Unpacking the new standards in global sustainability reporting: IFRS S1 and IFRS S2

Sustainability - covering both environmental and other impacts, increasingly including social effects - has been a growing concern for some years. Despite some recent politicisation, it remains a major issue for regulators and for investor and public sentiment.

One of the problems is that a plethora of reporting frameworks has grown up around the field.  This proliferation of standards - though historically at least, mostly voluntary - resulted in the twin problems of uncertainty and complexity in what and how to report and very different levels of quality in reporting.  This, in turn, has resulted in accusations of greenwashing and its social impact equivalent as an expectation gap opened up.

Creation of the International Sustainability Standards Board (ISSB)

Regulators and governments responded, initially by piecemeal regulation or legislation to raise minimum standards in particular areas (for instance TCFD reporting in the UK), but then sought a single integrated approach to minimum standards in these areas. In Europe, this has resulted in the mandatory regulation of the Corporate Social Responsibility Directive (CSRD) and the associated European Sustainability Reporting Standards. These will, in time, capture UK businesses with significant EU operations. Outside Europe, governments and regulators have supported bringing together several of the existing sustainability reporting frameworks under the aegis of the IFRS Foundation and forming the International Sustainability Standards Board (ISSB). 

The first two standards: IFRS S1 and IFRS S2

The ISSB has now released its first two standards: IFRS S1 and IFRS S2. IFRS S1 sets out the general content and minimum requirements for a complete suite of sustainability reporting. IFRS S2 sets out more detailed requirements for reporting specifically on climate change. It is envisaged that more standards will follow (i.e. IFRS S3, IFRS S4) which will require more detail for areas such as reporting on the workforce or biodiversity, as well as sector-specific reporting requirements.

The standards are based on the structure of the TCFD framework, reporting under; Governance, Strategy, Risks, and Targets and Measures. In particular, IFRS S2 is built on the TCFD framework.

UK adoption – not there yet

The UK has been an enthusiastic supporter of the ISSB project and both the government and the FCA stated their intention to adopt well in advance of publication of the standards. Though the ISSB has stated that the standards should apply from January 2024, they are not yet mandatory in the UK, either for listed or unlisted companies. The UK now has commenced a dual endorsement process looking at the adoption of these standards and considering to which entities the requirements should apply.


The FCA has stated that it expects to adopt UK standards as endorsed by this process and that it hopes to have requirements in place for reporting by listed companies from 1 January 2025. Government policy suggests larger, unlisted companies will also have to use the UK-adopted standards, though the timing of this is not yet certain.

What’s in the box?

Both IFRS S1, the general standard, and IFRS S2, the climate standard, are arranged under the headings of governance, strategy, risks and measures. 

  • Governance asks companies to explain how they manage risks and opportunities, both at the board level and within management. 
  • Strategy asks for details of risks and opportunities.
  • Risks cover the systems the company has in place to identify risks and opportunities.
  • Metrics and targets look at the way the company measures its sustainability exposures, the targets it has and how it is currently and expects to perform against them.

Reporting on governance and risk is principally about process; who is responsible, what reporting processes there are, how frequently meetings or reviews occur, etc. However, the risk analysis must look out further, both in time and into supply chains, than many companies would historically have looked. Unlike financial data, large parts of the information companies are expected to provide under strategy and metrics are either forward-looking or not from their own systems. Each provides its own problems. Forward-looking data on environmental plans is part and parcel of the company’s overall commercial plans giving issues of both certainty and commercial sensitivity. Other data will come from areas outside the company’s control and be both less complete and less certain than traditional financial data, yet the company is still responsible for it. 

Rising to the challenge

As mentioned, the importance of and responsibility for this area is steadily increasing. The FRC has proposed updating the UK Corporate Governance Code to give audit committees a clear responsibility for monitoring the integrity of the front end of the annual report and ESG data. The FCA has made it clear that it considers the duty to maintain adequate systems and controls applicable to both financial and non-financial data. If and when IFRS S1 and IFRS S2 are implemented in the UK, it will significantly up the ante. 

Boards and audit committees will have to find ways of assuring themselves that they can stand behind this data and understand the level of uncertainty in the estimates involved. They will also have to deal with changes in the estimates and methods which have shown themselves to be both larger and more frequent than we expect from financial data.

The standards are not without flexibility. There are various reliefs in the in the standard to allow proportionality based on sector, scale and readiness, though it remains to be seen how these will be incorporated into UK legislation and implemented by UK regulators. While these will relieve the burden somewhat, initial leniency, as was the case for TCFD, is likely to reduce as the regulations become established and the bar for quality and extent of disclosure will rise rapidly.

A global view

The implementation of European sustainability reporting standards is now underway, with the first phase of companies affected in 2024, ahead of the UK’s implementation of the ISSB standards. The SEC in the US has also proposed regulations on climate reporting, though it is not clear, at the time of writing, if or when these will come into force. Each of these new sets of regulations should provide greater clarity and consistency in reporting in the areas they cover, and there is hope of interoperability between European and international standards here (i.e. much of the disclosures under one set of standards could be used to satisfy disclosures under the other). However, the aim of a single set of standards has not been realised, and a number of larger or more international companies may be subject to the burden of more than one set of rules.

What do business leaders need to do next?

Both management and boards will need to find substantial time and resources in order to work out what data is required in the future and set up the systems to produce them. They will also need to find assurance, both with internal and external systems, that the information they produce is fit for purpose and its shortcomings explained. Finally, management will have to explain the new measures, and the changes in them year-on-year, to investors and other stakeholders. Those that do this well will reap the benefits of an improved reputation. Those who do not risk both accusations of greenwashing and direct reputational damage. 

Published November 2023