ESRS and IFRS S1 and S2 Interoperability Guidance

On the other hand, we have the new investor-friendly voluntary global standards from the International Sustainability Standards Board (ISSB) - IFRS S1 and S2, which companies can utilize to increase their competitiveness in the global markets.

Fortunately, the entities that developed the standards ISSB and EFRAG (European Financial Reporting Advisory Group) have worked closely over the years to ensure the highest possible harmony between the two standards. This collaborative effort has resulted in publishing a guide to simplify the reporting process. The guide, while non-binding, is a valuable resource for companies that want to comply with IFRS requirements in addition to the ESRS application. It is intended to facilitate the simultaneous application of both standards and avoid duplication of efforts. By identifying common disclosures between the two standards and aligning them, the guide reduces complexity and fragmentation, simplifying the reporting process and relieving companies of unnecessary burdens.

The guide is organized in the following matters:

Section 1 comments on general requirements in ESRS and IFRS standards, such as the concept of materiality. To sum up, what is considered material for users of general-purpose financial reports is aligned between the two sets of standards. Both standards focus on financial materiality – how climate (in ESRS also beyond climate) matters affect the entity's financial position, cash flows, access to financing, etc. The ESRS standards go one step further than IFRS by requiring impact materiality assessment, i.e., how the entity affects its environment. The section highlights how IFRS standards reference the potential use of ESRS as a source when "applying judgment" for sustainability matters relevant to the entity but lacking a specific disclosure requirement in IFRS. Similarly, ESRS also refer to the IFRS industry-based guidance for covering sustainability matters that are material for the undertaking in its sector.

Section 2 highlights standard climate-related disclosures by presenting specific data points in IFRS and their equivalent in the ESRS in a tabular manner divided into governance, strategy, risk management, metrics, and targets. Where equivalence is not fully achieved, footnotes explain the basis for alignment in specific areas of interoperability, while asterisks reference further elaboration in other sections of the report.

Section 3 - ESRS to IFRS S2 (climate) summarises the information that an entity starting with ESRS needs to know when applying ISSB standards to enable compliance with both. The topics with additional points to consider are transition plan assumptions, scenario analysis, industry-based metrics, climate-related opportunities, carbon credits and financed emissions.

Section 4 -  IFRS S2 (climate) to ESRS summarises the information that an entity starting with ISSB Standards needs to know when applying ESRS to enable compliance with both. The topics with additional points to consider are the same as in section 3, with the addition of GHG measuring and reduction targets, climate-related physical and transition risks and certain quantitative information.

Leaders from both EFRAG and ISSB have worked together over the years to develop the standards to ensure the highest possible alignment while remaining true to the expectations and the nature of respective standards. This collaborative effort has been met with strong support from experts, who have praised the guidance's practical nature. This practicality instils confidence in the audience, as it promotes the international convergence of sustainability-related disclosures and ensures that ESRS preparers can comply with ISSB Standards with minimal additional effort.