Harmonizing Sustainability Reporting: How IFRS S1 and S2 Will Impact Your Business

The International Financial Reporting Standards (IFRS) is a non-profit organization that founded the International Sustainability Standards Board (ISSB) which operates alongside the International Accounting Standards Board (IASB). The ISSB was launched by the IFRS at COP26 to improve the measures of sustainability reporting worldwide. Their aim is to bring transparent, global accounting standards that foster trust and promote sustainable business practices. The result would be stronger decision making for investments and more stability in accounting all around. It also helps eliminate greenwashing by requesting more specific data to enhance accuracy and confidence.

On June 26, 2023, the ISSB released IFRS S1 and S2 which are in accordance with the four pillars of the Task Force on Climate-Related Financial Disclosures. The four pillars of the TCFD are mandatory for both the general sustainability disclosure (S1) and the climate disclosure (S2).

In this article, we’ll cover what the IFRS S1 and S2 standards are, what they entail, and how Net0 can fulfill S2 climate disclosure requirements. 

IFRS S1 - General sustainability disclosures

IFRS S1 is the general requirement for sustainability reporting. This would include disclosing any sustainability risks and opportunities associated with the company’s cash flows and access to capital at any moment in time. It requires general and industry specific (according to Sustainability Accounting Standards Board (SASB)) disclosures related to sustainable opportunities and risks. It can also be applied by those utilizing the Generally Accepted Accounting Principles (GAAP).

IFRS S2 - Climate-related disclosures

IFRS S2 is directly related to climate-related risks and opportunities and how these can affect the entity’s prospects. Companies are required to include and identify the physical or transitional risks of their strategies and the targets and achievements of those climate-related strategies. Firms also must conduct scenario analyses to illustrate the potential impacts of diverse climate-related occurrences on their future business operations. Companies may include metrics specific to them, their industries, or cross-industries. 

IFRS S2 Obligations and solutions

• Reporting scopes 1, 2, and 3 of GHG emissions with a detailed breakdown of the methodologies and assumptions applied is required for S2. 

Solution: Net0 measures all 3 scopes of GHG emissions breaking them down in an itemized way on the final report, such as location, vendors, scopes, and categories automatically depending on the data that is entered either by automation or manually into the platform. Net0 also offers many resources on carbon accounting methodologies that make navigating through your reporting journey that much easier. 

• The total amount of funding allocated towards climate-related initiatives.

Solution: The extent and ratio of business operations susceptible to transition and physical risks, as well as those poised to benefit from climate-related opportunities. Net0’s initiative finder feature guides companies in initiatives to participate in to reduce carbon emissions.

• Emission intensity metrics, calculated by normalizing emissions against a business indicator such as revenue. 

Solution: Net0 uses AI capabilities to conclude what cost-effective carbon reduction strategies are best for the company based on the data that is entered for various emissions categories. Net0’s intelligent platform automatically maps out what solution to carbon reduction will work for your business, based on what is high-risk and what is cost-effective. In this way, businesses are able to scale what actions to take in real-time and what they can plan for in the long-term. Net0’s Blueprint offers a MAC curve that enables companies to see what profitable carbonization measures they can take. The platform calculates these costs for businesses, making it simple to plan for future funding on carbon reduction strategies and to convey an amount as accurately as possible for potential investors and government reporting initiatives. 

• The proportion of executive compensation tied to climate-related objectives.

Solution: This can be calculated by what Net0 calculates for your net zero strategy based on the actions the company chooses to take by relating that proportion to executive pay.

Are the IFRS mandatory?

At the moment these standards aren’t mandatory although they are a popular framework for reporting as so many other mandatory government directives are aligned with them. Here are some important reporting facts:

• The IFRS has been in effect since January 1, 2024. 
• Reporting can be phased in meaning the first year, an entity may just focus on S2 climate-related disclosures and incorporate S1, which covers broader sustainability metrics the year after. 
• Companies also have a 9 month grace period where S1 can be reported after S2. This allows companies to compile more quantitative data first, such as from GHG emissions, while they assess their qualitative data with time. 
• Moreover, companies may opt out of reporting scope 3 emissions in their first year of reporting as well.

Why adhere to IFRS S1 and S2?

• To establish a unified international standard - Facilitating the alignment of international markets and enabling equitable comparison of financial information related to ESG aspects.
• To benchmark your current carbon footprint - Using one comparison standard to see progress internally and in the business’ value chains.
• For a competitive advantage - Relying on a single framework to review the standards that other companies in your market are adhering to is important for sustainable growth and improvement. It’s also important not only to compete but to facilitate change in industries and share about what works and what doesn’t. 

Related content

For more information about how to report on your emissions, check out our additional resources:

• How Are Carbon Emissions Measured?
• Conducting a Materiality Assessment for ESG Reporting
• Carbon Accounting Methodologies for Measuring Emissions

What is materiality?

In sustainable accounting, materiality refers to the importance of information related to an organization's ESG impacts, risks, and opportunities that could influence the decision-making of stakeholders. Materiality helps in determining which ESG issues are critical for reflection in the organization's financial and sustainability reports, based on their potential to affect financial performance, reputation, or operational outcomes.

The concept of materiality in sustainability accounting goes beyond the traditional financial definition, which focuses solely on the financial impacts of decisions. The second concept encompasses a broader view that considers the potential environmental and social implications of a company's operations and how these could affect its sustainability and long-term value creation. This approach helps organizations prioritize their sustainability efforts, allocate resources effectively, and communicate their sustainability performance to stakeholders in a meaningful way.

The concept of double materiality emphasizes that companies should report how sustainability issues affect their business and how their business activities impact society and the environment. This approach aims to provide a more comprehensive view of a company's performance and its contributions to or detractions from sustainable development, empowering investors to make more informed decisions based on a more complete understanding of a company's impact.

To conclude

Net0 emissions management software is equipped to evaluate your company's carbon footprint and provide you with the necessary resources to reduce emissions. Consider scheduling a complimentary demo with our specialists to find out more.