Key Considerations for an Entity to Report under IFRS S1 and IFRS S2

-CA Amrita Thapa

The author is member of ICAN, currently serving as an Assistant Director at ICAN. She can be reached at: amrita.thapa@ican.org.np

Abstract:

Sustainability reporting under IFRS S1 and IFRS S2 is an investor focused sustainability reporting framework that provides decision useful information about an entity’s sustainability-related risk and opportunities that enable investors to assess the entity’s ability to generate cash flows over the short, medium and long term. IFRS S1 and IFRS S2 are being adopted across a number of jurisdictions worldwide, and their relevance has further increased following endorsement by the International Organization of Securities Commissions (IOSCO). Nepal is also in the process of developing Sustainability Standards based on IFRS S1 and IFRS S2. Accordingly, entities should prepare their sustainability reports in line with these international sustainability disclosure standards. This article aims to provide a brief synopsis of roadmap the reporting entity may adopt to implement sustainability disclosure standards. The key considerations under IFRS S1 and IFRS S2 to be compiled by reporting entities especially under the matric and target and Greenhouse Gas GHG emission reporting are summarized and presented in the article.

Key Words: Sustainability, Sustainability Disclosure Standards, IFRS S1, IFRS S2, Green House Gas Emissions, SASB, PCAF

Background

The International Sustainability Standards Board (ISSB) issued Sustainability Disclosure Standards IFRS S1: General Requirements for Disclosure of Sustainability Related Financial Information and IFRS S2: Climate Related Disclosure in June 2023 as the first globally unified baseline for sustainability disclosure aimed at investors and capital markets. Internationally, the IFRS S1 and IFRS S2 are effective for implementation for annual reporting period beginning on or after 1^st January 2024.

It is seen that as of June 2026, 36 jurisdictions have either adopted or were finalizing the implementation of IFRS S1 and IFRS S2 into their regulatory framework. 19 jurisdictions have formally announced or finalized their decisions on the adoption or other use of ISSB Standard, and 17 jurisdictions have taken steps towards considering adoption or other use of ISSB Standards including Nepal.

In South Asian Region, the IFRS S1 and IFRS S2 are already being implemented in Sri Lanka, Bangladesh and Pakistan. In context of Nepal, the Accounting Standards Board (ASB) Nepal issued exposure draft of NFRS S1 and NFRS S2 which are fully aligned with IFRS S1 and S2 in April 2026 for public consultation. And, the Sustainability Standards shall be pronounced by the Institute of Chartered Accountants of Nepal (ICAN) once finalized by ASB, Nepal. However, the implementation strategy, including the determination of industries for initial implementation and application of transitional relief, will be developed through coordinated efforts among Securities Board of Nepal (SEBON), Office of Company Registrar (OCR), ICAN, ASB, Nepal, Nepal Rastra Bank (NRB), Nepal Insurance Authority (NIA) and other regulators.

Consequently, the entities in Nepal will be expected to comply with the reporting requirements under sustainability disclosure standards. Key steps involved in adopting these standards are outlined below:

Sustainability Reporting Implementation Roadmap

Phase 1: Governance and Organizational Set-up

Entities required to prepare sustainability disclosures in accordance with IFRS S1 and IFRS S2 should not regard sustainability reporting as a standalone exercise or merely a regulatory compliance obligation. Effective implementation of these standards requires a coordinated, organization-wide effort involving multiple functions and levels of management, rather than reliance on a single department or individual. Accordingly, the first step in adopting sustainability reporting standards is to establish an appropriate governance framework and organizational structure to oversee and support the sustainability reporting process. Hence the entity shall establish an oversight structure and set up such as:

1. Board level Committee to oversee sustainability related policy matters
2. Management level Committee to oversee sustainability related operational matters
3. Management level Officials / Division to execute sustainability related activities
4. Facilitation of cross functional resource sharing
5. Defining the reporting scope and limitation (IFRS S1 Para. 20, requires the entity’s sustainability related financial disclosure shall be for the same reporting entity as the related financial statements.). Hence, the entity (with subsidiaries, JV. etc.) should consider setting scope and limitation under sustainability reporting requirements

Phase 2: Materiality Assessment

IFRS S1 Para. 17, requires an entity to disclose material information about sustainability related risk and opportunities. Whereby, information are material if omitting, misstating or obscuring it could reasonably be expected to influence investors’ decisions. Likewise, materiality is entity specific and it depends on the nature and magnitude of information relative to the entity’s circumstances.

