IFRS S1: A Technical Deep Dive into the General Requirements for Sustainability-Related Financial Disclosures

This article offers a detailed technical analysis of IFRS S1, examining its structure, core requirements, and implications for preparers and users of general-purpose financial reports.

The primary objective of IFRS S1 is to require entities to disclose information about sustainability-related risks and opportunities that is useful to primary users existing and potential investors, lenders, and other creditors of general-purpose financial reports in making decisions related to providing resources to the entity. The standard emphasizes that an entity’s ability to generate cash flows is inextricably linked to its interactions with stakeholders, society, the economy, and the natural environment throughout its value chain. In terms of scope, IFRS S1 applies to all 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, while excluding matters that could not reasonably be expected to affect the entity’s prospects. It may be applied irrespective of whether the entity’s financial statements are prepared under IFRS or other GAAP, and while it uses terminology suitable for profit-oriented entities, not-for-profit entities may need to adapt descriptions to fit their context.

IFRS S1 aligns with the Conceptual Framework for Financial Reporting and establishes clear qualitative characteristics for useful sustainability-related financial information. The fundamental characteristics include relevance where information must be capable of making a difference in users’ decisions through predictive or confirmatory value and faithful representation, requiring information to be complete, neutral, and accurate. Enhancing characteristics encompass comparability, verifiability, timeliness, and understandability, all of which are detailed in Appendix D of the standard. These characteristics guide the preparation and presentation of disclosures, ensuring that the information provided is both reliable and decision useful.

The standard mandates disclosures across four core content areas, often referred to as the “four pillars.” Under governance, entities must disclose information about the governance processes, controls, and procedures used to monitor and manage sustainability-related risks and opportunities, including the identification of responsible governance bodies, how responsibilities are reflected in mandates, and how sustainability is integrated into strategy and risk management. Regarding strategy, entities must disclose their approach to managing sustainability-related risks and opportunities, including descriptions of identified risks and opportunities, their time horizons, effects on the business model and value chain, and the resilience of the strategy to such risks. For risk management, entities must disclose the processes used to identify, assess, prioritize, and monitor sustainability-related risks and opportunities, including inputs, parameters, and the use of scenario analysis. Finally, under metrics and targets, entities must disclose the metrics used to measure performance, targets set or required by law or regulation and ensure consistency in metric definition and calculation over time.

Materiality is a central concept in IFRS S1, where information is considered material if omitting, misstating, or obscuring it could reasonably be expected to influence the decisions of primary users. Materiality is entity-specific and based on the nature, magnitude, or both of the information in the context of the entity’s sustainability-related financial disclosures. Fair presentation requires that a complete set of sustainability-related financial disclosures present fairly all material sustainability-related risks and opportunities, necessitating the disclosure of relevant information and faithful representation, along with additional information if compliance with specific requirements is insufficient for user understanding.

Entities must also provide connected information, enabling users to understand the linkages between various sustainability-related risks and opportunities, between disclosures on governance, strategy, risk management, and metrics and targets, and between sustainability disclosures and other general purpose financial reports such as financial statements. Furthermore, sustainability-related financial disclosures must be for the same reporting entity as the related financial statements, ensuring consistency and comparability across reports.

In terms of practical application, disclosures may be included in management commentary, integrated reports, strategic reports, or separate sustainability reports, provided they are cross-referenced and accessible. Sustainability-related financial disclosures must be reported at the same time and cover the same reporting period as the related financial statements. Comparative information for the preceding period must be disclosed for all amounts, narrative, and descriptive information, unless otherwise permitted or required by another standard.

To identify sustainability-related risks and opportunities and applicable disclosure requirements, entities must refer to IFRS Sustainability Disclosure Standards, SASB Standards for disclosure topics and metrics, CDSB Framework Application Guidance for water and biodiversity, and other standard-setting bodies such as GRI and ESRS, to the extent they do not conflict with IFRS Standards. This multi-source approach ensures that entities can draw on relevant guidance while maintaining consistency with global benchmarks.

IFRS S1 becomes effective for annual reporting periods beginning on or after 1 January 2024, with early application permitted. Transition reliefs include the option to report sustainability disclosures after financial statements in the first year, the option to disclose only climate-related information in the first year using IFRS S2, and no requirement to provide comparative information in the first year. These reliefs are designed to facilitate a smoother implementation process for entities adopting the standard for the first time.

The standard includes several appendices that provide essential guidance. Appendix A defines key terms such as business model, value chain, and material information. Appendix B offers detailed application guidance on materiality, connected information, cross-referencing, and more. Appendix C outlines additional sources of guidance, including GRI and ESRS. Appendix D elaborates on the qualitative characteristics of useful sustainability-related financial information, and Appendix E covers the effective date and transition provisions.

In conclusion, IFRS S1 represents a significant step towards global harmonization of sustainability-related financial reporting. By establishing general requirements grounded in the principles of financial reporting, it aims to provide decision-useful, comparable, and reliable information to capital market participants. Entities preparing to adopt IFRS S1 should focus on integrating sustainability into governance and risk management, developing robust processes for identifying and assessing material sustainability risks and opportunities, ensuring connectivity between financial and sustainability disclosures, and building internal capabilities for data collection, measurement, and reporting. The standard is intended to be used alongside future IFRS Sustainability Disclosure Standards, creating a scalable and consistent framework for sustainability reporting worldwide.