Wind turbines in a field with bales of straw

ISSB issues IFRS S2 new climate-related disclosure standard

IFRS S2 is the ISSB’s first topic-based Standard, requiring entities to provide information about climate-related risks and opportunities.

In brief

  • IFRS S2 requires companies to have plans that disclose physical and transition risks and their potential impact on the move towards a low carbon economy.
  • Companies will need to use scenario analysis to understand how resilient they are in the face of uncertainty and risk.
  • Companies could face challenges in meeting Scope 3 greenhouse emissions disclosure requirements for which the ISSB has provided temporary relief.

The International Sustainability Standards Board (ISSB) has just published its first two standards, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures, in June 2023. Read our article on IFRS S1. The objective of IFRS S2 is to require companies to disclose information about their climate-related risks and opportunities that is useful to investors. Like IFRS S1, the requirements of IFRS S2 are structured around four core elements: governance, strategy, risk management and metrics and targets. The ISSB has set the implementation date for IFRS S2 for annual reporting periods beginning on or after 1 January 2024. However, the effective date in each jurisdiction will depend on the local legislation. The ISSB has also confirmed that it will permit companies to adopt the standard earlier than the effective date, provided that they disclose that they are early adopters and they also apply IFRS S1 at the same time.

This article highlights some strategic considerations for board members and senior executives as they provide oversight on the company’s initial plans to adopt the standard.

Develop a robust transition plan

IFRS S2 distinguishes climate-related risks the following ways:

  • Physical risks
    • Event-driven or acute risks
    • Longer-term shifts or chronic risks
  • Transition risks (those associated with moving to a lower-carbon economy)

Transition risks may expose a company to various degrees of financial and reputational risk depending on the nature, speed and focus of the risks associated with moving to a lower-carbon economy. In a world focused on reducing carbon emissions, as governments increasingly commit to transitioning towards lower-carbon economies, companies are recognizing the importance of developing transition plans as a key part of their overall strategy. IFRS S2 incorporates many specific disclosure requirements regarding transition plans, with the overall goal of enabling primary users to understand the impact of climate-related risks and opportunities on a company's strategy and decision-making. This could prove useful, for example, when a company needs to explain whether a climate-related risk it has identified is physical or transitional in nature. In addition, companies will also have to disclose the amount and percentage of their assets or business activities that are vulnerable to transition risks specifically. For companies that have already developed a transition plan, IFRS S2 requires them to disclose key information about:

  • Critical assumptions and/or dependencies that they identified when developing their transition plan; and
  • How they are resourcing, or plan to resource, the activities outlined in their transition plans.

It’s important to remember that a transition plan is different from a long-term goal; it needs to be sufficiently detailed so as to clearly illustrate the company’s overall strategy for how it plans to transition towards a lower-carbon economy, as well as setting out specific targets and actions about how it plans to transition, i.e., reducing its greenhouse gas emissions.

The use of scenario analysis to enhance resilience

Given the requirements of IFRS S2, investors will have access to a much broader spectrum of information about a company and its climate related risks and opportunities that will help them to understand and adjust to uncertainty related to climate change. Specifically, IFRS 2 requires companies to explain the resilience of their strategy and business model to both physical and transition risks and opportunities. To achieve this, IFRS S2 mandates that companies conduct climate-related scenario analysis to evaluate their climate resilience. This analysis should use a suitable method, appropriate for their circumstances considering their exposure to climate-related risks and opportunities, as well as the skills, capabilities and resources that are available at the time of reporting. Companies will have to determine their approach to climate-related scenario analysis based on all reasonable and supportable information that is available without undue cost or effort and take into account both the choice of inputs and the analytical decisions made when conducting the analysis.

The disclosure requirements cover the core elements of governance, strategy, risk management and metrics and targets, including, for example, whether, and how, the company uses climate-related scenario analysis to inform the identification of climate-related risks and/or opportunities.

Performing scenario analysis will help companies better understand the resilience of their strategy and business model to climate-related changes, developments or uncertainties. The results of that scenario analysis will, in turn, give companies deeper insight into how they can fine-tune their overall strategy and business model in order to enhance risk management procedures that are fit to tackle the climate change challenges. In practice, this will likely be an iterative process, the success of which requires appropriate oversight as well as collaboration across multiple different business functions.

Focus on the value chain to reduce greenhouse gas emissions

The reduction of greenhouse gas (GHG) emissions into the atmosphere, including those from carbon dioxide and other gases, is a critical component of climate change mitigation efforts. IFRS S2 specifically requires companies to disclose the absolute gross GHG emissions they generated during the reporting period. The GHG emissions are generally measured in accordance with the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004) (the GHG Protocol). However, in recognition of the scale of this undertaking for all companies required to comply, IFRS S2 does give some flexibility the use of the GHG Protocol when it comes to aligning the GHG measurement approach with it. For example, if a jurisdictional authority requires companies to use a different method to measure its GHG emissions, IFRS S2 will allow to use this alternative method. Moreover, during the first annual reporting period in which a company applies IFRS S2, it can continue using a measurement method other than the GHG Protocol to measure its greenhouse gas emissions, if it had used an alternative approach in the annual reporting period immediately preceding the date of initial application of the standard.

A closer look at the scope of the GHG disclosure requirements shows that they cover different types of emissions, including:

  • Scope 1 direct greenhouse gas emissions that occur from sources that are owned or controlled by a company;
  • Scope 2 indirect greenhouse gas emissions that occur from the generation of purchased electricity, heat or steam consumed by a company ; and
  • Scope 3 indirect emissions outside Scope 2 GHG emissions that occur in the value chain of a company, including both upstream and downstream emissions.

Given that the complexity of the Scope 3 disclosure which captures GHG emissions along a company’s value chain which, historically, has presented a number of challenges for companies in terms of data quality and its collection, the standard provides a temporary transition relief. The relief permits companies not to disclose Scope 3 GHG emissions in the first year that they apply the standard. The ISSB acknowledges that companies may not always be able to effectively influence their Scope 3 emissions, especially in the short term. 

Businesses will need to proactively engage with stakeholders across their entire value chain and work together to ensure that proper systems and controls are in place to support their disclosures. Moreover, to achieve any Scope 3 emission targets in the future, companies will likely already need to carefully evaluate what products they would like to offer in the long term and how they are designed, manufactured and delivered to customers along the value chain.


IFRS S2 is the first topic-based standard finalised by the ISSB. It lays the foundation of a global baseline on sustainability reporting related to climate change for those using financial reports. This standard will also help facilitate greater understanding within companies across all sectors when it comes to the impact of global warming and other climate issues, change their behavior collectively and transition to a net-zero economy sooner.


The issue of IFRS S2 requires companies to act now to put comprehensive plans in place to disclose climate-related information on how they will transition to a low carbon economy. As part of this approach, the use of climate-related scenario analysis will help companies to test the resilience of their business model and strategy in the face of change and uncertainty. They also need to look at their entire value chains to get ready to comply with the Greenhouse Gas Protocol and set and measure their targets for reducing greenhouse gas emissions.

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