IFRS S1 and IFRS S2 Explained for UAE Businesses

Key Takeaways

• IFRS S1 covers material sustainability-related risks and opportunities that may affect a company’s financial prospects.
• IFRS S2 focuses specifically on climate risks, climate opportunities, emissions and climate resilience.
• Both standards follow four reporting areas: governance, strategy, risk management, and metrics and targets.
• They are investor-focused standards rather than general corporate social responsibility frameworks.
• UAE businesses should assess regulatory applicability while preparing their systems for possible mandatory or voluntary reporting.

What Are IFRS S1 and IFRS S2?

IFRS S1 and IFRS S2 were issued by the International Sustainability Standards Board, or ISSB, in June 2023. They are designed to create a common global baseline for sustainability-related financial disclosures.

The standards became effective for annual reporting periods beginning on or after 1 January 2024, subject to adoption or use within individual jurisdictions. Companies applying the standards are generally expected to apply IFRS S1 and IFRS S2 together.

They do not replace IFRS Accounting Standards. Instead, they complement financial statements by explaining how sustainability and climate matters may affect:

• Revenue and operating costs.
• Assets and liabilities.
• Cash flows.
• Access to finance.
• Cost of capital.
• Business strategy and long-term resilience.

This connection with financial performance is what distinguishes ISSB reporting from a traditional sustainability or corporate social responsibility report.

IFRS S1 vs IFRS S2

What Does IFRS S1 Require?

IFRS S1 requires a company to disclose material information about sustainability-related risks and opportunities that could reasonably affect its cash flows, access to finance or cost of capital over the short, medium or long term.

It acts as the foundation for sustainability-related financial reporting.

Governance

A company must explain how its board and management oversee sustainability-related risks and opportunities. This may include:

• The board committee responsible for sustainability.
• Management responsibilities.
• Reporting and escalation processes.
• Skills and experience available to decision-makers.
• How sustainability performance is monitored.

Strategy

The company must explain how material sustainability matters affect its business model, value chain, strategic decisions and financial position.

For example, a UAE food manufacturer may depend heavily on imported raw materials and water-intensive production. Water availability, commodity prices and supply-chain disruption may therefore represent financially material sustainability risks.

Risk Management

The company should disclose how it identifies, assesses, prioritises and monitors sustainability-related risks and opportunities.

The sustainability process should connect with the company’s existing enterprise risk-management system rather than operate as a separate reporting exercise.

Metrics and Targets

The company must report the indicators it uses to measure and monitor material sustainability matters, including progress against internally established or legally required targets.

IFRS S1 also requires companies to consider industry-based guidance, including relevant SASB Standards, when identifying appropriate sustainability topics and metrics.

What Does IFRS S2 Require?

IFRS S2 applies specifically to climate-related risks and opportunities that could reasonably affect a company’s financial prospects.

It covers two broad categories of climate risk.

Physical Climate Risks

Physical risks result from climate-related events or longer-term environmental changes. In UAR, this may include:

• Flooding affecting warehouses, properties or transport infrastructure.
• Extreme temperatures increasing cooling and energy costs.
• Water scarcity affecting manufacturing or food production.
• Heat stress affecting construction workers and outdoor operations.
• Supply-chain disruption caused by extreme weather in other countries.

Transition Climate Risks

Transition risks arise as economies move towards lower-carbon business models. Examples include:

• New emissions-reporting requirements.
• Changes in fuel, energy or carbon-related costs.
• Customer preference for lower-carbon suppliers.
• New building-efficiency standards.
• Technology becoming outdated.
• Difficulty obtaining finance for high-emission activities.

IFRS S2 requires disclosures covering Scope 1, Scope 2 and Scope 3 greenhouse gas emissions. It also requires information on physical risks, transition risks, climate opportunities, capital deployment, internal carbon pricing and climate-linked executive remuneration where relevant.

Does IFRS S2 Require a Net-Zero or Transition Plan?

IFRS S2 does not require every company to create a climate transition plan.

However, where a company has a transition plan, emissions-reduction strategy or climate commitments, it must disclose material information about how that plan affects its strategy, resources, assumptions and performance.

The IFRS Foundation confirms that IFRS S2 contains several disclosure requirements concerning climate transition, even though it does not directly require a company to adopt a transition plan.

Businesses should therefore avoid announcing net-zero targets without developing:

• A reliable emissions baseline.
• Defined reporting boundaries.
• Interim reduction targets.
• Capital and operational plans.
• Assigned responsibilities.
• Monitoring and governance controls.

What Is Climate Scenario Analysis?

IFRS S2 requires companies to use climate-related scenario analysis when assessing the resilience of their strategies and business models.

Scenario analysis asks how the business might perform under different climate-related conditions. It is not a prediction of exactly what will happen.

A UAE real estate company, for example, could assess how its portfolio may be affected by:

• Higher cooling demand.
• Stronger building-efficiency requirements.
• Increased insurance costs.
• Flood exposure.
• Tenant demand for certified green buildings.
• Changes in the availability and cost of finance.

The analysis should be proportionate to the company’s circumstances, capabilities and exposure. A smaller business may begin with a qualitative assessment, while a large bank, listed company or property group may require detailed quantitative modelling.

Are IFRS S1 and IFRS S2 Mandatory in the UAE?

There is currently no single blanket requirement making IFRS S1 and IFRS S2 mandatory for every company operating in the UAE.

The standards’ legal application depends on decisions made by relevant regulators, financial markets and jurisdictional authorities. The IFRS Foundation separately tracks jurisdictions that have formally adopted, introduced or proposed ISSB-aligned requirements.

However, the direction of travel in the UAE is clear.

