IFRS sustainability standards

As environmental, social, and governance (ESG) considerations become central to global business operations, the need for standardized reporting frameworks has become critical. The International Financial Reporting Standards (IFRS) Foundation, known for its robust financial reporting standards, has responded with a landmark initiative: developing IFRS Sustainability Standards to bring transparency, consistency, and comparability to sustainability-related reporting.

What Are IFRS Sustainability Standards?

IFRS Sustainability Standards represent a set of global standards that guide companies in disclosing sustainability-related information, particularly around climate change, human rights, and other environmental and social risks. The goal of these standards is to allow investors and other stakeholders to better understand the risks and opportunities posed by sustainability issues, which in turn affects long-term corporate performance.

These standards are developed by the International Sustainability Standards Board (ISSB), which was established by the IFRS Foundation in November 2021. The ISSB aims to create a global baseline for sustainability reporting, similar to the established IFRS accounting standards that companies worldwide follow for financial reporting. This global baseline ensures transparency, consistency, and comparability in corporate sustainability disclosures, making the information more useful for investment decisions.

The first two standards introduced by the ISSB are:

IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information
IFRS S2: Climate-related Disclosures

Each standard is designed to address different facets of sustainability reporting, allowing organizations to provide consistent, comparable, and reliable information to stakeholders.

Key Components of IFRS S1 and IFRS S2

IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) sets the foundational framework for sustainability disclosures, focusing on helping companies communicate the impact of various sustainability-related risks and opportunities on their enterprise value.

The scope includes all aspects of sustainability, spanning environmental, social, and governance (ESG) factors, and is intended to capture significant information that could affect a company’s financial performance and resilience.

Key Features of IFRS S1:

Materiality: IFRS S1 emphasizes the materiality of disclosures, requiring companies to focus on information that is relevant to stakeholders’ understanding of how sustainability factors affect the company’s cash flows, access to finance, and cost of capital. Disclosures are judged based on their ability to influence investor decisions regarding the company’s enterprise value.
Integration with Financial Reporting: IFRS S1 encourages companies to provide sustainability disclosures in tandem with financial statements, facilitating an integrated view of both financial and sustainability information. This ensures sustainability issues are seen as financially relevant and not separate, siloed reports.
Alignment with Existing Standards: IFRS S1 promotes convergence by building on existing, widely recognized sustainability reporting frameworks like the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), allowing companies flexibility while moving towards a global standard.

IFRS S2 (Climate-related Disclosures) provides specific guidelines for disclosing climate-related risks and opportunities. This standard draws heavily from the established framework of the Task Force on Climate-related Financial Disclosures (TCFD), which is already well-regarded in the financial and sustainability reporting spheres. With its direct focus on climate risks, IFRS S2 addresses an area of critical importance for investors, governments, and society.

Key Features of IFRS S2:

Governance and Strategy: Companies must disclose information about the governance structure overseeing climate risks and opportunities, as well as their overall climate-related strategy. This includes describing the board’s oversight of climate risks and how management assesses and integrates climate issues into the business strategy and decision-making processes.
Risk Management: IFRS S2 requires companies to outline how they identify, assess, and manage climate-related risks. This involves describing the processes used to assess physical risks (e.g., extreme weather, resource scarcity) and transition risks (e.g., policy changes, technology shifts) and how these processes are integrated into the entity’s overall risk management framework.
Metrics and Targets: Organizations need to report on the specific metrics and targets used to manage and monitor their climate-related impacts and progress toward goals. This includes disclosing key performance indicators (KPIs), such as Greenhouse Gas (GHG) emissions, capital deployment toward climate solutions, and internal carbon prices.

Why Are IFRS Sustainability Standards Important?

1. Improving Transparency and Accountability

Investors, regulators, and consumers are demanding more transparency from companies on their environmental and social impacts. The IFRS Sustainability Standards provide a rigorous and structured way for companies to disclose this information, significantly enhancing transparency.

2. Building Investor Confidence

The new IFRS Sustainability Standards are designed to provide investors with reliable, comparable data on sustainability risks and impacts. With this consistent information, investors can effectively evaluate and compare companies on their sustainability performance, which significantly influences investment decisions (e.g., where capital is allocated and at what cost). In turn, this market pressure drives companies to integrate sustainable practices more closely with their core business operations (e.g., procurement, capital planning) rather than treating ESG as a separate, peripheral function.

3. Global Consistency in Sustainability Reporting

The ISSB’s standards aim to create a global baseline for sustainability reporting, strategically reducing the current fragmentation caused by multiple competing frameworks (e.g., CDP, SASB, GRI).

With universal standards, both companies and investors benefit significantly:

Simplified Reporting for Companies: Companies operating in multiple jurisdictions can simplify their reporting processes (streamlining data collection and disclosure), reducing the compliance burden and cost.
Consistent Information for Investors: Investors benefit from more consistent, comparable information across global markets. This allows for better evaluation of sustainability performance and risk-adjusted decision-making, as they can more easily benchmark companies globally.
Addressing Global Issues: This global approach ensures that sustainability issues that do not respect national boundaries, such as climate change, are addressed consistently across the global economy.

