UPDATED: 27/10/23

With the effects of climate change becoming more and more prevalent, investors and financiers around the world are calling on organisations, companies, and other large entities to assess the effects of climate change on their future cash-flows, operations, and strategic decision-making. 

To this end, in June 2023, the International Sustainability Board (ISSB), a subset of the International Accounting Standards Board (IASB), released the first two IFRS Sustainability Disclosure Standards: 

  • IFRS S1 (for the disclosure of sustainability-related information); and 
  • IFRS S2 (for the disclosure of climate-related information), 
    (the Standards).

The Standards are not mandatory in New Zealand, but their relevance to both voluntary and mandatory disclosures offers companies (big and small) a unique opportunity to pro-actively report on their sustainability and climate related risks and opportunities now, improving not only their financial reporting practices, but also their overall strategic preparedness and market positioning. 

While the Standards are not the first of their kind in the world of financial reporting, they represent a major milestone in the creation of a global baseline for comparable and streamlined reporting on the sustainability and climate-related risks and opportunities affecting entities participating in global capital markets.

Key takeaways

  • The Standards provide a framework for quantifying reasonably foreseeable climate-related financial risks and ensuring these are reflected in financial reporting disclosures. In future, the ISSB plans to release standards for other sustainability areas.
  • For New Zealand entities with an international profile, disclosure under the Standards may be a useful tool for connecting on sustainability issues with users of their financial statements, such as investors and financiers. An alternative is voluntary compliance with the New Zealand-built climate-related disclosures (CRD) regime, which has a great deal of similarity to the Standards (although there are still many key differences in the details).
  • Directors who adopt these disclosures will also find that they provide a systematic framework for identifying and addressing climate-related risks and opportunities in a way that supports the discharge of their director duties.
  • The Standards build on existing frameworks published by the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB), but offer a standardised approach that reduces repetition and duplication in reporting.
  • Investors care about how the companies they invest in respond to and manage climate risks and opportunities, and financiers are increasingly regulated to care (ie they have their own mandatory disclosures). While the Standards are not mandatory in New Zealand, proactive compliance with them will not only enable potential investors to make meaningful assessments of a company’s sustainability and climate risks and opportunities (as they relate to financial performance), but will also improve that company’s market positioning and reputation.
  • Entities do not have to be carrying out IFRS financial reporting to make use of the Standards.

The Standards at a glance

The purpose of IFRS S1 and S2 is to require entities to disclose relevant information about their sustainability and climate-related (physical and transition) risks and opportunities that investors can use to make informed decisions about their investments.

Fundamentally, the primary objective of the Standards is to require entities to disclose “material” information about any sustainability-related or climate-related risk or opportunity that could reasonably be expected to impact an entity’s financial prospects (ie an entity’s cash flows, access to finance or cost of capital over the short, medium or long term). 

IFRS S1 is the underlying standard. It sets out several conceptual foundations that underpin reporting under all present and future IFRS Standards. 

We set out below the key concepts introduced by IFRS S1: 

  • Reporting entity: IFRS S1 has introduced a new “reporting entity” concept that says that an entity’s sustainability-related disclosures shall be for the same reporting entity as the related financial statements. This means that if the reporting entity is a group, the group’s consolidated financial statements and sustainability-related disclosures will relate to the parent company and its subsidiaries.
  • Industry-specific disclosures: IFRS S1 requires industry-specific disclosures so that companies are only reporting focussed information that is actually useful for investors. 
  • Fair presentation: Entities must present disclosures in a way that fairly presents all sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects. 
  • Materiality: Entities must disclose material information about sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects. Information is material if “omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports”. 
  • Connected information: Entities must provide information in a way that allows users of general purpose financial reports to understand the connections between the information and the items to which the information relates.
  • Enhancing qualitative characteristics: Where possible, entities will need to “enhance” the information they provide using four “enhancing qualitative characteristics” - comparability, verifiability, timeliness and understandability. 

