Strategic Business Reporting (International) · Analysis and interpretation of financial and non-financial information and measurement of performance

ISSB IFRS S1 and S2 and ESG Reporting for SBR

Updated 11 October 2026 · Fact-checked

Sustainability reporting discloses social, environmental and governance risks and opportunities that affect a business. IFRS S1 sets general requirements for sustainability-related financial disclosures. IFRS S2 covers climate-related disclosures. To answer SBR questions, identify the issue, explain the disclosure requirement, apply it to the scenario, and assess the effect on performance and stakeholders.

Understand Sustainability, ESG and Environmental Reporting

Traditional financial statements show past financial results. Investors now also want to know how sustainability matters, such as climate change, labour practices and governance, could affect the entity's cash flows, access to finance and cost of capital. That is the idea behind ESG reporting: Environmental, Social and Governance.

The ISSB (International Sustainability Standards Board) sits under the IFRS Foundation. It issued IFRS S1 and IFRS S2. They aim to give investors and lenders a consistent, comparable global baseline of sustainability information. The focus is on matters that could reasonably be expected to affect the entity's prospects. This is a financial-materiality view, often called the investor lens.

IFRS S1 requires disclosure of sustainability-related risks and opportunities. It is organised around four content areas: governance, strategy, risk management and metrics and targets. Information should be connected to the financial statements and reported at the same time, for the same reporting entity. IFRS S2 applies the same four areas to climate. It covers physical risks, transition risks and climate-related opportunities. It also requires information on greenhouse gas emissions, and on how the entity assesses climate resilience of its strategy, including through scenario analysis.

Do not confuse this with integrated reporting. Integrated reporting is a broader framework from the IFRS Foundation (formerly the IIRC). It tells a concise story of how strategy, governance, performance and prospects create value over time through six capitals. Sustainability reporting under ISSB is a set of specific disclosure standards. Integrated reporting is a principles-based communication approach. Other regimes, such as GRI, use a wider impact lens, looking at the entity's effect on society and the environment. Mandatory use of ISSB standards depends on each jurisdiction's adoption.

For performance assessment, ESG matters can change how you read the numbers. Poor environmental controls may point to future fines, impairment of assets or provisions. Strong governance may lower risk. Beware greenwashing: claims that overstate sustainability credentials. Ethics and professional scepticism link directly to this.

Key rules to remember

IFRS S1 content areas: Governance + Strategy + Risk management + Metrics and targets; Use these four headings to structure any answer on what must be disclosed. IFRS S2 uses the same four for climate.
Climate risk types (IFRS S2): Climate risks = Physical risks + Transition risks; Physical: acute (storms, floods) or chronic (rising temperatures). Transition: policy, technology, market and reputation changes. Opportunities are disclosed as well.
Materiality test (ISSB): Material if omitting, misstating or obscuring could reasonably be expected to influence primary users' decisions; Primary users are investors, lenders and other creditors. This is the financial-materiality view.
Greenhouse gas scopes: Scope 1 = direct; Scope 2 = purchased energy; Scope 3 = other value-chain emissions; IFRS S2 requires disclosure of Scope 1, 2 and 3 emissions. Scope 3 is usually hardest to measure.
Integrated reporting capitals: Financial, Manufactured, Intellectual, Human, Social and relationship, Natural; Six capitals. Value creation is explained through how the entity uses and affects them.

How to solve Sustainability, ESG and Environmental Reporting questions

Use this method for any ESG, sustainability or integrated reporting requirement. It keeps your answer tied to the scenario and earns professional skills marks.

1Read the requirement and mark the verb: discuss, explain, advise, evaluate or assess. Note who the answer is for, such as a board or an investor.
2Identify the sustainability issue in the scenario: environmental, social or governance. Pick out the facts that matter, such as emissions, supply chain or board structure.
3State the relevant framework: IFRS S1 for general requirements, IFRS S2 for climate, or integrated reporting for the value story.
4Structure the disclosure points using governance, strategy, risk management, and metrics and targets. Apply each to the scenario facts.
5Link the issue to financial effects: cash flows, provisions, impairment, access to capital or going concern. Name the relevant IFRS Accounting Standard where it applies.
6Assess the effect on performance and stakeholders. Consider whether results or targets look reliable, and raise greenwashing or ethical concerns where the facts support it.
7Conclude with a clear recommendation or judgement. Keep the tone suited to the reader.

Quickest way: Four-box ESG answer plan

When to use it: Use it when you have under ten minutes for a discussion requirement and need a structure fast.

Draw four boxes: Governance, Strategy, Risk management, Metrics and targets.
Put one scenario fact in each box. Add the likely disclosure point beside it.
Add a fifth line: financial statement effect, such as a provision, impairment or cost of finance.
Write a short answer: one point per box, then the financial effect, then a one-line recommendation.

