On June 26, 2023, the International Sustainability Standards Board (ISSB), an International Financial Reporting Standards (IFRS) Foundation initiative, released IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2, Climate-related Disclosures; both are effective for years beginning on or after January 1, 2024, with earlier application permitted.

These standards require entities that follow IFRS to disclose sustainability-related information with their financial statements. These standards will affect the deliberations of global standards setters such as the Global Reporting Initiative, Financial Stability Board, Corporate Sustainability Reporting Directive, International Organization of Securities Commissions and the SEC. Each country’s standards setters still should accept the new standards. Brazil became the first to do so, making them voluntary by January 1, 2024 and mandatory by January 1, 2026. Kenya, Nigeria, Zimbabwe, and Sri Lanka have announced full adoption.

Although not authoritative for companies that follow U.S. GAAP, the new standards establish guidelines to support voluntary sustainability reporting and could guide the SEC, and other U.S. standards setters as they develop future reporting requirements.

While IFRS S1 sets reporting and disclosure requirements for sustainability-related risks and opportunities, IFRS S2 applies to climate-related risks and opportunities. These items include events to help general purpose financial report users make decisions about providing resources to the entity. The entity should thus disclose information about climate-related risks and opportunities that could reasonably be expected to affect its cash flows, its access to financing or cost of capital over the short, medium or long term. However, in the absence of an IFRS Sustainability Disclosure Standard that applies to a sustainability-related risk or opportunity, an entity shall apply judgment to identify relevant information that faithfully represents its sustainability-related risks or opportunities. In making this judgment, the entity should refer to and consider the applicability of the disclosure topics in and the metrics associated with the disclosure topics included in the Sustainability Accounting Standards Board (SASB) Standards. They also may consider the Global Reporting Initiative Standards or European Sustainability Reporting Standards.

Specifically, the disclosures should help general purpose financial report users understand the following:

  • ▪ An entity’s governance processes, controls, procedures, and strategies to monitor, manage, and oversee climate-related risks and opportunities, including whether and how it integrates such processes into its overall risk management process; and
  • ▪ An entity’s performance relative to its climate-related risks and progress in meeting its own (or legally mandated) climate-related targets.

The Standards

IFRS S1 provides entities with standards and guidance on reporting sustainability information. Thus, investors, lenders, and other users will have better information on how environmental and social factors can affect the entity financially. This will help them improve short- and long-term capital allocation decisions.


IFRS S1 applies to all entities following IFRS, regardless of their size, industry, or geographical location. It covers the reporting of all sustainability-related information material to an entity’s financial performance, position, and impacts. The standard is designed to be flexible and scalable, allowing entities to tailor their reporting to their specific circumstances while providing comparability and transparency.

Conceptual foundation.

IFRS S1 provides a set of principles to guide entities in the preparation of sustainability reports. These principles include the following:

  • ▪ Fair presentation. Disclosure of relevant information about risk and opportunities that could reasonably be expected to affect the entity’s prospects. An entity shall provide complete, neutral, and accurate depiction of the risks and opportunities.
  • ▪ Materiality. Entities should identify and report information that is material to their stakeholders, considering both qualitative and quantitative aspects. Specifically, S1 states: “…information is material if omitting, misstating, or obscuring that information could reasonably be expected to influence decisions that primary users of general-purpose financial reports make on the basis of those reports, which include financial statements and sustainability-related financial disclosures which provide information about a specific reporting entity.” See the authors’ previous article (“Materiality for ESG Decisions,” The CPA Journal, August 2023) for further discussion of materiality in ESG reporting.
  • ▪ Connected information. An entity shall provide information of the connections between its sustainability-related risk and opportunities, governance, strategy, risk management, metrics, and targets.

Core components.

IFRS S1 highlights core components, which require an entity to report on the following:

  • ▪ Sustainability governance. Explain how the entity integrates sustainability into its governance processes, including the controls and procedures it uses to monitor, manage, and oversee the risks and opportunities. Entities may need to strengthen their governance, redesign controls, and rethink their processes and procedures.
  • ▪ Strategy. Outline its sustainability objective, targets, and plans to manage sustainability-related risk and opportunities. The entity should also describe the risk and opportunities, the time horizons (short-, medium-, or long-term), and how it describes its time horizons.
  • ▪ Risk management. Report how the entity identifies, assesses, and manages sustainability-related risks.
  • ▪ Metrics and targets. Disclose key performance indicators (KPI) relevant to its sustainability objectives. Entities should select appropriate metrics and targets for sustainability reporting, which is more forward looking than historical financial information. They should plan to obtain this forward-looking information. Because IFRS S1 provides no direct measurement guidance, entities should apply judgment and consider metrics associated with the industry-based SASB standards and other frameworks.

An entity should report its sustainability-related financial disclosures concurrently with its related financial statements; these should cover the same reporting period as the financial statements. Comparative information should usually be provided for IFRS S1 reporting; this is not required under IFRS S2 in the first year of reporting. Reports are required annually, not on an interim basis.