Disclosure under the Standards is organised into four distinct categories, which many readers will recognise from the TCFD framework and New Zealand’s mandatory CRD regime: 

Governance Strategy Risk management Metrics and targets
Disclosure of information about an entity’s oversight (monitoring and management controls) of sustainability and climate related risks and opportunities. Disclosure of information about an entity’s strategy for managing sustainability and climate related risks and opportunities over the short, medium and long-term (including scenario analysis). Disclosure of information about an entity’s processes for identifying, assessing, prioritising and monitoring sustainability and climate-related risks and opportunities. Disclosure of information about an entity’s performance in relation to sustainability and climate-related risks and opportunities.

While IFRS S1 and S2 are a package deal and intended to be applied together, IFRS S2 contains the specific climate-related disclosure requirements, in particular:

  • disclosures specific to climate-related physical risks (risks resulting from climate change that are event driven or a result of longer-term shifts in climatic patterns) and climate-related transitional risks (risks that arise from efforts to transition to a lower-carbon economy); 
  • disclosures in relation to specific climate metrics (for example, total greenhouse gas emissions classified as scope 1, scope 2 and scope 3 and internal carbon prices); 
  • disclosures in relation to climate-related targets that a company is required to meet by law or regulation; and 
  • disclosures in relation to how companies will respond to identified climate-related risks and opportunities. 

How do the Standards relate to New Zealand? 

The Standards are not currently mandatory in New Zealand and the XRB has stated that New Zealand will continue to rely on the existing CRD regime as the standard framework for climate reporting. 

Nonetheless, it is entirely possible that the XRB will have regard to the content of IFRS S1 and S2 when conducting a post-implementation review of the three Aotearoa New Zealand Climate Standards (NZ CS) that set climate statement content requirements for the CRD regime, scheduled to begin by December 2025.  In the meantime, the XRB has released a document comparing NZ CS 1 and 3 with IFRS S1 and S2, noting a strong degree of alignment in the core content and concepts across the two sets of standards, although with many differences in the detail (including, in particular, some key differences in the approach to scenario analysis and a difference in the definition of “transition risks”).

At some point, Parliament may also choose to extend the application of the CRD regime, which may lead to a broader application of climate and sustainability reporting in New Zealand. We note that the National Adaptation Plan signalled that the Government will make a decision by 2024 on extending mandatory disclosure to public entities at a national and local level. The “Zero Carbon” aspects of the Climate Change Response Act 2002 already give the Minister for Climate Change and the Climate Change Commission the power to require certain public entities and lifeline utilities to provide climate-related risk and opportunity information in the TCFD style. Mandatory disclosure is therefore clearly an evolving space. 

Even though adherence to the Standards is not currently mandatory, proactive compliance can, and likely will, prove advantageous for companies with an international exposure, by improving their sustainability and climate efforts and preparing them well for any future regulatory reform. 

For companies with a New Zealand footprint only, and who are not subject to a mandatory reporting obligation, a good stepping stone to this exercise is voluntary compliance with New Zealand’s own CRD regime. See our recent article here.

Process for adopting the Standards in New Zealand

  • IFRS Standards are adopted in New Zealand by way of New Zealand-specific equivalent documents (referred to as NZ IFRS). 
  • NZ IFRS are developed by the New Zealand Accounting Standards Board (NZASB), a subset of XRB, and subsequently approved by XRB and presented to Parliament in accordance with the Legislation Act 2019. 
  • Generally, NZ IFRS contain additional requirements and terminology that are tailored to the New Zealand legislative environment (in particular, the Financial Markets Conduct Act). 
  • Once adopted, the relevant NZ IFRS Standard is mandatory for New Zealand companies trading their securities on a public market and for foreign companies trading their securities on NZX. 

What is the rest of the world doing? 

While New Zealand is certainly a leader in the climate-reporting arena (from a policy implementation perspective), we are not the only ones making strides toward more robust sustainability reporting practices. Several countries, including the United Kingdom, Japan, and South Africa, have said that they are looking to adopt the Standards for domestic use. Australia is also proposing that very large listed and unlisted entities will be required to report under IFRS S2 (ie climate-related disclosures) in 2024-25, with a broader group of listed and unlisted entities being captured by 2027-28.[1]

This is not surprising, as more and more regulators and policy bodies (eg the International Organisation of Securities Commissions) are urging organisations to adopt robust sustainability measures at the internal governance level and beyond. 