Common mistakes in Sustainability, ESG and Environmental Reporting

Treating IFRS S1 and S2 as accounting standards that change recognition and measurement.
The IFRS label suggests they work like IAS 37 or IFRS 15.
Fix: State that they set disclosure requirements for sustainability information. Recognition and measurement stays in the Accounting Standards.
Writing a generic list of ESG benefits with no link to the scenario.
Students memorise theory and do not read the facts closely.
Fix: Use at least one named fact from the scenario in every paragraph and say what it means for the entity.
Confusing integrated reporting with sustainability reporting.
Both deal with non-financial information.
Fix: Say that integrated reporting is a principles-based value-creation story using the capitals, while ISSB standards are specific disclosure requirements.
Ignoring the financial-materiality focus of ISSB.
Students assume all social and environmental impacts must be reported.
Fix: Explain that the focus is on risks and opportunities that could reasonably affect the entity's prospects, as seen by investors and lenders.
Not challenging the reliability of sustainability claims.
Students accept management's statements at face value.
Fix: Comment on greenwashing, lack of assurance, weak measurement and the ethical duty of the accountant to avoid misleading information.
Forgetting the conclusion and professional skills.
Time pressure leads to unfinished answers.
Fix: Finish with a clear judgement. Aim for scepticism, commercial awareness and clear communication throughout.

Worked examples

Example 1

Delta plc is a manufacturer with large coal-fired operations. Its board has no climate responsibility, and its annual report says only that it is 'committed to the environment'. An investor asks what IFRS S2 would require Delta to disclose and why it matters. Advise the investor.

Show the solution

Identify the issue: climate-related disclosure, which is the scope of IFRS S2. Delta's reliance on coal points to high transition risk.
Governance: Delta should disclose who oversees climate risks and opportunities. At present no board responsibility exists, which is a weakness.
Strategy: Delta should disclose the climate risks and opportunities that could affect its business model, outlook and cash flows. It should also explain how resilient its strategy is, including scenario analysis.
Risk management: Delta should explain how it identifies, assesses, prioritises and monitors climate risks, and how this is built into overall risk management.
Metrics and targets: Delta should disclose greenhouse gas emissions (Scope 1, 2 and 3) and any climate targets with progress against them.
Financial effect: coal assets may face impairment or shorter lives, carbon costs may rise, and finance may become costlier or harder to obtain. These affect the performance and valuation the investor is assessing.
Conclude: the current statement is vague and not decision-useful. The investor should view Delta as higher risk until it discloses specific, connected information.

Answer: IFRS S2 would require Delta to disclose climate governance, strategy and resilience, risk management, and metrics and targets including emissions. This matters because Delta's coal exposure could affect asset values, costs and financing. The present vague statement gives the investor little to rely on.

Example 2

Echo Ltd publishes both a sustainability report and an integrated report. The finance director says they are the same thing. Explain the differences to the board and comment on one risk in the sustainability report, which claims the company is 'carbon neutral' without any supporting data.

Show the solution

Define sustainability reporting: it discloses sustainability-related risks and opportunities. Under ISSB, the focus is on information useful to investors and lenders, set out in specific disclosure standards.
Define integrated reporting: it is a concise communication of how strategy, governance, performance and prospects lead to value creation over time, using the six capitals.
Contrast the two. Sustainability reporting under ISSB is a set of requirements and is detailed on metrics. Integrated reporting is principles-based and focuses on connectivity and the long-term story.
Note that they are complementary. A sustainability report can feed the integrated report, and the integrated report shows how sustainability links to strategy and financial results.
Comment on the risk: a 'carbon neutral' claim with no data or method could be greenwashing. It could mislead users, damage reputation and may breach regulations or the duty not to be associated with misleading information.
Recommend: Echo should disclose the emissions measured, the method, any offsets used and the scope covered. It should also consider external assurance.

Answer: The two are not the same. Sustainability reporting is a more detailed set of disclosures on risks, opportunities and metrics. Integrated reporting is a broader value-creation story based on the capitals. Echo's unsupported 'carbon neutral' claim risks greenwashing and should be backed by measured data, method and assurance.

Exam tips

Always tie the standard to scenario facts. A recital of S1 or S2 with no application scores poorly.
Use the four headings (governance, strategy, risk management, metrics and targets) as your answer skeleton. It saves thinking time.
Expect ESG to appear alongside another issue, such as impairment, provisions or ethics. Link the ESG point to the accounting effect.
Where management makes sustainability claims, show scepticism. Comment on reliability, assurance and greenwashing.
Keep the reader in mind. A board, an investor and a regulator each need different emphasis and tone.

Practice questions from Analysis and interpretation of financial and non-financial information and measurement of performance

Sustainability, ESG and Environmental Reporting in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Sustainability, ESG and Environmental Reporting: frequently asked questions

What is the difference between IFRS S1 and IFRS S2?

IFRS S1 sets the general requirements for disclosing sustainability-related risks and opportunities. IFRS S2 deals specifically with climate-related disclosures. Both use the four areas of governance, strategy, risk management, and metrics and targets.

How is sustainability reporting different from integrated reporting?

Sustainability reporting under ISSB gives specific, investor-focused disclosures on sustainability risks and opportunities. Integrated reporting is a principles-based report on how the entity creates value over time using the six capitals. They can work together.

How do I answer an ESG question in SBR?

Identify the issue, name the relevant framework, and apply the four content areas to the scenario facts. Then explain the effect on performance, stakeholders and the financial statements. End with a clear recommendation.

Do ISSB standards apply to every company?

No. Whether they are mandatory depends on whether a jurisdiction has adopted them or required their use. In the exam, read the scenario to see what the entity is required or choosing to do.