4. Enhancing Corporate Strategy and Risk Management

The IFRS Sustainability Standards encourage companies to look beyond short-term financial gains and strategically consider the long-term risks and opportunities associated with sustainability.

By adopting this long-term view, companies achieve critical strategic goals:

Develop Resilient Strategies: Companies are better positioned to develop resilient strategies that align with environmental and social goals. This mitigates risks (like resource scarcity or climate-related damage) that can affect long-term enterprise value.
Adapt to Regulatory Changes: They can anticipate and adapt to future regulatory changes (e.g., carbon taxes, stricter labor laws) rather than being forced into costly, reactive compliance measures.
Anticipate Consumer Shifts: They can anticipate shifts in consumer preferences towards ethical and sustainable products, positioning them to capture future market share and enhance brand loyalty.

This proactive, forward-looking approach transforms sustainability from a compliance burden into a core driver of resilience and competitive advantage.

5. Aligning with Regulatory Requirements

Regulators worldwide are increasingly requiring companies to disclose ESG (Environmental, Social, and Governance) information. The IFRS Sustainability Standards are likely to be endorsed by many of these regulatory bodies (such as those in the EU, UK, Canada, and Japan), effectively establishing the global baseline for investor-focused sustainability reporting.

How Can Companies Adapt to IFRS Sustainability Standards?

Build Cross-functional Teams: Sustainability reporting requires input from various departments, including finance, risk management, human resources, and operations. Forming cross-functional teams is essential to facilitate smooth data collection, integration, and analysis across these traditionally siloed functions. This ensures that the financial implications of non-financial data are properly captured.
Invest in Data Collection and Management Systems: High-quality data is non-negotiable for compliance with IFRS standards. Companies must invest in systems that allow them to accurately capture, track, and analyze sustainability data. This might include emissions tracking software (for GHG Scopes 1, 2, and 3), supply chain monitoring tools, or employee satisfaction tracking platforms to gather auditable, non-financial metrics.
Educate and Train Employees: Employees, especially those involved in financial reporting and sustainability functions, will need to understand the IFRS standards in depth, specifically IFRS S1 and S2. Training programs must be implemented to help employees grasp the requirements of these standards (e.g., how to calculate Scope 3 emissions or apply the TCFD framework) and ensure accurate and compliant reporting.
Conduct a Materiality Assessment: IFRS standards require companies to report on material sustainability issues. Conducting a materiality assessment is a strategic step that helps identify the issues (e.g., water scarcity, labor rights) that matter most to stakeholders and aligns with the company’s strategy. This ensures that reported information is relevant to investor decision-making regarding enterprise value.
Engage Stakeholders: Companies should involve their stakeholders in the sustainability reporting process to understand their expectations and communicate efforts transparently. This might include consultations with investors (who use the data for capital allocation), customers (who prioritize ethical sourcing), and regulatory bodies (to ensure alignment on emerging requirements).
Continuously Monitor Regulatory Changes: As sustainability reporting evolves globally (with new standards and jurisdiction-specific rules), companies must stay updated on new regulatory requirements and industry best practices. Active monitoring allows companies to adapt their policies and systems promptly and remain compliant as new standards emerge or existing ones are revised.

The Road Ahead: Challenges and Opportunities

The introduction of IFRS Sustainability Standards represents a significant milestone in corporate reporting, but several challenges remain for companies implementing them. However, these difficulties are balanced by the strategic opportunity to build a transparent and resilient organization.

Companies may find several hurdles in adapting to the new ISSB requirements:

Data Capture and Accuracy: Many companies may find it difficult to capture and report accurate data, especially for complex metrics like Scope 3 Greenhouse Gas (GHG) emissions (which covers the entire value chain).
System and Resource Costs: Organizations may struggle with the costs and resources associated with implementing new data collection, analysis, and reporting systems across disparate functions (Finance, Operations, Risk).
Skill Gaps: Employees require training to understand and apply the complex financial materiality requirements of IFRS S1 and the technical aspects of IFRS S2.

These challenges are balanced by the opportunity for companies to gain a competitive edge:

Build Reputation and Trust: Compliance offers the chance to build a reputation as a transparent, responsible, and forward-looking organization among investors, customers, and regulators.
Enhanced Resilience: The standards compel companies to identify and manage long-term risks (e.g., climate, resource scarcity), leading to the development of more resilient strategies that ensure sustained viability.
Attract Capital: The standards are poised to become a critical tool for investors worldwide. Companies that embrace the changes can attract capital by demonstrating accountability and offering high-quality, comparable data needed for ESG-driven investment decisions.

The IFRS Sustainability Standards offer a framework for not only meeting regulatory demands but also creating value by aligning business practices with societal needs, contributing meaningfully to a more sustainable world.

Johnny Meagher

6 min read