Legal Implications of ISSB’s S1 and S2 Standards in Sustainability

Adherence to these standards may become increasingly important for businesses to build trust with stakeholders, meet regulatory requirements, and position companies for long-term success in sustainable business practices.

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The International Sustainability Standards Board (ISSB) recently introduced two groundbreaking sustainability-related disclosure standards, IFRS S1, and IFRS S2, aiming to provide a globally consistent framework for sustainability reporting.

The ISSB Standards build upon existing reporting frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD) Recommendations and the Sustainability Accounting Standards Board (SASB) Standards.

By consolidating these frameworks, ISSB aims to establish a global baseline for sustainability and climate-related risks and opportunities reporting, offering comparable and verifiable data for investors and creditors.

This article explores the legal implications of these standards in industrial sustainability, focusing on their core content requirements and how they interact with existing reporting frameworks.

The four-pillar core content framework

Both IFRS S1 and IFRS S2 adopt a four-pillar core content framework, aligning with the TCFD Recommendations. The pillars are as follows:

1. Governance: Entities must disclose information about sustainability governance, including roles, responsibilities, and how sustainability-related risks and opportunities are considered in decision-making.
2. Strategy: Entities must address the effects of sustainability-related risks and opportunities on their business model, strategy, and decision-making over the short, medium, and long term.
3. Risk management: Reporting entities should provide insights into their processes for identifying, assessing, and managing sustainability-related and climate-related risks and opportunities.
4. Metrics and targets: Entities must disclose metrics, targets, and performance against those targets regarding sustainability and climate-related risks and opportunities.

By consolidating existing frameworks and introducing granular requirements for climate-related disclosures, these standards aim to establish a global baseline for sustainability reporting.

Critical differences in legal implications

While both standards share the four-pillar core content framework, there are some notable differences in their legal implications:

Scope and applicability

IFRS S1: This standard applies to all sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s cash flows, access to finance, or cost of capital over the short, medium, or long term. It is a broad framework encompassing various sustainability factors that may impact an entity’s financial prospects.

IFRS S2: Conversely, IFRS S2 specifically targets climate-related risks and opportunities, including physical and transition risks. It focuses on the financial implications of climate change and is more narrowly tailored to address climate-related issues faced by reporting entities.

Disclosure

IFRS S1: The disclosure focus of IFRS S1 is on sustainability-related risks and opportunities in general. It requires entities to report on governance, strategy, risk management, and metrics related to sustainability factors that could affect their financial performance and prospects. The risks and opportunities may cover various environmental, social, and governance (ESG) aspects.

IFRS S2: Conversely, IFRS S2 has a specific and granular disclosure focus on climate-related risks and opportunities. It includes the financial impacts of climate change, both in terms of physical risks (such as extreme weather events) and transition risks (e.g., policy and market changes related to climate goals). IFRS S2 requires entities to provide detailed information on their exposure to these climate-related factors.

Metrics and targets

IFRS S1: Entities must disclose a broad set of sustainability-related metrics and targets relevant to their operations and activities. These may encompass various ESG metrics and targets.

IFRS S2: The metrics and targets under IFRS S2 focus on climate-related factors. Entities must disclose metrics related to greenhouse gas emissions, including scope 1, scope 2, and even scope 3 emissions. Additionally, entities must disclose information about their climate-related targets, review processes, and progress toward achieving them.

Legal obligations

IFRS S1: As of its issuance, IFRS S1 remains a voluntary reporting framework. Entities may choose to adopt it voluntarily to enhance their sustainability-related financial disclosures. However, its voluntary nature means there are no specific legal requirements to comply with IFRS S1 reporting.

IFRS S2: Like IFRS S1, IFRS S2 is also a voluntary reporting framework, meaning entities are not legally obligated to adopt it. However, the legal implications of IFRS S2 can vary depending on the jurisdiction. In some regions, regulators or authorities may consider adopting or mandating IFRS S2 reporting for certain entities to align with climate-related reporting initiatives and global sustainability standards.

Differing legal implications

While both IFRS S1 and S2 aim to improve sustainability-related financial disclosures, their distinct scopes and specific focuses on general sustainability and climate-related factors lead to different legal implications and potential regulatory considerations for reporting entities.

Building upon existing reporting frameworks and introducing granular requirements for climate-related disclosures, these standards aim to provide investors and creditors with comparable and verifiable data to assess companies’ sustainability performance. 

Adherence to these standards may become increasingly important for businesses to build trust with stakeholders, meet regulatory requirements, and position companies for long-term success in sustainable business practices.