What is IFRS S1 and S2?

What is IFRS S1 and S2?

IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) are the first two standards issued by the International Sustainability Standards Board in June 2023. IFRS S1 establishes the framework for disclosing sustainability-related risks and opportunities that could affect a company's prospects, structured around four pillars: governance, strategy, risk management, and metrics and targets. IFRS S2 provides specific requirements for climate-related disclosures, building on and effectively replacing the TCFD recommendations. Together, they form the global baseline for sustainability-related financial reporting.

Why It Matters

IFRS S1 and S2 represent the convergence point for decades of fragmented sustainability standard-setting. By consolidating TCFD's structure, SASB's industry metrics, and CDSB's connectivity principles into a unified framework, the standards give companies a single authoritative reference for investor-focused sustainability disclosure. This matters operationally because companies that previously reported under three or four overlapping frameworks can now anchor their disclosure program on one coherent architecture.

The standards carry real teeth through jurisdictional adoption. When the UK mandates reporting under its Sustainability Disclosure Standards—which are substantively aligned with IFRS S1 and S2—companies face the same legal obligations, audit requirements, and liability exposure as they do for financial reporting under UK-adopted IFRS. This isn't a suggestion to disclose; it's a legal requirement with consequences for non-compliance. Similar enforcement mechanisms are emerging across adopting jurisdictions.

IFRS S2's climate requirements are particularly consequential because they operationalize scenario analysis and transition planning at a level of specificity that TCFD left to company discretion. Companies must assess the resilience of their strategy and business model against climate-related scenarios—including, at minimum, a scenario consistent with the Paris Agreement's temperature goals. They must disclose how climate-related risks and opportunities have affected their financial position, performance, and cash flows, and how they expect these to change. This moves climate disclosure from narrative aspiration to quantitative financial analysis.

For CFOs and finance teams, IFRS S1 and S2 blur the boundary between financial and sustainability reporting. IFRS S1 explicitly requires that sustainability disclosures be connected to financial statements—companies must explain the linkages between sustainability-related risks and opportunities and the financial information in their general-purpose financial reports. This connectivity requirement means sustainability data must be produced with financial-grade rigor, timing, and governance.

How It Works / Key Components

IFRS S1's four-pillar structure mirrors the TCFD framework and applies to all sustainability-related risks and opportunities: governance (who oversees sustainability matters and how), strategy (how sustainability factors affect business model, strategy, and financial planning), risk management (how risks are identified, assessed, prioritized, and monitored), and metrics and targets (what quantitative measures are used to track performance). The standard requires companies to disclose information about risks and opportunities over short, medium, and long-term horizons, defined in alignment with the company's strategic planning periods.

IFRS S2 layers climate-specific requirements onto this structure. Under governance, companies disclose board-level climate competence and oversight mechanisms. Under strategy, they describe climate-related risks and opportunities, their effects on business model and value chain, financial impacts (current and anticipated), climate resilience assessment through scenario analysis, and transition plans. Under risk management, they explain climate risk identification and prioritization processes. Under metrics and targets, they disclose GHG emissions (Scope 1, 2, and 3), climate-related targets, and progress against those targets.

Key technical requirements include: GHG emissions measured per the GHG Protocol, industry-specific disclosure topics derived from SASB standards, scenario analysis using at least one Paris-aligned scenario, and cross-referencing between sustainability disclosures and financial statements where climate matters affect recognized amounts. Companies must also disclose financed emissions where relevant (financial institutions) and the use of carbon credits in climate strategies, including the type and integrity of credits used.

Transition provisions ease first-year reporting. Companies can omit comparative information in the first annual reporting period, delay Scope 3 emissions disclosure by one year, and limit scenario analysis to qualitative approaches initially. SASB-derived industry metrics are encouraged rather than required in the first year, with jurisdictions deciding on mandating them subsequently. These reliefs acknowledge the data and capability gaps many companies face while maintaining the expectation of rapid improvement.

Council Fire's Approach

Council Fire provides end-to-end implementation support for IFRS S1 and S2 compliance, from gap analysis and data infrastructure design through scenario analysis development, GHG inventory construction, and connectivity mapping between sustainability and financial disclosures. We help clients build the governance structures, internal controls, and analytical capabilities required to produce investor-grade sustainability information that meets both the letter and the intent of the standards.

Frequently Asked Questions

How are IFRS S1 and S2 different from TCFD?

IFRS S2 builds directly on TCFD's four pillars and effectively supersedes the TCFD recommendations—the Financial Stability Board disbanded the TCFD in 2023, transferring monitoring responsibilities to the ISSB. Key differences include greater specificity (IFRS S2 prescribes detailed metrics where TCFD offered guidance), mandatory Scope 3 disclosure (TCFD recommended but didn't require it), explicit transition plan requirements, and mandatory scenario analysis including at least one Paris-aligned scenario. Companies already reporting under TCFD have a strong foundation but will need to deepen their disclosures to meet IFRS S2 requirements.

What does "connectivity" between sustainability and financial reporting mean in practice?

Connectivity means that sustainability disclosures must be consistent with and explicitly linked to the financial statements. If a company discloses climate transition risk in its IFRS S2 reporting, the financial statements should reflect consistent assumptions—for example, asset impairment testing should use climate scenarios consistent with those disclosed in sustainability reporting, and provisions for environmental liabilities should align with disclosed risk assessments. Auditors will increasingly test this connectivity, meaning sustainability and finance teams must coordinate on assumptions, methodologies, and data.

Can my company use IFRS S1 and S2 voluntarily before they're mandated in my jurisdiction?

Yes. The ISSB standards are effective immediately for voluntary adoption. Early adopters gain several advantages: they build internal capabilities before mandatory deadlines create time pressure, demonstrate governance maturity to investors and rating agencies, influence internal processes before they become compliance obligations, and identify data gaps while there's still time to address them. The ISSB encourages voluntary adoption and has published implementation guidance specifically to support early adopters.