Unlike other sustainability reporting frameworks that focus on dual materiality, IFRS S1 and IFRS S2 are more investor focused and consider only single materiality i.e. financial materiality, which focuses on how sustainability factors affect an entity’s financial performance and position over time. Therefore, the reporting entity shall carefully consider this while assessing materiality. The differences are summarized below:

Concept	Framework	Perspective	Focus
Financial Materiality	IFRS S1 and IFRS S2	Outside – in	Impact of sustainability (environment, social, economy) on the Company.
Impact Materiality	Global Reporting Initiative (GRI)	Inside-out	Impact of Company on sustainability (environment, social, economy).
Dual Materiality	European Sustainability Reporting Standards (ESRS)	Both	Impact of sustainability on Company and Impact of Company on Sustainability

 

KPMG's implementation guide recommends a six-step materiality process (KPMG, Guide to Sustainability Reporting, 2025):

1. map impacts and dependencies across the value chain
2. identify potentially relevant sustainability related risk and opportunities
3. determine which sustainability related risk and opportunities could affect cash flows or cost of capital or access to capital
4. identify potentially material information by applying IFRS S2 and SASB Standards
5. determine material information by assessing decision-relevance for primary user
6. validate conclusions through the Board or a Sustainability Committee of the entity.

Besides, the SASB standards state the sustainability topics that are considered financially material for the specific industry. Also, an entity can use the SASB Standards Materiality Finder to identify financial material sustainability topic relevant to their industry.

Phase 3: Reporting under Four Core Content

Four Core Contents (Pillars) at a Glance

1. Governance

Under Governance disclosure, entity needs to disclose about entity’s process, controls and procedure used to monitor and manage Sustainability and Climate Related Risk and Opportunities. It shall disclose information about board level oversight and management level roles.

1. Board level disclosure shall include following:

• How are Board’s responsibilities relating to sustainability-related risks and opportunities
• incorporated into Board’s terms of reference and mandates.
• How the Board ensures that appropriate skills and competencies are available to oversee sustainability-related matters
• How frequently, and through what mechanisms, the Board is informed about sustainability-related risks and opportunities
• How sustainability-related risks and opportunities are considered in major business transactions
• How executive remuneration is connected to sustainability-related targets

1. Management level disclosure shall include following:

• Whether oversight responsibility has been delegated to a specific position or committee
• How management applies controls and procedures to support such oversight.

1. Strategy

Under Strategic disclosure, entity shall disclose its approach to manage sustainability related risk and opportunities. Reporting Entity shall specifically report following:

• How sustainability related risk and opportunities affect their business model and value chain and how they plan to respond to it
• What is the entity's strategic response and progress against previously disclosed plans
• What are the financial effects on entity’s position, performance, and cash flows
• What is the resilience of the strategy assessed through scenario analysis

• Scenario Analysis

Entity is also required to disclose about how the entity uses scenario analysis to inform its identification of sustainability related risk.  IFRS S2 para 22, requires entity to use climate-related scenario analysis to assess its climate resilience using an approach that is commensurate with the entity’s circumstances.

• Time Horizon

IFRS S1 para 38-40, requires entity to disclose identified sustainability related risk and opportunities and their expected time horizons (short, medium and long term) and their current and anticipated effects on the business model and link them with strategic planning.

1. Risk Management

Under Risk Management, entity shall disclose its process to identify, assess, prioritize and monitor sustainability-related risks and opportunities. Reporting Entity shall specifically report following:

• How entity describe the inputs and parameters used in risk identification
• How scenario analysis informs risk identification
• How risks are assessed for nature, likelihood, and magnitude
• How sustainability related risk and opportunities are prioritized relative to other types of risk
• How sustainability risk management processes are integrated into the entity's overall enterprise risk management framework.

