From Compliance to Leadership: How IFRS S1 & S2 can Shape Strategy, Trust and Brand Value
The world’s focus on transparency has never been sharper. Stakeholders demand better accountability from businesses when it comes to their environmental, social and governance (ESG) practices. Increasingly, the focus is on the business case for sustainability.
Enter IFRS S1 and S21: designed to establish a high-quality, global baseline of investor-focused sustainability-related disclosures. With over 30 jurisdictions2 worldwide already adopting or preparing to implement these standards3—developed by the International Sustainability Standards Board (ISSB) under the International Financial Reporting Standards (IFRS) Foundation—their impact is set to grow. But these aren’t just about compliance; they’re part of a toolkit for strategic decision making and building trust with your most important stakeholders.
However, while IFRS S1 and S2 focus on financial materiality, they do not fully address double materiality, which also considers impact materiality—how business activities impact the economy, the environment and people, including human rights (as defined by GRI4). Many jurisdictions, particularly the European Union with the Corporate Sustainability Reporting Directive (CSRD) and its European Sustainability Reporting Standards (ESRS), require companies to assess both perspectives to provide a more comprehensive view of sustainability impacts, risks and opportunities. Businesses looking to lead in sustainability—and create disclosures that are both credible and strategically valuable—should integrate both financial and impact materiality rather than treating IFRS as a standalone solution.
With this in mind, let’s explore what IFRS S1 and S2 bring to the table.
What are IFRS S1 and S2?
Think of IFRS S1 and S2 as financial translators, encouraged by investors and lenders to transform inconsistent ESG/sustainability reporting into their own language. They give everyone the same playbook to assess and compare what sustainability means in business terms, driving informed, financial decision making.
- IFRS S1: The foundation. It sets the ground rules for sustainability-related financial disclosures, linking ESG issues to the bottom line—whether that’s cash flow, access to finance or cost of capital. In short, it helps businesses communicate to investors what sustainability-related risks and opportunities they face and how they’re being managed.
- IFRS S2: The climate specialist. It builds on IFRS S1 but focuses squarely on climate-related risks and opportunities—think extreme weather, carbon pricing, renewable energy and the broader transition to a low-carbon future. Specific disclosures help investors and banks assess your performance on everything from Scope 1, 2 and 3 greenhouse gas emissions to the percentage of assets vulnerable to climate-related risks, and even the amount of CAPEX you’ve invested in climate resilience.
Together, they’re a power duo that nudges businesses towards transparency while giving them the tools to strengthen resilience and craft a story worth telling.
What Do We Need to Know?
SR has been helping clients make sense of IFRS S1 and S2 since before they were finalised (June 2023, a.k.a., ages ago in corporate sustainability terms). We’ve found a few things are helpful to understand when you begin your journey with them:
Financial Mindreading
Forget dumping loads of information about every possible risk into your report—you have to spotlight what investors and lenders are likely to care about when they make financial decisions. But what does that really mean for a business in your industry, or geography? How can you get into the heads of your capital providers? It’s important to structure the disclosure process to credibly arrive at an answer to these questions, especially if your disclosures will be verified now, or as required in the near future.
Governance with Guts
No fluff here. The standards require companies to clearly outline governance structures, processes, controls and procedures—who’s responsible, how decisions are made and how ESG risks and opportunities are managed at the highest levels. With lawsuits like ClientEarth’s case against Shell’s board5 and regulatory risk directly linked to sustainability performance and disclosures, it’s important to carefully articulate your approach to ESG oversight. And when you have trouble with that, it’s a good indication that changes need to be made.
Future-proof Thinking
Beyond just pointing out the risks, you need to disclose how you’ll remain resilient to them well into the future. This can involve scenario analysis for any ESG issue, and it’s already required for climate change under IFRS S2 (aka TCFD 2.06). Climate risks? Transition opportunities? IFRS S2 pushes you to think through scenarios, mapping out how climate change could reshape your business. This isn’t guesswork—it’s about being prepared for the inevitable hitting the bottom line.
Metrics that Mean Business
No more cherry picking—when disclosing both quantitative and qualitative data, companies must consider metrics in the SASB Standards where relevant and disclose other specific data points. You might spend some extra effort collecting new data, but the result is a connected view of ESG risks, opportunities and related financial impact that your investors and banks will care about. Bonus: it keeps you honest too.
Making IFRS Work for Business: How SR Helps Companies Lead
IFRS S1 and S2 lay the foundation for credible sustainability reporting, but their real value emerges when companies embed them into business strategy. That’s where SR comes in—to use IFRS-driven insights to enhance governance, manage risk and create competitive differentiation.
- Aligning sustainability and business strategies: A well-structured IFRS disclosure process isn’t just a regulatory necessity; it’s a strategic asset. We recently led a multinational financial institution through its first financial materiality assessment, aligning senior leadership—including the Board—around six strategic sustainability priorities equally important to the go-forward business strategy, environment and society. In an age when sustainability is becoming controversial for some, our process connects fiduciary duty with corporate responsibility.
- Sustainability as a brand asset: ESG issues are fertile ground for reputational risks and opportunities—key value drivers that we help clients unearth in the IFRS disclosure process. But our work doesn’t stop there. SR is a rare breed of consultancy that merges technical sustainability expertise with compelling creativity to build sustainability into your brand strategy. We recently helped ACEN position its sustainability bona fides as a market differentiator, credibly embedding it into the company’s brand identity through an integrated strategy.
- Guarding against greenwashing: IFRS adoption is part of a broader push for comparable, verifiable ESG data. At the same time, all businesses now live within the wild west of influencer-driven social media, where even frivolous takes on your actions can erode hard-earned trust. SR’s process spotlights your hot-button ESG issues based on what stakeholders really think, helping you back sustainability claims with real insights. We’ve helped Swire Pacific tackle this issue proactively, delivering anti-greenwashing training to equip leaders across the group with the knowledge to ensure sustainability claims remain credible and defensible.
From Compliance to Leadership
IFRS S1 and S2 aren’t just about keeping up with regulations—they present an opportunity to strengthen leadership, build resilience and differentiate in the market. Businesses that embed these frameworks effectively—while also considering impact materiality and jurisdiction-specific requirements like HKFRS—don’t just report; they lead.
Let’s work together to transform your IFRS disclosures from a requirement into a strategic advantage.
1IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 – Climate-related Disclosures.
2Some jurisdictions integrate the IFRS standards into local standards, such as in the Hong Kong SAR with the Hong Kong Financial Reporting Standards (HKFRS).
4Global Reporting Initiative (GRI)’s Sustainability Reporting Standards.
6https://www.ifrs.org/content/dam/ifrs/supporting-implementation/ifrs-s2/ifrs-s2-comparison-tcfd.pdf