The disclosure may be part of management’s discussion and analysis, or in a separate report or part of the notes to the financial statements. If the sustainability disclosure is outside the financial statements, the auditor should treat these disclosures as “other information” and perform the procedures required by AU-C 720. If the disclosure is within the notes, the auditor would perform the same type of procedures as for any note information.

The entity should disclose information about the key judgments and the measurement uncertainty in the disclosure.


The objective of IFRS S2 is for an entity to disclose information about climate-related risks and opportunities that could reasonably be expected to affect its cash flows, and access to financing or cost of capital over the short, medium, or long term (collectively called “climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects”).

Management should disclose its strategies to enable its general-purpose financial statement users to understand how it plans to manage climate-related risks and opportunities, including:

  • ▪ Climate-related risks and opportunities that could reasonably affect its prospects;
  • ▪ Current and anticipated effects of those climate-related risks and opportunities on the entity’s business model and value chain;
  • ▪ Effects of those climate-related risks and opportunities on the entity’s strategy and decision making, including information about its climate-related transition plan;
  • ▪ Effects of those climate-related risks and opportunities on its financial position, financial performance, and cash flows over the short, medium, and long term, considering how those climate-related risks and opportunities were factored into its financial planning; and
  • ▪ Climate resilience of its strategy and business model to climate-related changes, developments, and uncertainties, considering the entity’s identified climate-related risks and opportunities.

The entity also should disclose its governance body (e.g., its board of directors) or individuals responsible for oversight of climate-related risks and opportunities, including

  • ▪ How it assigns responsibilities for climate-related risks and how the body or individual determines whether appropriate skills are available or will be developed to respond to climate-related risks and opportunities;
  • ▪ How often the body or individual learns of climate-related risks and opportunities;
  • ▪ How the body or individual considers climate-related risks and opportunities in overseeing the entity’s strategy, decisions on major transactions, and its risk management processes and related policies, including trade-offs regarding such risks and opportunities; and
  • ▪ How the body or individual oversees setting targets related to climate-related risks and opportunities, and monitors progress towards meeting those targets.

Thus, the entity should develop and disclose appropriate performance metrics and rewards for managers who meet such targets.

Management should also disclose governance processes, controls, and procedures used to monitor, manage, and oversee climate-related risks and opportunities. It should disclose whether it does the following:

  • ▪ Delegates this role to a specific management-level position or management-level committee and how oversight is exercised over that position or committee; and
  • ▪ Uses controls and procedures to support overseeing climate-related risks and opportunities and, if so, how these controls and procedures are integrated with other internal functions.
  • ▪ Adjusts or adapts its policies to rede-ploy, repurpose, upgrade, or decommission existing assets or otherwise adjust its strategies to short-, medium-, or long-term contingencies.

Moreover, in identifying climate-related risks and opportunities, entities should disclose their climate-related scenario analysis, including the following:

  • ▪ Information about the inputs used in the analysis;
  • ▪ Key assumptions made throughout the analysis;
  • ▪ The reporting period that the analysis took place;
  • ▪ Any adopted transition plan, including the assumptions used to develop it; and
  • ▪ Its absolute Scope 1, Scope 2, and Scope 3 gross greenhouse gas emissions generated during the reporting period, expressed as metric tons of CO2 equivalents.

Scope 1 covers emissions from sources that an entity owns or controls directly, such as from its owned trucks. Scope 2 emissions arise from company indirectly using energy purchases in its production processes. Scope 3 encompasses emissions that are not produced by the company itself nor from activities of assets it owns or controls directly; rather, these emissions are those attributed upstream from suppliers and downstream from use of the entity’s products/services after their sale.

Entities should also disclose the metrics and targets used to manage and monitor their performance relative to their climate-related risks and opportunities, including the following:

  • ▪ Performance and outcome measures that support the qualitative disclosures across governance, risk management and strategy disclosure requirements; and
  • ▪ Targets that an entity uses to measure its performance goals related to significant climate-related risks and opportunities.

To provide relief for first-year reporting, S2 does not require companies to report comparative information nor its Scope 3 greenhouse gas emissions.

Time to Prepare

While neither standard contains any documentation requirements, entities should document their procedures to comply with these standards in preparation for its effective date. This especially applies to governance, controls, strategy, risk management, metrics, and targets.

S1 and S2 provide opportunities for CPAs in affected entities to help create and document appropriate controls and procedures. CPAs in public practice may consult on these issues, but if they serve in an audit role, they should be careful to preserve their independence.

The summary in this article is just a starting point. CPAs who may assist in preparing or attesting to sustainability reports under S1 and S2 should familiarize themselves with the full standards and the likely forthcoming interpretive guidance.

Alan Reinstein, CPA, CGMA, DBA, is retired as the George R. Husband Professor of Accounting in the school of business administration at Wayne State University, Detroit, Mich.
Thomas R. Weirich, CPA, PhD, is a professor of accounting in the college of business administration at Central Michigan University, Mt. Pleasant, Mich.
Abraham D. Akresh is retired as CPA, CGFM, and consultant in Potomac, Md.