Background

The ISSB was established in November 2021 to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs. In March 2022, the ISSB launched a consultation on its first draft IFRS Sustainability Disclosure Standards (IFRS S1 and IFRS S2). After a consultation period of 120 days, the ISSB redeliberated the proposals in the draft Standards and decided to finalise the proposals.

Key requirements

The main requirements in IFRS S2 broadly reflect the proposals in ED/2022/S2 ‘Climate-related Disclosures’ with changes introduced in the following areas:

• Strategy and decision-making, including transition planning
• Climate resilience
• Greenhouse gas emissions
• Industry-based requirements
• Proportionality of the requirements
• Current and anticipated financial effects of sustainability-related and climate-related risks and opportunities on an entity’s financial performance, financial position and cash flows

The key requirements are as follows:

• Objective: The objective of IFRS S2 is to require an entity to disclose information about its climate-related risks and opportunities that is useful to primary users of general purpose financial reports in making decisions relating to providing resources to the entity. These are climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term.
• Scope: IFRS S2 applies to climate-related risks to which the entity is exposed (climate-related physical risks and climate-related transition risks) and climate-related opportunities available to the entity.
• Governance: The objective of climate-related financial disclosures on governance is to enable users of general purpose financial reports to understand the governance processes, controls and procedures an entity uses to monitor, manage and oversee climate-related risks and opportunities. The standard sets out the disclosures required to achieve this objective.
• Strategy: The objective of climate-related financial disclosures on strategy is to enable users of general purpose financial reports to understand an entity’s strategy for managing climate-related risks and opportunities. The standard sets out the disclosures required to achieve this objective.
• Risk management: The objective of climate-related financial disclosures on risk management is to enable users of general purpose financial reports to understand an entity’s processes to identify, assess, prioritise and monitor climate-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process. The standard sets out the disclosures required to achieve this objective.
• Metrics and targets: The objective of climate-related financial disclosures on metrics and targets is to enable users of general purpose financial reports to understand an entity’s performance in relation to its climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation. The standard sets out the disclosures required to achieve this objective.

Effective date and transition

An entity is required to apply IFRS S2 for annual reporting periods beginning on or after 1 January 2024. Earlier application is permitted. If an entity applies IFRS S2 earlier, it is required to disclose that fact and apply IFRS S1 at the same time.

The following transitional provisions are available:

• Comparative information: An entity is not required to disclose comparative information in the first annual reporting period in which it applies IFRS S2.
• Greenhouse Gas Protocol: If, in the annual reporting period immediately preceding the date of initial application, the entity used a method for measuring its greenhouse gas emissions other than the ‘Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004)’, the entity is permitted to continue using that other method in the first annual reporting period in which the entity applies IFRS S2.
• Scope 3 greenhouse gas emissions: In the first annual reporting period in which an entity applies IFRS S2, the entity is not required to disclose its Scope 3 greenhouse gas emissions which includes, if the entity participates in asset management, commercial banking or insurance activities, the additional information about its financed emissions.

Additional information

The following additional information is available on the IFRS Foundation (free registration required for some documents) website and on IAS Plus:

• ISSB press release (translations of the press release into eight other languages available)
• Access to the standard
• Access to the basis for conclusions on S2
• Effects analysis on IFRS S1 and IFRS S2
• Project summary of IFRS S1 and IFRS S2
• Feedback statement for IFRS S1 and IFRS S2
• Article Ten things to know about the first ISSB Standards
• Access to two short webcasts on the new standards
• Need to know newsletter explaining the new requirements
• Our UK Accounting Plus summary of IFRS S2
• Our UK Accounting Plus project page on Climate-related disclosures
• Statement of the IFRS Foundation Monitoring Board welcoming the finalisation of the first two standards