1. Metrics and Targets

Under Metrics and Targets, an entity shall disclose its performance and targets in relation to sustainability-related risks and opportunities, either set by entity itself or mandated by laws and regulations. Reporting Entity shall specifically report following:

 

1. Cross Industry Metrics

Under IFRS S2 para. 29, entities are required to report under following six cross industry metrics:

1. absolute gross GHG emissions by Scope 1, 2, and 3
2. assets vulnerable to transition risks
3. assets vulnerable to physical risks
4. assets aligned with climate opportunities
5. capital deployed toward climate-related risks and opportunities
6. internal carbon price

1. Industry Specific Disclosure under SASB Standards

IFRS S1 para 55, requires an entity to consider the applicability of Sustainability Accounting Standards Board (SASB) Standards while identifying sustainability related risk and opportunities. Currently, there are 77 industry-specific SASB Standards organized under the Sustainable Industry Classification System (SICS). An entity may conclude that certain SASB topics or metrics are not applicable, but this conclusion must rest on a documented materiality judgment of the entity.

1. Setting Targets and Reporting Performance: GHG Emissions Disclosure

Entity shall disclose the quantitative and qualitative targets under each metric. The actual performance and basis for measurement, judgments and revision in initial estimates shall also be disclosed along with metrics and targets.

GHG Emission Disclosure is among the most technically demanding requirements under IFRS S2.  Entities are required to disclose their absolute gross greenhouse gas (GHG) emissions across all three scopes, expressed in metric tons of carbon dioxide equivalent (CO₂e), using the GHG Protocol unless an alternative method is mandated by the relevant jurisdictional authority.

1. Scope 1: Direct Emission from source owned or controlled by the entity

• Example: Emission from fuel consumed in operation / manufacturing, fugitive emissions, chemical processing, etc.
• Measurement Basis: The emission factors for scope 1 emission are generally same worldwide.

1. Scope 2: Indirect Energy Emissions

• Example: Emissions from purchased electricity,  steam, heating or cooling.
• Measurement Basis: the emission factor for scope 2 emission varies on jurisdiction based on composition of energy source

1. Scope 3: Value Chain Emissions (Upstream and Downstream Category)

• Example: Emission from all other indirect emissions across the entity's entire value chain, measured across 15 categories defined in the GHG Protocol Corporate Value Chain (Scope 3).
• Measurement Basis: Scope 3 emission is generally largest component of entity’s GHG footprint and most difficult to measure, often requiring estimation using proxies and secondary data. Scope 3 emission is measured under following 15 categories.

The 15 Scope 3 GHG Categories

Upstream Category	Downstream Category
Purchased goods and services	9. Downstream transportation & distribution
Capital goods	10. Processing of sold products
Fuel & energy-related activities	11. Use of sold products
Upstream transportation & distribution	12. End-of-life treatment of sold products
Waste generated in operations	13. Downstream leased assets
Business travel	14. Franchises
Employee commuting	15. Investments (financed / facilitated / associated emissions)
Upstream leased assets

Source: Greenhouse Gas Protocol. (2011). Corporate value chain (Scope 3) accounting and reporting standard. World Resources Institute & World Business Council for Sustainable Development. https://ghgprotocol.org/standards/scope-3-standard

 

Among these, category 15 (Investments) is specifically relevant for Banks and Financial Institutions, which are required to report emissions under this category using the Partnership for Carbon Accounting Financials (PCAF) standards. PCAF provide methodologies to report GHG emission under the following three categories:

• Financed Emission: GHG emissions attributed to loans and investments. Calculated as emissions of borrowers and investees, weighted by the bank's share of outstanding debt or equity
• Facilitated Emissions: GHG emissions enabled by capital market transactions such as equity or debt underwriting. They are reported separately from financed emission.
• Insurance Associated Emissions: GHG emissions linked to underwritten insurance policies, weighted by the insurer's share of the total insured value

Phase 4: Drafting of Sustainability Reporting

Every entity is required to develop a sustainability report based on above four contents. The sustainability disclosure report shall be clear and concise and should not unnecessarily be made lengthy. Entity shall avoid general information that is not specific to industry and duplication. Following are the major considerations while drafting the sustainability disclosure reports by an entity:

1. Qualitative Characteristics:

IFRS S1 (Appendix D: Qualitative characteristics of useful sustainability related financial information) states for sustainability-related financial information to be useful, it must be relevant and faithfully represent what it purports to represent. While the usefulness of sustainability-related financial information is enhanced if the information is comparable, verifiable, timely and understandable. Hence, the sustainability reports shall be:

• Relevant: Information capable of making a difference in the decisions made by primary users.
• Material: Material Information shall be disclosed.
• Faithful Representation: Information must be complete neutral and accurate.
• Comparable: Information should be comparable by entity in previous period and with other entities operating within same industry.
• Verifiable: Verifiable information gives confidence to user that the report is complete, neutral and accurate.
• Timeliness: Information shall be provided on timely manner to users.
• Understandable: Sustainability information shall be understandable to the users, it should be prepared using clear language and should be clearly structured.