The UAE Sustainable Finance Working Group has established principles for sustainability-related disclosures for reporting entities. These principles emphasise adequate reporting systems, materiality, transparency and alignment between disclosures and actual governance, strategy and risk-management practices.

The Central Bank of the UAE is also advancing climate-related financial-risk governance and sustainability disclosure expectations for the financial sector.

ADGM’s ESG disclosure framework permits in-scope businesses to report using recognised international standards, including ISSB-based reporting.

Who Should Prioritise ISSB Readiness?

IFRS S1 and IFRS S2 readiness should be a priority for:

• UAE-listed companies.
• Banks and insurance companies.
• Asset managers and investment firms.
• Large private groups.
• Government-related entities.
• Companies seeking international finance.
• Businesses with overseas parent companies.
• Suppliers to multinational organisations.
• Companies planning an IPO, acquisition or major fundraising exercise.

SMEs may not need to publish a complete ISSB-compliant report immediately. They may still be asked for emissions and sustainability information by banks, major customers, investors and international supply chains.

UAE Business Example

Consider a UAE logistics business operating warehouses and a commercial vehicle fleet. Under IFRS S1, it may identify material matters such as workforce safety, fuel availability, supply-chain dependency, data security and customer requirements.

Under IFRS S2, it may assess:

• Fuel combustion and Scope 1 emissions.
• Electricity used in warehouses as Scope 2 emissions.
• Outsourced transport and purchased services within Scope 3.
• Exposure of facilities to flooding and extreme heat.
• Customer demand for lower-carbon logistics.
• Investment in electric or more efficient vehicles.
• The financial effect of changing fuel and regulatory costs.

The company would then explain how these matters affect its strategy, capital expenditure, risk controls and financial outlook.

IFRSLAB Consultant Perspective

“IFRS S1 and IFRS S2 should not be treated as an isolated sustainability-reporting assignment. They require coordination between finance, risk, operations, procurement, HR and senior management. The most difficult part is normally not writing the disclosure. It is establishing reliable data, determining financial materiality and connecting sustainability risks with actual business decisions.”

IFRSLAB consultants recommend that companies begin with a readiness assessment rather than immediately attempting to claim full compliance. A readiness review can identify:

• Missing governance responsibilities.
• Weak or incomplete emissions data.
• Differences between ESG and financial reporting boundaries.
• Material risks not included in the corporate risk register.
• Unsupported environmental targets.
• Inconsistent reporting periods.
• Gaps in internal controls and evidence.

Practical IFRS S1 and IFRS S2 Readiness Checklist

Governance and Responsibility

• Assign board oversight for sustainability and climate matters.
• Nominate an executive owner for ISSB implementation.
• Define responsibilities across finance, ESG, risk, HR, operations and procurement.
• Establish review and approval procedures.

Materiality and Risk

• Identify sustainability and climate risks that may affect financial prospects.
• Define short-, medium- and long-term time horizons.
• Map risks across the company’s operations and value chain.
• Integrate material risks into the enterprise risk register.

Data and Metrics

• Establish the same reporting entity and period used in the financial statements.
• Calculate Scope 1 and Scope 2 emissions.
• Identify and calculate material Scope 3 categories.
• Document methodologies, assumptions and emission factors.
• Retain evidence supporting every material metric.

Strategy and Financial Effects

• Assess how sustainability risks affect revenue, costs, assets and liabilities.
• Review climate-related capital expenditure.
• Evaluate physical and transition risks.
• Conduct proportionate climate scenario analysis.
• Document transition plans and targets where applicable.

Reporting and Controls

• Select appropriate industry-specific metrics.
• Connect sustainability disclosures with financial statements.
• Establish internal controls over ESG data.
• Prepare comparative information where required.
• Consider internal audit or independent assurance.
• Train employees responsible for sustainability data.

How Finance and Accounting Teams Should Contribute

ISSB reporting cannot be owned by the sustainability team alone. Finance and accounting teams should help reconcile emissions, energy, employee and supply-chain data with:

• Utility bills.
• Fuel invoices.
• Fixed-asset registers.
• Procurement records.
• Payroll information.
• Capital expenditure.
• Budgets and forecasts.
• Financial-statement assumptions.

This process can also identify data relevant to VAT records, corporate tax documentation and wider accounting controls.

How IFRSLAB Can Support ISSB Readiness

IFRSLAB supports UAE businesses with:

• IFRS S1 and IFRS S2 readiness assessments.
• Sustainability and climate materiality reviews.
• Carbon accounting and Scope 1, 2 and 3 inventories.
• ESG governance and policy development.
• Climate-risk and scenario analysis.
• Sustainability-related financial disclosures.
• Transition planning.
• ESG data controls and evidence frameworks.
• I-REC procurement and retirement.
• Board and employee training.
• Reporting and assurance preparation.

Author Details

IFRSLAB Sustainability and ESG Advisory Team

IFRSLAB provides ESG reporting, carbon accounting, IFRS S1 and IFRS S2 readiness, climate-risk advisory, I-REC services and sustainability training for businesses operating in the UAE and wider region.

References

• IFRS Foundation — IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information.
• IFRS Foundation — IFRS S2 Climate-related Disclosures.
• IFRS Foundation — Introduction to the ISSB and IFRS Sustainability Disclosure Standards.
• IFRS Foundation — IFRS S1 and IFRS S2 implementation resources.
• UAE Capital Market Authority — Principles for Sustainability-Related Disclosures for Reporting Entities.
• Central Bank of the UAE — Sustainable Finance and Climate-Related Financial Risk Management.
• Abu Dhabi Global Market — ESG Disclosures Framework.