IFRS S1 sustainability-related disclosure requirements

Publication of International Financial Reporting Standard (IFRS) S1 and S2 standards by the International Sustainability Standards Board (ISSB) mark a step change in what is expected of firms, with S1 raising the bar on how firms’ approach and make sustainability-related disclosures. These new Sustainability Disclosure Standards (SDS) will be effective for reporting periods beginning on or after January 1, 2024, but the timing of implementation will depend upon local jurisdictions’ regulatory timelines for adoption.

The Financial Conduct Authority (FCA) has signalled the IFRS SDSs are to be adopted in the UK for reporting periods on or after January 1, 2025 – others may launch sooner. The type of entities in scope of new requirements are not yet decided, but current rules could change.

Indeed, the trend in recent years has been to cast the net wider, increasing the number of firms in scope of existing laws and regulation, including the Taskforce for Climate-Related Financial Disclosures (TCFD) and Climate Related Financial Disclosures regulations (CRFD) in the UK, and the Corporate Sustainability Reporting Directive in the EU. Proposed changes by the Securities and Exchange Commission (SEC), although currently highly uncertain, would also require US registrants to include climate-related disclosures in their annual statements and periodic reports.

With increasingly rigorous requirements and expectations, organisations should start work now, investing incrementally as we move toward implementation to avoid a significant gap at the end.

What four things should organisations do now?

1. Understand your current position and priorities. 
   Evaluate your existing climate risk governance and reporting structures, and sustainability strategy to ensure they’re fit for purpose. We recommend this includes a gap analysis against new standards and the capabilities required to deliver, and a materiality assessment to prioritise your work. Firms should take a holistic view of their full suite of reporting requirements and expectations, including voluntary and non-voluntary. Time spent upfront putting in place strong governance and consistent processes will avoid extensive rework and challenges or complexity down the road.
2. Strengthening controls and reporting processes.
   Establish internal controls and procedures capable of supporting the disclosure of information to a standard consistent with requirements. This may take some time for organisations to establish and mature. It is a challenge for many firms – there remains a significant gap between financial and non-financial reporting, in terms of levels of testing and assurance in place to protect the organisation against the risks of misstatement.
   A good place to start is with an evaluation of existing controls, and how they compare to those of more established financial reporting. This should include ‘hard controls’ in relation to the collation and analysis of sustainability-related data, as well as ‘soft controls’ around report structure and presentation, explanation, and transparency in respect of limitations and measurement uncertainty.
3. Harness internal audit as an ally to help you prepare.
   The internal audit function can support sustainability reporting teams to establish robust processes and controls. This is however still an emerging area for many internal audit teams, and so ensuring these teams upskill their knowledge and experience is key to getting value out of the process.
4. Complete a ‘dry run’ exercise.
   Finally, we strongly recommend firms complete a ‘dry run’ exercise to assess their readiness to report in line with new requirements. The majority of new requirements are likely to impact organisations during 2025, for the year end 2024, and so the next 12 months offer an excellent opportunity to build capability in private. This will also support you to improve incrementally toward assurance-ready reporting.

If you have existing reporting processes in place – TCFD, for example – we recommend building on those capabilities, using the time until formal adoption, to prepare the ground for additional disclosures, and to establish the necessary capabilities to deliver.

The new S1 standard has a significant focus on the ‘how’ of the reporting process. Hence, establishing robust data and reporting controls and procedures should not be overlooked. Engaging internal audit and undertaking a dry run exercise can provide valuable support and is highly recommended. Doing so will identify areas for further improvement and help to close the gap without a last-minute sprint to the finish line.

For more information or to discuss these topics in more detail, please contact Alex Hindson or you usual Crowe contact.

Please find our insight on the IFRS S2 climate-related disclosure requirements here.