IFRS S1 and S2: The New Global Baseline for ESG Financial Disclosures
📋 The 4 Core Pillars of IFRS S1 & S2
Derived from the TCFD framework, the ISSB standards structure all sustainability disclosures around four operational pillars. This ensures that ESG risks are managed with the same rigor as traditional financial risks:
The governance bodies, processes, controls, and procedures used to monitor sustainability-related risks and opportunities.
The current and anticipated effects of sustainability risks and opportunities on the company's business model, strategy, and financial planning.
The processes used by the company to identify, assess, prioritize, and monitor sustainability-related risks and opportunities.
The performance metrics and quantitative/qualitative targets used to measure progress toward sustainability commitments.
For years, the corporate sustainability landscape was often described as an "alphabet soup" of overlapping, voluntary reporting frameworks. Companies struggled to decide whether to report under GRI, SASB, TCFD, or CDSB, while investors lamented the lack of comparable, reliable sustainability data.
To address this challenge, the International Financial Reporting Standards (IFRS) Foundation established the International Sustainability Standards Board (ISSB) at the COP26 climate summit. The goal was simple: to create a single, unified global baseline for ESG reporting that would hold sustainability disclosures to the same high standard as traditional financial accounting.
In June 2023, the ISSB officially released its first two standards: IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures). As of 2026, these standards have been integrated into national regulatory frameworks worldwide, establishing a new era of investor-grade corporate sustainability reporting.
This guide provides CFOs, investor relations officers, and financial analysts with a comprehensive breakdown of IFRS S1 and S2, how they differ from European standards, and how to establish the data infrastructure required to meet them.
Table of Contents
- What Are the ISSB Standards?
- IFRS S1: General Requirements for Disclosure
- IFRS S2: Climate-Related Disclosures
- The Concept of Financial Materiality in ISSB
- How ISSB Standards Differ from CSRD/ESRS
- Streamlining ISSB Compliance with ExecutESG
- Frequently Asked Questions
- Recommended Articles
What Are the ISSB Standards?
The ISSB standards are designed to serve as the global standard for sustainability disclosures, specifically targeted at capital markets. By aligning ESG reporting with the familiar IFRS accounting framework, the ISSB ensures that sustainability data is presented in a structured, audit-ready format.
Rather than creating a brand-new standard from scratch, the ISSB consolidated several of the most widely accepted existing frameworks:
- TCFD Consolidation: The ISSB fully absorbed the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). In late 2023, the Financial Stability Board officially handed over TCFD monitoring responsibilities to the IFRS Foundation.
- SASB Integration: The Sustainability Accounting Standards Board (SASB) standards, which provide industry-specific metrics across 77 sectors, were consolidated under the IFRS Foundation. IFRS S1 explicitly directs companies to refer to SASB standards when identifying material sustainability risks and appropriate metrics.
- CDSB and Integrated Reporting: The Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) were formally merged into the IFRS Foundation to ensure a cohesive approach to corporate value creation.
The result is a unified framework that translates complex ESG issues into their direct, measurable impacts on corporate financial health and enterprise value.
IFRS S1: General Requirements for Disclosure
IFRS S1 establishes the foundational requirements for sustainability disclosures. It requires companies to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity's cash flows, access to finance, or cost of capital over the short, medium, or long term.
Under IFRS S1, companies must structure their disclosures around the four pillars inherited from TCFD:
- Governance: Disclosing the governance bodies, processes, controls, and procedures used to oversee and monitor sustainability-related risks and opportunities. This includes identifying which board committee or executive position holds formal responsibility for these matters.
- Strategy: Explaining the current and anticipated effects of sustainability risks and opportunities on the company's business model, strategy, and financial planning. Companies must articulate how their strategy responds to these risks, including the potential financial impacts on assets, revenues, and cost of capital.
- Risk Management: Outlining the processes used to identify, assess, prioritize, and monitor sustainability-related risks and opportunities. This includes details on how these processes are integrated into the company’s overall risk management system.
- Metrics & Targets: Providing quantitative and qualitative data on how the company measures performance. This includes the specific metrics required by applicable IFRS standards, as well as targets the company has set or is required to meet.
