Understanding ISSB S1 and S2: The New Global Standards for Sustainability Reporting

 

The Push for Global Sustainability Transparency

In today’s corporate landscape, sustainability is no longer just a buzzword—it’s a critical driver of business resilience and investor confidence. However, for years, companies faced a major challenge: the lack of a unified system for reporting environmental, social, and governance (ESG) risks. With dozens of competing frameworks—from GRI and SASB to TCFD—investors struggled to compare data, while businesses wasted resources navigating inconsistent requirements.

This changed in 2021 when the IFRS Foundation, the organization behind the widely adopted International Financial Reporting Standards (IFRS), established the International Sustainability Standards Board (ISSB). Its mission? To create a global baseline for sustainability disclosures, mirroring the clarity that IFRS brought to financial accounting.

In June 2023, the ISSB delivered its first two standards: IFRS S1 (general sustainability disclosures) and IFRS S2 (climate-specific reporting). Together, they mark a turning point in corporate transparency. This article explains their background, key requirements, and why they matter for businesses and investors alike.

The Origins of ISSB: Filling the Sustainability Reporting Gap

Before diving into S1 and S2, it’s essential to understand the problem they solve. Historically, sustainability reporting was fragmented. A company might use the Global Reporting Initiative (GRI) to discuss its social impact, the Sustainability Accounting Standards Board (SASB) for industry-specific risks, and the Task Force on Climate-related Financial Disclosures (TCFD) for climate scenarios. This patchwork made it difficult to assess performance across companies or sectors.

Meanwhile, investors demanded better data. A 2023 CFA Institute survey found that 85% of investment professionals consider sustainability disclosures material to their decisions. Regulators also stepped in, with the EU’s Corporate Sustainability Reporting Directive (CSRD) and the U.S. SEC’s proposed climate rules adding pressure for standardized disclosures.

The IFRS Foundation responded by launching the ISSB in 2021, tasking it with developing a global lingua franca for sustainability reporting—one that prioritizes decision-useful, financially material information.

IFRS S1: The Foundation for Sustainability Disclosures

IFRS S1 provides the overarching framework for how companies should report sustainability-related risks and opportunities. Unlike broad ESG frameworks, S1 focuses specifically on financially material issues—those that could influence cash flows, access to capital, or long-term resilience. Think of it as the "core rulebook" that ensures disclosures are comparable and relevant to investors.

Under S1, companies must address four key areas:

1. Governance: How boards and management oversee sustainability risks. For example, Nestlé’s 2023 report outlines how its Board’s Corporate Governance Committee reviews climate risks quarterly, with CEO bonuses linked to plastic reduction goals. This aligns with S1’s governance rules.  Poor governance of sustainability risks can lead to crises. Volkswagen’s "Dieselgate" scandal (2015) showed how weak oversight of environmental compliance resulted in €30B+ in fines—a risk S1 aims to mitigate.  Key Requirements includes:

• Board-level accountability: Describe the governance body (e.g., a sustainability committee) responsible for oversight.
• Management’s role: Explain how executives integrate sustainability into business strategy and risk management.
• Incentive alignment: Disclose if executive compensation is tied to sustainability targets (e.g., carbon reduction). 

2. Strategy: The actual and potential impacts of sustainability issues on business models and financial planning.  Siemens uses S1-aligned reporting to show how its shift to renewable energy services (like grid modernization) could generate €50B in revenue by 2030, offsetting declines in fossil fuel-related sales. Ignoring risk planning can result in having negative financial impact like BP’s $17.5B write-down of oil assets in 2020 due to their delayed transition planning.  Key Requirements include:

• Short-, medium-, and long-term effects: For example, how water scarcity could disrupt manufacturing by 2030.
• Scenario analysis: Use plausible future scenarios (e.g., 2°C warming) to assess financial impacts.
• Competitive positioning: How sustainability creates opportunities (e.g., Tesla’s EV market dominance amid fuel regulations).

3. Risk Management: Processes to identify, assess, and mitigate sustainability risks.  Coca-Cola’s reports its water-stress risk assessments in drought-prone regions, with $2B invested in water efficiency since 2010—a direct response to a financially material risk.  Key requirements include:

• Risk identification: Tools used (e.g., materiality assessments, stakeholder engagement).
• Integration with ERM: How sustainability risks are embedded into enterprise-wide risk management.
• Mitigation actions: Policies, due diligence, and investments to reduce risks (e.g., Apple’s $4.7B Green Bond for carbon-neutral supply chains).

4. Metrics and Targets: Quantitative data (e.g., carbon emissions, water usage) and progress toward goals.  For example, IKEA’s "Climate Positivity" plan tracks 1,500+ metrics, from renewable energy use (%) to supply chain emissions per product that is all verified by third parties.  Failure to include targets or disclosing vague targets can erode trust.  For example, when Amazon’s "Climate Pledge" failed to disclose Scope 3 emissions (2021), critics accused it of greenwashing—a pitfall S1’s metrics rules address.

Crucially, S1 adopts a financial materiality lens—focusing on sustainability factors that could reasonably affect a company’s cash flows or access to capital. This distinguishes it from broader impact-focused frameworks like GRI.

How the Four Pillars of IFRS S1 Work Together: A Dynamic Feedback Loop

At first glance, IFRS S1’s four pillars—Governance, Strategy, Risk Management, and Metrics & Targets—might appear as standalone requirements. But in practice, they function as an interconnected system, where each element informs and reinforces the others. This creates a continuous feedback loop that helps companies not just report on sustainability, but actively manage it as a core driver of financial resilience.  Here’s how it flows in practice:

1. Governance sets the tone: When Siemens tied executive pay to decarbonization, it signaled sustainability was a priority, not just optics.
2. Strategy translates priorities into action: Unilever’s Sustainable Living Plan identified plant-based foods as a growth opportunity, anticipating consumer and regulatory shifts.
3. Risk Management operationalizes strategy: Nestlé invests in water-saving tech at high-risk factories, turning strategic plans into tangible safeguards.
4. Metrics close the loop: Microsoft’s annual carbon tracking allows course corrections, like reallocating investments when suppliers miss targets.