1. Quantitative Disclosure

Entities are required to disclose Quantitative information about financial effects to the extent possible. However, if measurement uncertainty is excessively high or the effects cannot be separately identified, qualitative disclosures may be provided instead, along with an explanation for why quantitative information has been omitted.

1. Statement of Compliance

Entities are required to make an explicit and unreserved statement of compliance when they have met all the requirements of IFRS Sustainability Disclosure Standards. However, entities are not required to disclose information prohibited from disclosure by laws and regulations of the jurisdictions and commercially sensitive information about a sustainability-related opportunity.

1. Transition Relief for First Time Adoption

IFRS S1 and IFRS S2 recognize the practical challenges of first-time implementation and provide following transition relief to the reporting entity:

Relief	Standard Reference	Description
Climate- First Reporting	IFRS S1, para E5	In the first year, an entity may limit disclosures to climate-related matters only, deferring other sustainability topics covered by IFRS S1
Timing of Reporting	IFRS S1 para E4	In the first annual reporting period, the entity is permitted to report its sustainability-related financial disclosures after it publishes its related financial statements.
No comparative information	IFRS S2, para C3	No comparative period data is required in the first annual reporting period
Scope 3 deferral	IFRS S2, para C4(b)	Entities need not disclose Scope 3 GHG emissions in the first annual reporting period
Alternative GHG method	IFRS S2, para C4(a)	Entities may continue using a non-GHG Protocol method (other than Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004)) if used in the immediately preceding reporting period

In addition to above transaction relief, the jurisdiction can allow extended relief to the reporting entities. Entities are required to disclose in their basis of preparation about all relief applied during the reporting period.

1. Can be Prepared in Conjunction with any Accounting Requirements

IFRS S1 Para 8, states that the sustainability disclosure standards can be used by all entities irrespective of entities financial reporting framework i.e. either IFRS based or Generally Accepted Accounting Principles or Practices (GAAP).

1. Other Reporting Requirement as per Jurisdiction

Entity shall incorporate other reporting requirements under their respective jurisdiction besides the disclosure required under IFRS S1 and IFRS S2.

Phase 5: Internal Review and Risk Assessment

The reliability of sustainability disclosure depends on robust internal control system in place within an entity. An entity should establish a structured governance and management framework over the sustainability reporting process. Hence, the entity may undertake the following actions:

• Management shall develop policies for selecting material sustainability related information, data source relied for GHG emission calculations, basis for estimation used, etc.
• Management shall adequately assess risk associated with the control system and control environment affecting sustainability reporting.
• Limitation on reporting shall be disclosed appropriately.
• Governance and Management shall develop processes, controls, and procedures used to oversee sustainability-related risks and disclosures.
• Internal audits shall assess the design and effectiveness of control over data collection, calculation and reporting.
• The Audit Committee and Risk Management Committee shall review key judgements, and material estimates while preparing sustainability reports.

Phase 6: External Assurance and Board Approval

IFRS S1 and IFRS S2 do not mandate external assurance of sustainability disclosure. However, it defines verifiability as one of the enhancing qualitative characteristics of useful sustainability information. Appendix D of IFRS S1 states that sustainability reporting is more useful when various knowledgeable and independent observers could reach the same conclusion that the depiction is a faithful representation. Some jurisdictions are also introducing mandatory and voluntary assurance requirements alongside adaptation of these standards.

Besides, the International Auditing and Assurance Standards Board (IAASB) has already issued following assurance standards related to sustainability reporting:

• International Standards on Assurance Engagements (ISAEs) 3410 – Assurance Engagements on Greenhouse Gas Statements, effective from GHG assurance report from 30 September 2013.
• International Standard on Sustainability Assurance (ISSA) 5000 – General Requirements for Sustainability Assurance Engagements, effective for sustainability reporting assurance report from 15 December 2026.

