

Co-Founder & CEO at Zell Education

Education

• ACCA – Association of Chartered Certified Accountants, Finance (2011 – 2014)
• Bachelor of Commerce (BCom), Financial Markets from H.R. College Of Commerce & Economics (2010 – 2013)

Location

Mumbai, India

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