Navigating IFRS S1 and IFRS S2: A Pathway for Integrated Risk Management and Sustainability

As sustainability reporting becomes increasingly critical for businesses, preparers are faced with new challenges and opportunities. The voluntary application of the International Sustainability Standards Board (ISSB) Standards, specifically IFRS S1 and IFRS S2, offers a framework for companies to disclose sustainability-related financial information, even ahead of regulatory mandates. To support companies, the IFRS Foundation has published Voluntarily applying ISSB Standards—A guide for preparers. This guide published provides companies a pathway to communicate their progress in aligning with these standards, supporting investor decision-making by offering transparent, comparable, and reliable information on sustainability risks and opportunities.

At the heart of these guidelines lies a core principle familiar to risk managers—integrated risk management (IRM). For businesses striving to balance compliance with sustainability disclosures and operational capability, IRM offers a valuable framework to ensure that risks—whether climate-related or operational—are identified, assessed, and managed in a cohesive way. This article explores the critical aspects of the ISSB's guide and how IRM plays a pivotal role in managing sustainability reporting transitions.

ISSB Standards: A Global Baseline for Sustainability Disclosures

IFRS S1 and IFRS S2 are designed to meet the capital markets' growing demand for standardized, transparent sustainability-related disclosures. They enable companies to provide investors, creditors, and other stakeholders with decision-useful information about how sustainability risks and opportunities might impact their financial performance.

For companies voluntarily adopting these standards, the challenge is often navigating the maturity of their data collection and reporting processes. The guide emphasizes phased compliance, offering transition reliefs and proportionality mechanisms that allow businesses to gradually improve their disclosures. This flexibility is essential, particularly for entities still developing capabilities for robust sustainability reporting.

The Role of Transition Reliefs and Proportionality Mechanisms

One of the key features of the ISSB Standards is the provision of transition reliefs, which offer preparers additional time to fully comply. These reliefs are critical for businesses that need to phase their reporting due to data constraints or the complexity of gathering sustainability metrics. For example, in the first year of applying IFRS S1, companies may opt to report only climate-related risks under IFRS S2 and delay non-climate sustainability disclosures until later periods. This gives them the breathing room to build more comprehensive reporting frameworks without claiming full compliance prematurely.

Moreover, proportionality mechanisms—which allow the use of reasonable, supportable information available without undue cost or effort—are instrumental in supporting smaller companies or those with limited resources. For example, businesses can rely on qualitative approaches when quantitative data isn’t feasible, while still maintaining adherence to the ISSB Standards.

This structured flexibility is where IRM becomes indispensable. The phased and proportional approach to sustainability disclosures mirrors the IRM framework, where companies incrementally identify and address risks, while maintaining transparency about their progress. Integrating these sustainability risks into broader enterprise risk management (ERM) ensures a more holistic view of financial, operational, and environmental risks, giving companies an advantage in both compliance and long-term value creation.

Integrated Risk Management: A Framework for Success

The key to successfully navigating the voluntary application of IFRS S1 and IFRS S2 lies in a company’s ability to manage sustainability disclosures alongside traditional financial risks. Here’s how IRM principles align with the ISSB’s guidance:

1. Risk Identification and Assessment: IRM encourages businesses to treat sustainability-related risks as integral to their risk universe. Identifying climate-related risks, for instance, becomes part of a broader ERM strategy. The ISSB Standards specifically call for companies to disclose not only the financial effects of these risks but also the uncertainty around their measurement—an approach that sits comfortably within an IRM framework.

2. Proportional Disclosure: By using ISSB’s proportionality mechanisms, companies can align their reporting capabilities with their risk tolerance and capacity. This is akin to IRM's prioritization of risks based on materiality, impact, and available resources. By focusing on "reasonable and supportable information," companies ensure that disclosures are aligned with their current capabilities without overextending.

3. Continuous Improvement: As with any effective IRM strategy, sustainability-related disclosures should evolve as new data becomes available and processes mature. The ISSB’s framework allows companies to communicate incremental progress, which is key for investor trust. Regular updates on the company’s journey towards full compliance keep stakeholders informed and ensure that risk management remains dynamic.

Applying ISSB Standards in Phases: Practical Steps

Companies beginning the journey toward ISSB compliance can benefit from these critical steps, integrated into their IRM approach:

• Start with Climate Disclosures: Leverage the transition reliefs by focusing on climate-related risks first, as allowed by IFRS S1. Incorporate these risks into your broader risk register, integrating climate scenario analysis into your overall risk assessment process.

• Leverage Existing Frameworks: Many companies are already using frameworks such as the TCFD, SASB, or the Integrated Reporting Framework. These are excellent starting points, and companies can build on them while working toward full ISSB compliance. IRM can help bridge the gap between these established frameworks and the more comprehensive ISSB requirements by creating a roadmap that aligns risk reporting with investor expectations.

• Phased Implementation: As emphasized in the ISSB guide, companies can phase in their sustainability disclosures. This approach mirrors IRM’s phased risk management implementation, allowing businesses to focus on areas with the greatest risk exposure first, and gradually expanding to encompass a more comprehensive risk profile.

• Transparent Communication: Finally, just as IRM emphasizes transparent communication of risks to stakeholders, companies should ensure that any partial application of IFRS S1 and S2 is clearly communicated. Investors should be informed about the progress and any limitations in disclosures, ensuring continued trust and engagement.

IRM as a Key Enabler of ISSB Compliance

For companies voluntarily adopting ISSB Standards, the path to compliance requires a strategic, risk-based approach that acknowledges both internal capabilities and external stakeholder demands. The principles of integrated risk management provide an ideal framework for managing this transition, ensuring that sustainability-related risks are embedded within broader financial and operational risk strategies.

As businesses move toward a future where sustainability risks play an increasingly central role in financial reporting, those that integrate IRM into their sustainability efforts will be well-positioned to meet regulatory requirements, build investor trust, and ultimately enhance long-term value