Given this growing trend, a near-term wide (and even voluntary) uptake of the Standards would not be surprising. In fact, it is arguable that sustainability reporting (or at the very least, an awareness of sustainability and climate risks in the corporate context) is already the norm for larger entities. In its 2022 Sustainability Survey, KPMG reported that 96% of G250 companies[2] report on sustainability or Environmental, Social and Governance (ESG) matters and 64% acknowledge climate as being a risk to their business. Moreover, and perhaps more notably, 71% of N100 companies[3] identify ESG topics material to their businesses. TCFD adoption has also doubled in recent years, going from 37% to 61% among the G250. 

Turning to New Zealand, KPMG New Zealand reported in November 2022 that New Zealand’s progress on adopting more comprehensive ESG reporting has been slower and less comprehensive in recent years than progress made by key trading peers. Nevertheless, it is notable that 80% of New Zealand organisations surveyed by KPMG are reporting on their ESG performance and 60% of financial institutions recognise climate change as a financial risk.[4]

Looking at the big picture, the move toward sustainability and climate reporting is well underway, both domestically and internationally. Investors are clearly seeking this information and, more importantly, the information itself is clearly becoming more and more critical to a company’s internal operations, strategic decision-making, and overall success. 

How can companies prepare? 

With the Standards now finalised, companies are well placed to implement action plans and strategies to incorporate the obligations in IFRS S1 and S2 (and more generally, sustainability and climate themes) into their reporting practices. 

While not mandatory, all companies should consider the benefits of both assessing and addressing their sustainability and climate risks. This is particularly important from a risk-management perspective, where sustainability and climate are intrinsically connected to business resilience (and critically, to a company’s profitability, cash flows and ultimately solvency). 

Addressing these risks now will undoubtedly improve a company’s risk profile and enable companies to optimise and adapt their operations, make considered and future-proofed decisions, and facilitate positive stakeholder engagement. With investors, consumers and partners increasingly looking beyond the brand, transparency on sustainability and climate is becoming more critical to company success. 

We’ve identified several practical steps that companies can take in the short term to integrate the Standards into their existing financial reporting processes: 

  • Assess current risk identification and management processes and ensure that these are robust and fit for purpose (both in the context of the Standards and in the context of sustainability and climate themes generally).
  • Evaluate governance structures and sustainability and climate strategies to ensure that requirements set out in the Standards are met (with a particular focus on materiality and financial considerations), including implementation or review of a sustainability or climate strategy to drive present and future compliance.
  • Identify the main sustainability and climate risks that relate to the business and identify how they affect the business, its operations, and its financial performance across the entire value chain. 
  • Consider any existing internal sustainability and climate policies and procedures and the extent to which they relate to the company’s financial position. 

What next? 

In New Zealand, the Aotearoa New Zealand Climate Reporting Standards (NZ CS 1, NZ CS 2 and NZ CS 3) remain the standard for large reporting entities.

As countries grapple with the new Standards, we will likely see more and more government consultations on domestic disclosure and reporting regimes relating to sustainability and climate and greater demand from financiers and investors for businesses to provide information on sustainability risks and opportunities. In parallel, IFRS is already looking to develop other sustainability reporting standards, recognising that ESG risks are material financial risks that would benefit from standardisation in disclosure. For businesses wanting to cover a range of sustainability risks, not just climate-related risks, the Standards will be the benchmark of choice.

While reporting in line with the Standards may seem like yet another compliance burden, compliance will give businesses the opportunity to strengthen their internal operations and future-proof themselves against major climate risks and improve their competitiveness in the market and long-term financial sustainability. 

We are actively working with clients on climate-related risk governance and disclosure, and on ESG in governance and disclosure. Please get in touch with your usual Simpson Grierson contact, or one of our specialists below, to discuss how you can use disclosure to assist in managing your governance, risk and opportunity objectives.

Special thanks to Isabel van Tuinen for her assistance in writing this article.


[1] Climate-related financial disclosure - consultation paper (treasury.gov.au)

[2] The world’s 250 largest companies by revenue (2021 Fortune 500 ranking).

[3] The top 100 companies by revenue in a sample of 4,900 companies across 49 countries.

[4] KPMG, Survey of Sustainability Reporting 2022 (NZ). Link: Opportunity is passing us by - Survey of Sustainability Reporting 2022 (kpmg.com).


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