The International Financial Reporting Standards on Sustainability (IFRS S1 and IFRS S2), issued by the International Sustainability Standards Board (ISSB), represent a milestone in the standardization of sustainability reporting. These standards seek to ensure the consistency, comparability and usefulness of sustainability-related financial data, thus facilitating decision-making by investors and other stakeholders.
IFRS S1: General Requirements for Sustainability Reporting
IFRS S1 establishes a comprehensive framework for the disclosure of sustainability financial information, requiring entities to present reports that faithfully reflect how environmental, social and governance (ESG) factors impact their financial situation and operational performance. Its main provisions include:
- Applicability and scope: The standard is generally applicable to all entities that prepare financial statements under IFRS and that must disclose sustainability information in a structured manner and aligned with their financial reports.
- Disclosure principles: The information presented must comply with the principles of relevance, reliability, verifiability, comparability and understandability, ensuring its usefulness in the evaluation of risks and opportunities.
- Interconnection with financial information: Sustainability information is required to be linked to traditional financial statements, providing a holistic view of the entity’s performance and strategy.
- Disclosure based on materiality: The entity must identify and disclose sustainability information that may influence the economic decisions of investors and other users of the financial statements.
IFRS S2: Disclosure of Climate-Related Information
IFRS S2 complements IFRS S1 by establishing specific requirements for the disclosure of risks and opportunities related to climate change. Based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), this standard imposes detailed obligations on the presentation of climate-related information, structured in the following areas:
- Governance: Requires entities to disclose the structure for supervising and managing climate-related risks and opportunities at the managerial and operational levels.
- Strategy: Requires the presentation of analyses of the impact of climate change on business models, cash flows and investment strategies in the short, medium and long term.
- Risk management: Imposes the need to document the processes used to identify, assess and mitigate climate risks, including the use of scenario analysis.
- Metrics and targets: Requires entities to disclose quantifiable indicators, such as greenhouse gas emissions (scopes 1, 2 and 3), along with their strategic objectives and climate impact reduction plans.
Implications and Benefits of Implementing IFRS S1 and S2
The adoption of these standards introduces a more rigorous and structured regulatory framework for the disclosure of sustainability information, with tangible benefits for entities, investors and regulators, such as:
- Greater transparency and comparability: By standardizing the disclosure of ESG information, information asymmetry is reduced and benchmarking between entities and sectors is facilitated.
- Better management of risks and opportunities: The implementation of these standards allows for a more precise identification of climate and sustainability risks, promoting more effective mitigation strategies.
- Access to sustainable capital markets: Companies that comply with IFRS S1 and S2 can improve their reputation and facilitate access to institutional investors who prioritize ESG criteria in their investment decisions.
- Regulatory compliance and alignment with international regulations: These standards harmonize sustainability reporting with emerging regulations in various jurisdictions, reducing the fragmentation of disclosure frameworks.
Conclusion
IFRS S1 and S2 are a major step towards the integration of sustainability into financial reporting. Their implementation will not only improve the quality and usefulness of financial reports, but will also strengthen the ability of companies to manage environmental and social challenges in a context of increasing regulatory and market scrutiny. As more entities adopt these standards, the reliability and consistency of sustainability information will increase, favoring a more efficient allocation of resources in line with the principles of sustainable development.