Navigating the Rapidly Changing World of Climate-Related Disclosures Part 3: International Financial Reporting Standards S2 (IFRS S2)

April 22, 2024

By: Lauren Sion

In our blog series, we started by looking at U.S.-centric climate-related disclosures: the U.S. Security and Exchange Commission’s (SEC) climate rules and California’s SB 253 and SB 261.

In Part 3 of our blog series, Navigating the Rapidly Changing World of Climate-Related Disclosures, we shift our focus from U.S.-centric climate-related disclosures to a more global view. Lauren Sion delves into IFRS S2, providing clarity around how this standard fits into the disclosure landscape and explaining its applicability. Read more and continue to untangle the web of climate reporting frameworks and requirements.

What is IFRS S2?

The International Financial Reporting Standards (IFRS) Foundation’s S2: Climate-related Disclosures standard provides a common framework for entities to disclose information about their climate impacts (e.g., greenhouse gas (GHG) emissions) as well as climate-related risks and opportunities which may be useful to investors and other users of financial reports for informing investment decisions. As we noted in our first blog, climate-related risks pose real threats to a company’s business, its longevity, its position in the market, and its financial success. Investors understand that these risks can have a material impact and need to be considered when making investment decisions.

Wasn’t that what the TCFD was for?

Yes. The Taskforce on Climate-Related Financial Disclosures (TCFD) was also created to develop a framework that could be used by organizations to report climate-related risks – and their financial impacts – in a consistent, comprehensive manner. However, the TCFD fulfilled its remit and disbanded in October 2023. The Financial Stability Board (FSB), who prompted development of the TCFD recommendations, asked the IFRS Foundation to take over monitoring the progress of companies’ climate-related disclosures.

As part of this takeover, the ISSB (which is the standard-setting body within the IFRS Foundation) developed the IFRS S1 (sustainability) and S2 (climate) standards, and IFRS S2 fully incorporates, and expands on, the TCFD final recommendations.

When did this happen?

We know, it can be confusing – especially because many companies are still reporting in accordance with the original TCFD framework. Please see the timeline below to better understand the evolution of IFRS S2 and climate-related financial disclosure acronyms, organizations, and frameworks.

What does IFRS S2 require? How is that different from TCFD?

As highlighted above, IFRS S2 adopts and expands on the recommendations of the TCFD. The IFRS S2 standard intends to establish worldwide baseline requirements for an organization to disclose information about its climate-related risks and opportunities in a way that is comprehensive and comparable. These disclosures include climate-related physical and transition risks that could reasonably be expected to affect an entity’s cash flow and are intended for those making decisions related to providing financial resources to the entity.

Is IFRS S2 a voluntary or required disclosure standard?

IFRS S2 itself, as a standard, is voluntary. That may sound confusing, since the standard talks about ‘requirements’, but the term ‘requirement’ in this case simply means that element is required to conform to the IFRS S2 standard.

However, the vision of the ISSB in developing the IFRS standards was to create a global baseline of sustainability disclosures for the capital markets to provide a common language and enable comparable and consistent reporting. The ISSB is working with jurisdictions around the world to deliver this. To this end, individual jurisdictions may choose to reference or adopt IFRS S2 and make it mandatory. IFRS Accounting Standards (established by the IASB) regarding general financial disclosure practices are already globally adopted and required for use by more than 140 jurisdictions. IFRS S2 was developed based on the concepts of these widely used accounting standards, though it is designed to be implemented with any accounting requirements.

What jurisdictions have adopted or referenced IFRS S2 and deemed it required reporting?

Since their release in June 2023, many jurisdictions have announced commitments to, or consideration of, adopting the IFRS S1 and S2 requirements. The landscape is always changing, so we hesitate to publish a complete list of countries and current adoption or commitment status. That said, as of end of Q1 2024, the following countries have made commitments to adopt IFRS S1 and S2 or are consulting (or have recently consulted on) such a commitment:

Australia
Bangladesh
Brazil
Canada
Costa Rica
European Union*

Hong Kong
India
Japan
Malaysia
Nigeria
Pakistan

Philippines
Singapore
Sri Lanka
Taiwan
Turkey
United Kingdom

* Note: The IFRS S2 disclosures are included in the European Sustainability Reporting Standard (ESRS) E1: Climate Change, adopted by the European Commission as part of the EU Corporate Sustainability Reporting Directive (CSRD). Blog 4 of our series will take a closer look at the CSRD and its implications for companies based in, or doing business in, the EU.

We expect this list to continue to grow, with more and more jurisdictions seeing the benefit of using IFRS S2 (and S1) to drive consistency and comparability, allowing investors and other stakeholders to make informed financial decisions.

The takeaway? There is a lot to take away here. Let us break it down for you:

No company is required to follow IFRS S2 (or S1) unless it is adopted by a local jurisdiction (e.g., a country) which requires it (and the company meets the local applicability thresholds for reporting).
EU’s CSRD and ESRS E1: Climate Change (which we will cover in our next blog), incorporates IFRS S2, so no need to address IFRS S2 separately.
For companies based in, or doing business in, the countries listed above, pay close attention to the adoption status for your country. Consider getting started with IFRS S2 now, voluntarily, to prepare for future disclosure requirements.
For companies that are not located in, and do not do business in, one of the jurisdictions listed above, we strongly recommend that you consider implementing IFRS S2 anyways. Why?
- Climate-related risks pose real threats to a company’s business and its financial success; implementing IFRS S2 will enable you to identify, assess, and mange those risks.
- Though your country(-ies) of operation may not currently be listed above, things could change. Continue to monitor what is happening in this space.
- If you’ve been reading this whole blog series, you will notice a trend – there are multiple rules, bills, directives, and guidelines that require or will require reporting on climate impacts (e.g., GHG emissions) and climate-related risks. Climate-related reporting is becoming ubiquitous and may soon be a universal reporting practice. Be ready for it!
For companies already reporting on the TCFD recommendations, they are still valid; you do not need to ‘move’ to IFRS S2 unless required to do so via local jurisdiction or another legal requirement. However, you may wish to plan a shift to IFRS S2 to ensure future readiness for more robust reporting.

If you would like a trusted advisor to guide you through IFRS S2, how it relates to TCFD, what that means related to CSRD, and help you learn all these acronyms(!), we are here to help. We pride ourselves on meeting our clients where they are and on teaching our clients along the way, rather than simply doing.

Lauren Sion
Senior Consultant, Sustainability and Climate Advisory
Lauren Sion is a Senior Consultant on Montrose’s Sustainability and Climate Advisory team with eight years of experience in environmental compliance and sustainability. She works closely with her clients to reduce their environmental impact and achieve their sustainability goals. Lauren is responsible for managing and executing technical projects involving quantification of Scope 1, 2 and 3 greenhouse gas (GHG) emissions, assessment of material emission sources, implementation of emission reduction opportunities, and development and achievement of sustainability targets. She has experience working with clients in various sectors, including energy, manufacturing and financial services. Lauren is skilled at providing customized technical advisory support for clients of all sizes and at all stages of their sustainability journey.