In essence, IFRS S1 functions as the operational template. If a company determines that a sustainability topic — such as water security, labor relations, or cyber security — is financially material to its business, it must report on that topic using this four-pillar structure.
IFRS S2: Climate-Related Disclosures
IFRS S2 is the first thematic standard issued by the ISSB, focusing specifically on climate-related risks and opportunities. Because climate change presents immediate and systemic risks to global capital markets, IFRS S2 mandates highly detailed disclosures across two broad risk categories:
- Physical Climate Risks: Acute risks (such as extreme weather events, floods, or wildfires) and chronic risks (such as rising sea levels or sustained temperature increases) that could directly damage assets, disrupt supply chains, or halt operations.
- Transition Climate Risks: Risks associated with moving toward a low-carbon economy. This includes regulatory and policy changes (such as carbon pricing or emissions caps), technological shifts (such as the obsolescence of fossil-fuel-powered equipment), and market changes (such as shifting customer preferences toward sustainable products).
To address these risks, IFRS S2 requires companies to report on several critical climate metrics:
Greenhouse Gas (GHG) Emissions
Companies must calculate and disclose their absolute greenhouse gas emissions in metric tonnes of CO₂ equivalent (tCO₂e). These calculations must cover:
- Scope 1 (Direct Emissions): Emissions from sources owned or controlled by the company (e.g., combustion of fuel in company vehicles or facilities).
- Scope 2 (Indirect Emissions): Emissions from the generation of purchased electricity, steam, heating, or cooling consumed by the company.
- Scope 3 (Value Chain Emissions): Indirect emissions that occur in the company’s value chain, both upstream (e.g., purchased goods and services, employee commuting) and downstream (e.g., use of sold products, distribution). IFRS S2 makes Scope 3 reporting mandatory, using the categories defined by the GHG Protocol. Learn more about compiling these metrics in our Scope 1, 2, and 3 Emissions Guide.
Scenario Analysis
IFRS S2 mandates that companies conduct climate scenario analysis to test the resilience of their business model. Companies must model how their operations, supply chains, and financial assets would perform under different climate futures, including a 1.5°C warming scenario (aligned with the Paris Agreement) and higher global warming pathways (e.g., 2°C or 3°C).
Climate Transition Plans and Targets
If a company has established greenhouse gas reduction targets, it must disclose them under IFRS S2. This includes detailing the target boundaries (e.g., whether it covers all Scopes or only Scopes 1 and 2), the base year, progress made, and the specific strategies, technologies, and capital allocations intended to achieve those targets.
The Concept of Financial Materiality in ISSB
The defining feature of the ISSB framework is its strict focus on financial materiality (often referred to as single materiality or the "outside-in" perspective).
Under IFRS S1, information is considered material if:
"...omitting, misstating or obscuring that information could reasonably be expected to influence decisions that the primary users of general purpose financial reports make on the basis of those reports, which provide financial information about a specific reporting entity."
In plain language, the ISSB standards do not ask how your company's operations impact the environment or society for the sake of public knowledge. Instead, they ask: How do environmental and social changes impact your company's ability to generate cash flow, secure capital, and create value for investors?
For example, if your manufacturing plant is located in a region facing severe water scarcity (a physical risk), or if new carbon taxes will significantly increase your raw material costs (a transition risk), these are material financial risks that must be disclosed under IFRS S2. The focus is entirely on investor-relevant risk management and valuation.
How ISSB Standards Differ from CSRD/ESRS
For companies operating internationally, the interaction between the ISSB standards and the European Union’s Corporate Sustainability Reporting Directive (CSRD) is a critical consideration. While both frameworks aim to standardize sustainability reporting, they differ fundamentally in their scope, philosophy, and legal requirements.
