ISSB (IFRS S1 & S2)

Disclose Financially Material ESG Risks

Risks affecting enterprise value

Integrate ESG into Financial Reporting

Link ESG with financial performance

Use Standardized Structure

Comparable disclosures across companies

Provide Forward-Looking Information

Risks, scenarios, and strategies

IFRS S1 (General Requirements)

IFRS S2 (Climate)

Core Requirements

• • Identify sustainability-related risks and opportunities across the value chain
• • Assess financial materiality of each risk and opportunity
• • Disclose governance processes for managing sustainability risks
• • Explain strategy and risk management approaches
• • Provide metrics and targets to track performance

Scope of Application

IFRS S1 applies to all entities that prepare general purpose financial statements under IFRS Accounting Standards. It covers sustainability-related information that is reasonably available and not excessively costly to obtain. Companies must disclose information about sustainability-related risks and opportunities that could reasonably be expected to affect the entity's cash flows, access to finance, or cost of capital over the short, medium, or long term.

Connecting Information

IFRS S1 requires companies to connect sustainability-related financial disclosures with financial statements. This includes explaining how sustainability-related risks and opportunities affect financial position, financial performance, and cash flows. The information must be consistent with the assumptions used in financial reporting.

Reporting Location

Sustainability-related financial disclosures must be provided in the same document as the financial statements (typically the annual report). This ensures investors can access all relevant information in one place and facilitates the connection between sustainability and financial performance.

Greenhouse Gas Emissions

IFRS S2 requires disclosure of Scope 1, Scope 2, and Scope 3 emissions:

• • Scope 1: Direct emissions from owned or controlled sources
• • Scope 2: Indirect emissions from purchased electricity, steam, heating, and cooling
• • Scope 3: All other indirect emissions in the value chain (required if material or if the company has set Scope 3 targets)

Climate-Related Risks

Companies must disclose both physical and transition risks:

• • Physical risks: Acute (extreme weather events) and chronic (long-term climate pattern changes)
• • Transition risks: Policy, legal, technology, market, and reputation risks from the transition to a lower-carbon economy

Climate Scenario Analysis

Companies must use climate-related scenario analysis to assess climate resilience. This includes analyzing different climate scenarios (including 1.5°C pathways) to understand potential impacts on business models, strategy, and financial performance. Scenario analysis must be proportionate to the company's circumstances and must disclose the resilience of the strategy under different scenarios.

Targets and Metrics

Companies must disclose climate-related targets (if any) and the metrics used to assess progress. This includes emissions reduction targets, transition plans, and cross-sector metrics defined by ISSB. Companies must explain how targets were set, the time horizon for achievement, and progress toward targets.

Industry-Based Guidance

IFRS S2 includes industry-based disclosure requirements to ensure relevance across different sectors. This includes specific guidance for emissions-intensive sectors, financial institutions, and other industries with unique climate-related risks and opportunities.

When Scope 3 Is Required

IFRS S2 requires Scope 3 disclosure in two circumstances:

• • If Scope 3 emissions are material: When the company determines that Scope 3 emissions could reasonably be expected to affect enterprise value
• • If the company has set Scope 3 targets: When the company has established emissions reduction targets that include Scope 3 emissions

Scope 3 Categories

The GHG Protocol defines 15 Scope 3 categories covering the value chain:

• • Purchased goods and services - Emissions from the production of purchased products
• • Capital goods - Emissions from the production of capital assets
• • Fuel and energy-related activities - Emissions from fuel and energy production not included in Scope 1 or 2
• • Upstream transportation and distribution - Emissions from transporting products to the company
• • Waste generated in operations - Emissions from waste disposal and treatment
• • Business travel - Emissions from employee travel
• • Employee commuting - Emissions from employee commuting
• • Upstream leased assets - Emissions from leased assets the company uses
• • Downstream transportation and distribution - Emissions from transporting products to customers
• • Processing of sold products - Emissions from processing sold products
• • Use of sold products - Emissions from customer use of products
• • End-of-life treatment of sold products - Emissions from product disposal
• • Downstream leased assets - Emissions from leased assets the company owns
• • Franchises - Emissions from franchise operations
• • Investments - Emissions from investments

Measurement Challenges

Scope 3 measurement presents significant challenges:

• • Data availability: Value chain partners may not have emissions data
• • Calculation methods: Multiple approaches (spend-based, average-data, supplier-specific) with varying accuracy
• • Boundary setting: Determining which categories and suppliers to include
• • Engagement requirements: Need to engage suppliers and partners for data collection

Disclosure Requirements

Companies must disclose the methodology used to calculate Scope 3 emissions, the categories included, and any assumptions or limitations. If Scope 3 is not disclosed, companies must explain why it is not material or why no targets have been set. Progressive disclosure is encouraged—starting with material categories and expanding over time.

Purpose of Scenario Analysis

Scenario analysis helps companies understand the potential impacts of climate change on their business, test the resilience of their strategy under different futures, and identify adaptation and mitigation opportunities. It provides forward-looking information that investors need to assess climate risk.

