A Beginner’s Guide to IFRS S2 Climate-Related Disclosures
Climate change is no longer just an environmental issue, it has become a financial and business challenge. Companies worldwide are facing extreme weather, regulatory changes, and shifting customer expectations, all of which impact their profits, risks, and long-term sustainability.
Investors, regulators, and stakeholders want to know how businesses are dealing with these climate-related risks and opportunities. However, without a clear and standardised way to report this information, it has been difficult to compare companies and assess their preparedness.
To solve this problem, the International Sustainability Standards Board (ISSB) introduced IFRS S2 Climate-Related Disclosures in June 2023. This standard provides a structured approach for companies to report climate-related financial information.
But what does IFRS S2 mean for businesses? Who needs to comply, and how can companies implement it effectively? This article will explain everything you need to know in simple terms.
What is IFRS S2?
IFRS S2 is a set of global reporting standards that require companies to disclose how climate change affects their financial position and business operations. It is part of the IFRS Sustainability Disclosure Standards, alongside IFRS S1 (which sets general requirements for sustainability-related financial disclosures).
This standard ensures that businesses provide clear, consistent, and comparable information about their exposure to climate-related risks and opportunities.
Why was IFRS S2 Introduced?
Before IFRS S2, many businesses reported climate-related risks in different ways, making it difficult for investors and regulators to compare companies. Some businesses provided too little information, while others presented complex reports that lacked transparency.
IFRS S2 solves this by:
Standardising climate disclosures so that companies follow the same structure.
Helping investors make informed decisions by ensuring companies report meaningful data.
Encouraging businesses to manage climate risks and seize climate-related opportunities.
Aligning with global frameworks, including the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas (GHG) Protocol.
By making climate reporting clear and reliable, IFRS S2 supports businesses in adapting to a world where climate change is a key financial factor.
Who Needs to Follow IFRS S2?
IFRS S2 applies to any company that reports under IFRS standards, which includes businesses in many countries worldwide. Large companies, especially those in high-risk industries (such as energy, finance, and manufacturing), will likely be the first to implement it.
Even if a company is not legally required to follow IFRS S2, many investors and stakeholders may expect them to. Companies that fail to disclose climate risks may lose investor confidence, face regulatory pressure, or miss out on business opportunities.
Key Requirements of IFRS S2
IFRS S2 requires companies to disclose information in four main areas:
1. Governance – Who is Responsible for Climate-Related Decisions?
Companies must explain how climate-related risks and opportunities are managed at the highest level. They must disclose:
Which board members, committees, or executives oversee climate-related risks.
How often climate risks are discussed by senior management.
How climate-related issues influence business strategy and financial decision-making.
Whether the company has climate-related performance metrics linked to executive remuneration.
This section ensures that businesses are accountable and that climate risks are considered seriously at the leadership level.
2. Strategy – How Does Climate Change Affect the Business?
Companies must describe:
The specific climate risks they face (e.g., extreme weather, regulatory changes, shifting customer behaviour).
The opportunities climate change presents (e.g., investing in renewable energy, launching eco-friendly products).
The financial impact of climate-related risks on their revenues, costs, and investments.
Whether the company has a climate transition plan—a roadmap for shifting to a low-carbon economy.
This section ensures that businesses assess and plan for climate-related changes.
3. Risk Management – How Are Climate Risks Identified and Addressed?
Businesses must explain how they identify, assess, and manage climate-related risks. This includes:
How they monitor climate risks (e.g., using climate scenario analysis).
How these risks are prioritised relative to other business risks.
Whether climate risks are integrated into their overall risk management framework.
This section helps investors understand whether businesses are actively managing climate risks rather than waiting until a crisis occurs.
4. Metrics & Targets – How is Progress Measured?
Companies must provide specific numbers and targets related to climate risks. This includes:
Greenhouse gas emissions (GHG): Companies must disclose their emissions using the standard framework of:
Scope 1 emissions: Direct emissions from company operations (e.g., fuel burned by company vehicles).
Scope 2 emissions: Indirect emissions from purchased energy (e.g., electricity used in offices).
Scope 3 emissions: Indirect emissions from the value chain, including suppliers and customers.
Climate-related financial impacts: How climate risks affect costs, revenue, and long-term financial stability.
Targets and progress tracking: Any climate-related goals (e.g., achieving net-zero emissions by a certain year).
This section ensures that businesses track their performance and stay accountable.
Example: A Manufacturing Company and IFRS S2
To understand IFRS S2 better, let’s look at an example:
Imagine a car manufacturer that relies on steel and produces petrol-powered vehicles. Climate change could affect the company in several ways:
Risk: Governments introduce laws that ban petrol cars in 10 years, reducing demand.
Risk: Steel suppliers face extreme weather events, raising material costs.
Opportunity: The company invests in electric vehicle (EV) production, opening a new market.
Under IFRS S2, the company must disclose these risks and opportunities and explain how they are managing them.
How Does IFRS S2 Benefit Businesses?
Although IFRS S2 introduces new reporting requirements, it also provides significant benefits:
✅ Better risk management – Helps businesses prepare for and adapt to climate-related risks.
✅ Investor confidence – Transparent reporting attracts investors who prioritise sustainability.
✅ Competitive advantage – Companies that manage climate risks effectively gain a market edge.
✅ Regulatory alignment – Helps businesses comply with global climate disclosure rules.
Challenges in Implementing IFRS S2
Some businesses may find it challenging to comply with IFRS S2, especially if they have not tracked climate-related data before.
⚠️ Data collection difficulties – Especially for Scope 3 emissions, which depend on suppliers and customers.
⚠️ New reporting systems – Companies may need to invest in software and training.
⚠️ Strategic changes – Some industries may need to adjust their business models.
Despite these challenges, companies that start early will have an advantage.
Final Thoughts
IFRS S2 is not just another reporting requirement, it’s a step towards a sustainable and resilient business future. By implementing IFRS S2, companies can:
Manage climate risks more effectively.
Identify new opportunities in the low-carbon economy.
Build trust and credibility with investors, regulators, and customers.
As the world moves towards net-zero emissions, IFRS S2 will play a crucial role in shaping how companies operate and disclose their climate impact.
Join CIBA for a CPD on Sustainability Reporting S1 and S2 here.
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