The Power of the Cycle

Ørsted’s energy transition shows this in action. Governance committed to renewables, strategy pivoted to wind power, risk management phased out coal early, and metrics confirmed the approach worked—accelerating further investment.  Firms like Ørsted that treat these pillars as interconnected see fewer surprises (MSCI found 25% lower earnings volatility). Those that don’t, like Boeing with its 737 MAX, face preventable crises.  In short, S1’s framework turns sustainability from a reporting task into a strategic advantage—when all parts work together.

IFRS S2: Climate-Specific Reporting

While S1 covers all sustainability topics, IFRS S2 zeroes in on climate change—the most urgent and systemic risk facing businesses today.  S2 requires companies to disclose how climate risks and opportunities impact their bottom line, going beyond generic sustainability statements to provide investors with decision-useful data.

S2 requires detailed disclosures on:

• Climate-related risks and opportunities, including physical risks (e.g., floods) and transition risks (e.g., policy shifts). Physical risks can be like costs from increasing wildfires (e.g., PG&E’s $25B wildfire liabilities), floods, or supply chain disruptions. Beverage giants like Coca-Cola now quantify how water scarcity in key regions could raise production costs by 15-20% by 2030.
• Transition plans: How the company is preparing for a net-zero economy, including investments in clean energy or efficiency.  Automakers like Ford disclose how stricter EU emissions rules could dent ICE vehicle sales while boosting EV demand.  Investors need to see both sides. When Shell downgraded its 2030 renewable energy targets in 2024, its shares fell 5%—showing how transition missteps hit valuations.
• Greenhouse gas emissions: Scopes 1, 2, and 3 emissions, with Scope 3 (indirect emissions) being a major focus for many industries.  Most firms lack Scope 3 visibility. Amazon’s early resistance to disclosing it (2021) drew activist pressure. Now, its Climate Pledge Fund requires suppliers to share emissions data—a shift S2 will standardize.
• Climate resilience: Scenario analyses showing how the business might perform under different warming pathways.  Agricultural firms like Cargill assess crop yield drops under drought scenarios. 

Notably, S2 fully incorporates the TCFD recommendations, streamlining reporting for companies already using this framework. 

Once again, these pillars aren’t standalone—they’re interconnected:

1. Risks inform transition plans (e.g., Coca-Cola’s water risks → $2B efficiency investments).
2. Emissions data validates plans (Microsoft’s Scope 3 tracking ensures its $1B/year fund hits targets).
3. Resilience tests reveal gaps (Swiss Re’s 3°C scenario showed reinsurance gaps, prompting new products).

Why These Standards Matter

The ISSB standards address three critical gaps in sustainability reporting:

Consistency for Investors
By replacing a maze of frameworks with a single baseline, S1 and S2 enable investors to compare companies’ sustainability performance as easily as they compare financial statements. A 2022 study by the Principles for Responsible Investment (PRI) found that 80% of institutional investors discard ESG reports due to inconsistent metrics, making ISSB’s standardization a game-changer. Research by Harvard Business School (2023) showed companies with strong sustainability disclosures had lower capital costs by up to 1.5%, as investors perceived them as lower-risk.
 
Efficiency for Businesses
Companies can now focus on one set of global standards rather than juggling multiple reporting requirements. This is especially valuable for multinational firms operating in different regulatory jurisdictions. A KPMG survey (2023) found that 70% of multinationals use at least three different ESG frameworks, costing an average of $700,000 annually in compliance overhead. ISSB’s global baseline could slash these costs.
 
Credibility for Stakeholders
With stringent data requirements and a focus on financial materiality, ISSB helps curb greenwashing by tying sustainability claims to measurable outcomes. A 2023 European Central Bank study found that 42% of "sustainable" funds mislabeled their ESG claims—a problem ISSB’s auditable metrics aim to fix. When H&M was accused of greenwashing in 2022, its lack of standardized disclosures (now required under ISSB S1’s governance and metrics rules) exacerbated reputational damage. Post-scandal, it adopted stricter reporting, aligning with ISSB prototypes.
 
Financial Performance and Climate Risk Links
A 2024 MSCI analysis of 9,000 companies revealed those failing to disclose climate risks (per ISSB S2) had 18% higher volatility in earnings calls. For example, after Unilever implemented TCFD-style reporting (now ISSB S2), it identified €300 million in cost savings from energy efficiency—data it previously didn’t track systematically.

How ISSB Fits Into the Broader ESG Landscape

The ISSB standards aren’t meant to replace existing frameworks but to complement them. For example:

• GRI remains relevant for organizations wanting to report on their societal impact.
• SASB’s industry-specific metrics are now integrated into ISSB.
• EU’s CSRD goes beyond financial materiality but aligns with ISSB on many climate disclosures.

This "interoperability" ensures companies can layer ISSB onto their current reporting practices without starting from scratch.

What’s Next?

With jurisdictions like the UK, Japan, and Canada moving to adopt ISSB-aligned reporting, companies should start preparing now. Early adopters will not only meet regulatory demands but also gain a competitive edge in attracting capital and talent.

In our next post, we’ll provide a step-by-step guide to implementing ISSB S1 and S2, including how to gather data, structure disclosures, and avoid common pitfalls.

For businesses, the message is clear: The era of inconsistent sustainability reporting is ending. Those who adapt early will lead the transition to a more transparent—and sustainable—future.