Required Scenarios

IFRS S2 requires companies to analyze scenarios that include:

• • 1.5°C pathway: A scenario aligned with the Paris Agreement goal of limiting warming to 1.5°C
• • Beyond 1.5°C (2°C or higher): A scenario with higher warming to understand downside risks
• • Company-specific scenarios: Scenarios tailored to the company's circumstances and sector

Scenario Sources

Companies can use established scenario sources or develop their own:

• • IEA scenarios: International Energy Agency scenarios (NZE, APS, STEPS)
• • IPCC scenarios: Intergovernmental Panel on Climate Change scenarios
• • NGFS scenarios: Network for Greening the Financial System scenarios
• • Industry-specific scenarios: Sector-specific scenario frameworks
• • Company-developed scenarios: Custom scenarios based on company analysis

Analysis Requirements

Scenario analysis must be proportionate to the company's circumstances and must include:

• • Climate-related risks and opportunities: How scenarios affect specific risks and opportunities
• • Business model impacts: How scenarios affect the company's business model and strategy
• • Financial impacts: Potential effects on financial position, performance, and cash flows
• • Strategy resilience: How the strategy performs under different scenarios
• • Adaptation measures: Actions to enhance resilience under each scenario

Disclosure Requirements

Companies must disclose the scenarios used, the time horizon analyzed, the methodology and assumptions, the key risks and opportunities identified, and the financial impacts. They must explain the resilience of their strategy under different scenarios and describe any adaptation measures planned or implemented.

ISSB Position on Assurance

ISSB has not mandated assurance for IFRS S1 and S2 disclosures. However, the standards are designed to be assurance-ready, and ISSB encourages companies to obtain assurance to enhance credibility. Many jurisdictions adopting ISSB standards have included assurance requirements.

Jurisdictional Assurance Requirements

Jurisdictions adopting ISSB have varying assurance approaches:

• • UK: Limited assurance required from 2024, moving to reasonable assurance over time
• • Canada: Limited assurance recommended, with potential future mandates
• • Singapore: Limited assurance required for listed companies
• • Japan: Assurance encouraged but not mandated
• • Australia: Assurance requirements under development

Limited vs Reasonable Assurance

Two levels of assurance are available:

• • Limited assurance: Provides moderate assurance through analytical procedures and inquiries. Less extensive testing and evidence gathering. Typically the initial requirement.
• • Reasonable assurance: Provides high assurance similar to financial statement audits. More extensive testing, verification, and evidence gathering. Often the target for future requirements.

Assurance Standards

Assurance is typically performed in accordance with ISAE 3000 (Assurance Engagements Other than Audits or Reviews of Historical Financial Information) or ISAE 3410 (Assurance Engagements on Greenhouse Gas Statements). These standards define the assurance methodology, evidence requirements, and reporting format.

Investor Expectations

Many institutional investors expect or prefer assured sustainability disclosures. Assurance enhances credibility, reduces information asymmetry, and supports investment decisions. Companies seeking capital or operating in investor-sensitive markets should consider obtaining assurance even if not required.

Key Adopting Jurisdictions

Adoption Approaches

Jurisdictions can adopt ISSB standards in different ways:

• • Direct adoption: Incorporate ISSB standards verbatim into local requirements
• • Endorsement: Formally approve ISSB standards for use in the jurisdiction
• • Building on: Use ISSB as a baseline and add additional requirements (like CSRD)
• • Voluntary use: Allow companies to voluntarily apply ISSB standards

US SEC Alignment

The US SEC climate disclosure rules are broadly aligned with ISSB standards, particularly IFRS S2. While not identical, the SEC rules incorporate similar requirements for Scope 1, 2, and 3 emissions, climate-related risks, and scenario analysis. Companies can often satisfy both requirements with a single disclosure framework.

June 2023 - Standards Issued

IFRS S1 and S2 were issued by the ISSB, establishing the global baseline for sustainability disclosures.

2024 - Early Adopters

Companies in jurisdictions with early adoption (UK, Canada, Singapore) begin reporting under ISSB-based standards. Voluntary application encouraged globally.

2025-2026 - Broader Adoption

Additional jurisdictions (Australia, Japan, others) implement ISSB-based requirements. Mandatory application expands globally.

2027+ - Global Standardization

ISSB expected to become the dominant global baseline for sustainability disclosures, with interoperability with CSRD and other frameworks.

Identify sustainability-related risks and opportunities that could affect enterprise value. Assess financial materiality using the ISSB definition. Focus on climate-related risks first (IFRS S2), then expand to other sustainability topics (IFRS S1).

Establish board oversight of sustainability risks. Define management responsibilities for disclosure preparation. Create cross-functional teams involving finance, sustainability, legal, and operations. Document governance processes for ISSB compliance.

Build data collection systems for emissions (Scope 1, 2, 3), climate risks, and other sustainability metrics. Establish data quality controls and validation processes. Integrate sustainability data with financial reporting systems to enable the "connecting information" requirement.

Develop climate scenario analysis capabilities. Select relevant scenarios (including 1.5°C pathways). Analyze impacts on business model, strategy, and financial performance. Document methodology and assumptions. Ensure scenario analysis is proportionate to company circumstances.

Prepare draft disclosures following the TCFD four-pillar structure (Governance, Strategy, Risk Management, Metrics & Targets). Connect sustainability information with financial statements. Ensure disclosures are decision-useful for investors. Conduct internal review and validation.

Engage external advisors or auditors to review disclosures against ISSB requirements. Address gaps and refine disclosures. Consider obtaining limited assurance (if required by jurisdiction or investors). Finalize disclosures for publication in annual reports.

1. Transparency Mechanism

ESG risks disclosed → Investor visibility

2. Risk Pricing Mechanism

Investors price risk → Cost of capital impact

3. Valuation Mechanism

Cash flows and risk → Valuation changes

4. Capital Allocation Mechanism

Better information → Investment decisions

ISSB

CSRD

Reporting Impact

Integration with financial reporting

Strategic Impact

ESG integrated into decision-making

Investor Impact

Increased scrutiny