IFRS S2: What It Is and How to Implement It

TL;DR

IFRS S2 is the global standard for climate-related financial disclosures. It requires companies to report how climate risks and opportunities affect their financial performance, strategy, and resilience using a structured four-pillar framework (governance, strategy, risk management, metrics & targets). Focused specifically on climate change, IFRS S2 builds on TCFD and complements IFRS S1. As climate regulation accelerates worldwide, early adoption helps companies strengthen credibility, manage risk, and attract capital.

What Is IFRS S2?

IFRS S2 (Climate-related Disclosures) is a sustainability reporting standard issued by the International Sustainability Standards Board (ISSB). It is part of the IFRS Sustainability Disclosure Standards and is designed to provide investors with consistent, comparable, and decision-useful information about climate-related risks and opportunities.

While IFRS S1 covers all sustainability topics that may affect enterprise value, IFRS S2 focuses exclusively on climate change, including both physical and transition risks, as well as climate-related opportunities.

In practical terms, IFRS S2 asks companies to explain:

• How climate change could affect their cash flows, access to finance, and cost of capital

• How resilient their strategy is under different climate scenarios

• How climate risks are identified, managed, and measured over time

Rather than treating climate as a standalone ESG topic, IFRS S2 embeds it directly into financial and strategic decision-making.

Scope and Structure of IFRS S2

IFRS S2 follows the same four-pillar structure as IFRS S1 and the TCFD framework, making it familiar to many organizations already reporting on climate.

Unlike voluntary climate reporting, IFRS S2 introduces greater rigor, consistency, and financial linkage, aligning climate disclosures with core financial reporting expectations.

Climate Risks and Opportunities Under IFRS S2

A central element of IFRS S2 is the distinction between different types of climate-related impacts.

Physical Risks

These relate to the direct impacts of climate change, such as:

• Extreme weather events (floods, heatwaves, storms)

• Chronic changes (rising temperatures, sea-level rise, water stress)

Companies must assess how these risks could disrupt operations, supply chains, assets, or customer demand.

Transition Risks

These arise from the shift to a low-carbon economy, including:

• Regulatory changes (carbon pricing, emissions limits)

• Market shifts (changing customer preferences)

• Technology disruption

• Legal and reputational risks

Transition risks often affect costs, competitiveness, and long-term profitability.

Climate-Related Opportunities

IFRS S2 also requires disclosure of opportunities, such as:

• Low-carbon products and services

• Energy efficiency improvements

• Access to sustainable finance

• Innovation driven by climate transition

This balanced view helps investors understand both downside risk and potential upside.

Metrics, Targets, and Emissions Reporting

One of the most operationally demanding aspects of IFRS S2 is its emphasis on quantitative climate metrics.

Companies are expected to disclose:

• Scope 1 and Scope 2 greenhouse gas emissions

• Scope 3 emissions, where material

• Climate-related targets (e.g. net-zero commitments)

• Progress against those targets

• Use of carbon credits or offsets, where applicable

IFRS S2 references established methodologies such as the GHG Protocol for emissions accounting and encourages consistency with other climate disclosures.

Importantly, metrics must be decision-useful, reliable, and connected to financial outcomes, not just sustainability narratives.

Scenario Analysis and Climate Resilience

A defining feature of IFRS S2 is the requirement for climate-related scenario analysis.

Companies must assess how resilient their strategy is under different climate scenarios, including:

• A 1.5°C or well-below 2°C transition scenario

• Scenarios with higher physical climate risks

The goal is not to predict the future, but to:

• Identify vulnerabilities

• Stress-test business models

• Inform strategic planning and capital allocation

For many companies, this represents a major shift, from backward-looking reporting to forward-looking risk assessment.

Why IFRS S2 Matters Now

Climate risk is increasingly recognized as financial risk, and IFRS S2 formalizes this connection.

Here’s why companies should act now:

Early adoption allows companies to shape their narrative proactively rather than respond defensively to regulatory pressure.

How IFRS S2 Works with IFRS S1

IFRS S2 does not stand alone. It is designed to be applied together with IFRS S1.

• IFRS S1 defines what sustainability information is financially material

• IFRS S2 provides detailed guidance on how to report climate-related information

In practice:

• Climate-related disclosures under IFRS S2 feed directly into the broader sustainability context required by IFRS S1

• Financial impacts of climate risks must be consistent across sustainability and financial statements

Together, they create a coherent, investor-focused sustainability reporting system.

How to Implement IFRS S2

A practical, phased approach helps reduce complexity:

Step 1: Identify Climate-Related Risks and Opportunities
Assess physical and transition risks across operations and value chain.

Step 2: Measure Emissions and Climate Metrics
Establish Scope 1, 2, and relevant Scope 3 baselines using recognized methodologies.

Step 3: Conduct Scenario Analysis
Evaluate resilience under multiple climate pathways.

Step 4: Integrate Climate into Risk Management
Align climate risks with enterprise risk management and financial planning.

Step 5: Define Targets and Transition Plans
Set credible climate targets and document how they will be achieved.

Step 6: Prepare Governance and Controls
Ensure board oversight, management accountability, and audit-ready data.

Common Challenges

Many companies encounter difficulties along the way of implementing IFRS S2. Here are some of the most common challenges and practical tips for addressing them.

Pro tip: IFRS S2 implementation is not about perfection on day one. Investors value transparency, assumptions, and progress over time.

IFRS S2 transforms climate reporting from a sustainability exercise into a core component of financial risk management and strategic planning. By requiring structured, forward-looking, and financially relevant disclosures, it helps companies—and investors—better understand how climate change will shape long-term value.

Companies that start early will be better equipped to manage climate risk, attract capital, and remain competitive in an economy defined by climate transition.

Getting ready to prepare your IFRS sustainability disclosure? Check out ECO-OS's ESG Manager's IFRS Survival Guide for a printable calendar and checklists to keep you on track throughout the year.