Similarly, Board of Director’s approval on sustainability reporting strengthens its accountability and supports investors confidence. Some jurisdiction has also mandated sustainability disclosure to be included in the Director’s Repot or management observation.

Hence, the reporting entities are required to adequately document their sustainability related workings, basis for preparation, key judgements on materiality, source of guidance and data used to report emissions etc. which will assist them in obtaining board’s approval as well as obtaining external assurance. Moreover, they can engage external assurance providers during early stage of reporting specially in GHG emissions data and financed emissions data calculations (in case of banks and insurance companies).

Phase 7: Publication of Sustainability Report

The approved sustainability report shall be published for information of public.  IFRS S1 (para 64.) requires sustainability related financial disclosures to be published at the same time and for same reporting period as the entity’s financial statements. This alignment ensures consistent financial and sustainability information at the same time to facilitate investors decision making.

Hence, the reporting entity will have following three options:

• Option 1: Integrated within annual report - Sustainability disclosures appear throughout the annual report or in a dedicated sustainability section.
• Option 2: Standalone sustainability report - Published as a separate document but cross-referenced from the annual report and financial statements.
• Option 3: Combination approach - Core disclosures appear in the annual report while supplementary details such as GHG methodology, SASB metrics, or data appendices are provided in a separate sustainability report or online.

In all three options the Board will have same level of responsibility. And sustainability reporting shall have clear cross reference and connectivity with financial statements. Sustainability disclosures must be clearly identifiable and not obscured by other information

Conclusion:

Sustainability Disclosure Standards and related reporting requirements are designed to encourage sustainable business practices and support the global objective of limiting climate change to 1.5°C above pre-industrial levels. Businesses should not view sustainability reporting as merely a compliance exercise. The effective implementation and intended outcomes of such reporting cannot be achieved unless businesses adopt sustainable practices that contribute to global sustainability.

Implementation of IFRS S1 and IFRS S2 requires a systematic, organization wide effort that spans governance oversight, strategy integration, risk consideration, data collection, system design, cross functional coordination and multi-disciplinary participation. A well-prepared sustainability disclosure report is a strategic communication of an entity that demonstrates resilience, builds investor confidence, and supports long-term value creation. In context of Nepal, an entity shall develop a structure and invest in system development and data collection to build assurance readiness from the initial stage and enhance the accountability of sustainability reporting.

Reference:

IFRS Foundation (2023, amended 2025). IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information. ISSB. Available at: https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ifrs-s1-general-requirements.html

IFRS Foundation (2023, amended 2025). IFRS S2 Climate-related Disclosures. ISSB. Available at: https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ifrs-s2-climate-related-disclosures.html

IFRS Foundation (2025). SASB Sustainability Accounting Standard

• Commercial Banks (FN-CB), Version 2025-12. ISSB. Available at: https://www.ifrs.org/issued-standards/sasb-standards/
• Insurance (FN-IN), Version 2025-12. ISSB
• Electric Utilities & Power Generators (IF-EU), Version 2023-12. ISSB.
• Construction Materials (EM-CM), Version 2023-12. ISSB.

IFRS Foundation. SASB Standards Navigator (Materiality Map). Available at: https://navigator.sasb.ifrs.org/sector/FN/industry/FN-CB

IFRS Foundation. (June 2026.). Use of IFRS Sustainability Disclosure Standards by jurisdiction. IFRS Foundation. https://www.ifrs.org/ifrs-sustainability-disclosure-standards-around-the-world/use-by-jurisdiction/

KPMG IFRG Limited (2025). IFRS Sustainability Disclosure Standards: Guide to Sustainability Reporting (October 2025 edition). Available at: https://assets.kpmg.com/content/dam/kpmgsites/xx/pdf/ifrg/2025/isg-2025-issb-ifs.pdf

EY Global (2025). Applying IFRS: Introduction to IFRS S1 and IFRS S2 (June 2025 update). Available at: https://www.ey.com/content/dam/ey-unified-site/ey-com/en-gl/technical/ifrs-technical-resources/documents/ey-gl-applying-ifrs-introduction-to-ifrs-s1-s2-updated-06-2025.pdf

PCAF (2022). Global GHG Accounting and Reporting Standard for the Financial Industry: Parts A, B, and C. Partnership for Carbon Accounting Financials. Available at: https://carbonaccountingfinancials.com