| Feature | ISSB Standards (IFRS S1 & S2) | CSRD / ESRS (EU Regulation) |
|---|---|---|
| Primary Target Audience | Investors, lenders, creditors, and capital market participants. | Broad stakeholders (investors, employees, customers, NGOs, and governments). |
| Materiality Definition | Financial Materiality: Focuses on how ESG risks affect the company's financial value ("outside-in"). | Double Materiality: Focuses on both financial value AND how the company impacts society and the environment ("inside-out"). |
| Legal Status | Voluntary, unless officially adopted into law by national jurisdictions (e.g., UK, Australia, Japan). | Mandatory statutory requirement under EU law for large and listed companies. |
| Scope 3 Emissions | Mandatory for all reporting entities. | Mandatory if deemed material through a Double Materiality Assessment. |
| Assurance Requirement | Determined by national regulators; typically requires independent third-party assurance. | Mandatory limited third-party assurance, transitioning toward reasonable assurance over time. |
| Reporting Format | Typically integrated into annual financial reports or standalone sustainability reports. | Must be published in the management report in a digital, machine-readable format (XBRL). |
Despite these differences, the ISSB and EFRAG (the European body that drafted the ESRS) have worked closely to ensure interoperability. In May 2024, the two organizations issued joint guidance mapping the alignment between their standards. A company reporting under the ESRS will collect almost all the necessary data points required to satisfy the ISSB standards, particularly regarding climate metrics.
If you are a smaller company seeking to understand where you fit in this landscape, we recommend starting with our Which ESG Framework to Report Under Guide, which includes a decision flowchart mapping out your exact requirements.
Streamlining ISSB Compliance with ExecutESG
While the ISSB standards are designed primarily for large, listed corporations, their implementation has a major trickle-down effect on small and medium-sized enterprises (SMEs).
Because IFRS S2 mandates Scope 3 emissions reporting, large companies subject to ISSB must collect emissions data from their upstream suppliers. If you are a supplier to a listed global corporation, you will increasingly receive requests to calculate and submit your carbon footprint.
ExecutESG is designed to help you handle these requests efficiently, turning compliance data into a strategic business asset:
- Investor-Grade Scope 1-3 Calculators: Our built-in carbon accounting tools align fully with the GHG Protocol, generating audit-ready emissions profiles that satisfy both corporate buyers and financial institutions.
- Structured Climate Risk Mapping: Easily identify, assess, and document physical and transition climate risks using our guided modules, building a solid foundation for IFRS S2 disclosures.
- Audit-Trail Integrity: Every data point in ExecutESG is linked directly to its source document (such as utility bills or invoice records), providing the transparency required by external auditors and bank lenders.
- Flexible Multi-Framework Exports: Enter your primary operational data once, and export it into the voluntary CSRD (VSME) format, GRI-aligned indexes, or investor-focused ISSB reports.
By moving away from static spreadsheets and establishing a software-driven sustainability operating system, your company can satisfy international buyers, secure green financing, and protect its margins.
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Frequently Asked Questions
Which countries have adopted IFRS S1 and S2?
Over 20 jurisdictions—representing more than half of the global economy—have taken steps to integrate IFRS S1 and S2 into their national reporting frameworks. This includes the United Kingdom, Australia, Brazil, Canada, Japan, Singapore, South Korea, and Hong Kong.
What is the difference between ISSB and TCFD?
The ISSB standards build directly upon the TCFD recommendations. Because the ISSB consolidated the TCFD into its framework, the Financial Stability Board officially disbanded the TCFD and handed its monitoring duties over to the IFRS Foundation. Practically, IFRS S2 represents the next, more detailed evolution of the TCFD framework.
Is ISSB reporting mandatory for private companies?
The ISSB standards are not directly mandatory for private companies unless mandated by national regulators. However, private companies face indirect pressure through supply chain Scope 3 data requests from their listed corporate customers, as well as ESG requirements from banks during financing applications.
Do IFRS S1 and S2 replace SASB standards?
No, they do not. The SASB standards remain active and are officially integrated into the ISSB framework. IFRS S1 requires companies to refer to the relevant SASB standards to identify industry-specific sustainability risks, opportunities, and appropriate metrics.
How does ISSB align with the GHG Protocol?
IFRS S2 explicitly mandates that companies calculate their Scope 1, Scope 2, and Scope 3 greenhouse gas emissions in accordance with the Greenhouse Gas Protocol Corporate Standard, ensuring international consistency in carbon accounting.