ESG | Navigating the What, Why, and How of IFRS Standards

Decoding the Objective, Scope and Conceptual Foundations of IFRS S1

On 26 June, the International Sustainability Standards Board (ISSB) issued IFRS 1 – General Requirements for Disclosure of Sustainability-Related Financial Information (IFRS S1) and Climate-Related Disclosures (IFRS S2) (collectively referred to as the “ISSB Standards”).

The ISSB Standards significantly shift sustainability disclosure from voluntary to mandatory requirements. Thus, regulatory authorities officially inaugurates the widely discussed concept of ESG (“Environmental”, “Social” and “Governance”).

ISSB standards will be effective for annual periods beginning 1 January 2024. However,  the exact implementation date for business hinges on their adoption and mandatory application within the individuals’ country or region.

We summarized the objectives, scope and conceptual foundations of IFRS S1, the Standard on General Requirements for Disclosure of Sustainability-Related Financial Information, to assist companies, in effectively preparing for forthcoming changes in financial reporting. Additionally, we outlined the potential consequences in the framework of the standard’s requirements.

IFRS Background

IFRS S1 is a standard on the general requirements for sustainable financial disclosure and applies to all sustainability-related topics (or sustainability-related risks and opportunities), including the diverse aspects such as climate change, biodiversity or human capital.

The position of IFRS S1 in the frame of standards can be compared to that of the International Financial Reporting Accounting Standards (IFRS Accounting Standards) in IAS 1 – Presentation of Financial Statements, IAS 8 -Presentation of Financial Statements.


The objective of IFRS S1 is to require enterprises to disclose material information about sustainability-related risks and opportunities that will assist the primary users of general purpose financial reports (i.e., investors and creditors) in making decisions related to the provision of resources to the enterprise.

Sustainability-related risks and opportunities required to be disclosed are collectively referred to as “the enterprise’s growth prospects”. These are defined as factors that can reasonably be expected to affect the following:

  • the enterprise’s cash flows
  • access to finance
  • cost of capital


ISSB standards can be applied to prepare financial disclosures around sustainability-related risks and opportunities. ISSB standards are irrespective of generally accepted accounting principles or practices (e.g., the use of IFRS or other accounting standards) currently employed by the company for the preparation of its general-purpose financial statements.

Conceptual Foundations

1. Fair Presentation

A complete sustainability-related financial disclosure should fairly reflect all sustainability-related risks and opportunities that could reasonably influence the enterprise’s growth prospects.

A fair presentation requires that disclosures of sustainable financial information hold fundamental characteristics such as relevance and truthfulness and enhancement characteristics such as comparability, verifiability, timeliness and understandability.The concept of fair presentation in IFRS S1 derives from the Conceptual Framework for Financial Reporting and is adapted to the disclosures of relevant sustainable financial information.

The above concepts are largely aligned with IFRS accounting standards. The concepts expedite the migration of accounting knowledge to realm of sustainable disclosure, therefore reducing the initialization cost.

2. Materiality

IFRS S1 requires enterprises to disclose material information regarding sustainability-related risks and opportunities that could reasonably be expected to affect the enterprise’s growth prospects.

Under IFRS S1, material information is determined based on whether the omission, misstatement or concealment of that information would affect the decisions made by users of general-purpose financial reports – which is consistent with the IASB’s (the International Accounting Standard Board”) Conceptual Framework for Financial Reporting and IAS 1 – Presentation of Financial Statements. Under limited circumstances, an enterprise is permitted to withhold material information, for example, when laws and regulations do not allow an enterprise to disclose relevant information or when the information related to sustainable opportunities meets the description of being commercially sensitive as described in the ISSB standard.

In practice, companies can actively communicate with users of information (e.g. through questionnaires) to make more targeted judgements of importance based on an understanding of users’ information needs and preferences.

3. Reporting Entity

According to IFRS S1, the disclosure of sustainability-related financial information should mirror the reporting entity used for the relevant financial statements. That is, if the reporting entity is an enterprise group, it shall include the parent company and subsidiaries within the scope of consolidation, but shall exclude investments outside the scope of consolidation, such as joint ventures and associates.

The ISSB standard defines reporting entities in a way that is consistent with IFRS accounting standards, facilitating consistency when users read both sets of information. However, we remind companies that when applying the ISSB standard to identify sustainability-related risks and opportunities, it is necessary to consider entities along the enterprise value chain, including investees outside the scope of consolidation, regardless of whether or not they have direct transactions with the enterprise.

The reason is that the scope of sustainability-related risks and opportunities can occur at various levels of the enterprise’s value chain. These risks and opportunities are not limited to the particular enterprise level where they occurs or the enterprise level with which they specifically transacts.

As an example, consider the impact of a shutdown among an enterprise’s second-tier suppliers- those who supply the enterprise’s suppliers. The enterprise may face a range of financial consequences, such as disruption of supply to the enterprise, due to non-compliance with the requirements relevant to greenhouse gas emissions regulations that may be transmitted to the enterprise level.

4. Connected Information

IFRS S1 requires companies to provide the following two types of linked information by providing necessary explanations, cross-references, and the use of consistent data, assumptions and units of measurement.

Connections between different types of sustainability-related risks and opportunities and between internal information for sustainability-related financial disclosure. Correlation between sustainability-related financial disclosures and their related financial statements.

According to the ISSB Guidelines, sustainable and relevant financial information, financial statement information, form an integral part of an enterprise’s general-purpose financial report. Sustainability-related financial information complements traditional financial statement information, and together, they serve the information needs of investors and creditors.

Therefore, correlation between the two sets of information is inevitable. For example, IFRS S1 requires an enterprise to disclose the current and expected financial impacts of sustainability-related risks and opportunities on the enterprise, and this disclosure requirement is a typical example of correlated information.

Examples of possible disclosures include the increasingly stringent greenhouse gas emissions regulations that companies face, which may result in a change in the pattern of use of a company’s long-lived assets, which may result in the current financial statements reflecting changes in the relevant depreciation lives and consideration of impairment provisions. Consumer preferences for low carbon emission related products in the market may lead to lower demand for a particular type of product, resulting in lower revenues.

Horizons View

The ISSB standards aims to address stakeholders’ demands for sustainability-related information. So, the Standards define the key users of such information should be consistent with those of financial statement information.

We advise enterprises setting out in the field of sustainable disclosure should strengthen dialogue with key users. Such approach guarantees a thorough grasp of the areas of concern and facilitates a conducive environment for sustainable financial information disclosure that aligns with the information demands of the capital market.

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