From Financial Reporting to ESG Reporting
The final frontier of corporate reporting. Investors increasingly want information that conventional financial statements don't capture — environmental, social and governance (ESG) data. This lesson introduces the new International Sustainability Standards Board (ISSB) and its first standards, IFRS S1 (general sustainability disclosures) and IFRS S2 (climate), the four disclosure pillars, the Scope 1/2/3 framework for greenhouse-gas emissions, and how the EU's CSRD goes further with double materiality.
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This is an emerging area — the standards are new (first reports expected in 2025), so there is little history yet to analyse. The aim here is to understand the concepts. ESG data spans the environmental (carbon emissions, water, waste), the social (workforce makeup, product and customer information), and the governance (lobbying, anti-corruption, board diversity).
Learning outcomes
- Explain why investors demand ESG information and how they use it.
- Describe the ISSB and the purpose of IFRS S1 and S2.
- Apply the four disclosure pillars to climate risk.
- Distinguish climate physical from transition risk and classify Scope 1/2/3 emissions.
- Contrast the ISSB's financial materiality with the EU CSRD's double materiality.
Why investors want ESG information
Demand has grown sharply (Amel-Zadeh & Serafeim, 2018; Starks, 2023): investors use ESG data both for value (it is financially material — a resource-dependent business is exposed to the price/availability of that resource; adverse external impacts invite regulation and reputational damage; risky business partners transmit risk) and for values. A common channel is engagement / active ownership — using shareholder power through dialogue with management, shareholder proposals and ESG-directed proxy voting.
The International Sustainability Standards Board (ISSB)
The IFRS Foundation announced the ISSB on 3 November 2021 at COP26, responding to strong market demand and building on earlier investor-focused initiatives. Its four objectives: a global baseline of sustainability disclosures; meeting investors' information needs; enabling comprehensive disclosure to global capital markets; and interoperability with jurisdiction-specific or broader-stakeholder frameworks. It issued its first standards in June 2023 (effective January 2024) — IFRS S1 and IFRS S2 — and adoption is spreading (Turkey, Brazil, Canada, Japan, the UK and others adopting or basing national standards on them).
IFRS S1 — general sustainability disclosures
IFRS S1 requires a company to disclose its sustainability-related risks and opportunities that are useful to investors' resource-allocation decisions, organised around four pillars:
Governance — how oversight of these risks/opportunities is assigned. Strategy — how they affect the business model and prospects. Risk management — the processes to identify, assess and monitor them. Metrics and targets — how performance is measured and what targets are set. (IFRS S2 applies exactly these pillars to climate.)
Key concepts mirror the financial framework: materiality (information is material if omitting, misstating or obscuring it could influence investors' decisions); fair presentation (complete, neutral, accurate); the same reporting entity as the financial statements; value-chain information (the full range of interactions and relationships in the business model); and connected information — sustainability data must use assumptions consistent with the financial statements (e.g. terminating a supplier over labour practices, or closing a high-emissions product line, is disclosed alongside the related financial-statement effects).
IFRS S2 — climate-related disclosures
IFRS S2 applies the S1 pillars to climate. It distinguishes two kinds of climate-related risk: physical risk (e.g. more severe extreme weather) and transition risk (policy action and technology change as the economy decarbonises) — and climate-related opportunities (new products or business from mitigation and adaptation). Across the four pillars it asks, among other things, for: governance responsibilities and skills; the strategy for managing climate risk including scenario analysis of resilience, transition plans and the effect on financial position, performance and cash flows; the risk-identification processes and their integration into overall risk management; and the metrics and targets used to track progress.
Greenhouse-gas emissions — Scope 1, 2 and 3
Under metrics and targets, GHG emissions are central (the 2015 Paris Agreement set the backdrop). Emissions are reported in three scopes:
Scope 1 — direct: a company's own operations — fuel combustion, company vehicles, fugitive emissions. Scope 2 — indirect energy: purchased electricity, heat and steam. Scope 3 — indirect value chain: everything else, up- and downstream — purchased goods and services, business travel, employee commuting, waste, use of sold products, transportation, investments, leased assets and franchises. Scope 3 is usually the largest and hardest to measure.
Schneider Electric's emissions profile
Where do a manufacturer's emissions actually sit?
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Schneider's own sites and cars (Scope 1&2) are tiny — ~0.17 + 0.06 MtCO₂e. Upstream Scope 3 (purchased goods and services) is 7.6 MtCO₂e, but the dominant figure is downstream Scope 3 — use of sold products at 47.3 MtCO₂e. The lesson: for many firms the emissions that matter are in the value chain, not the factory — which is exactly why S2 pushes Scope 3 disclosure. Cross-industry metrics also cover assets exposed to transition/physical risk, capital deployed to climate, internal carbon prices, and climate-linked executive pay; industry-specific metrics draw on SASB standards.
Downstream Scope 3 (use of sold products, 47.3 MtCO₂e) dwarfs Scope 1&2CSRD and double materiality
The two regimes differ in ambition. The ISFR Sustainability Disclosure Standards are voluntary, international, currently narrow (two standards), and focus on financial materiality — what matters to the company's own value. The EU's Corporate Sustainability Reporting Directive (CSRD) mandates reporting under the European Sustainability Reporting Standards (ESRS), with comprehensive ESG coverage and, crucially, double materiality.
Double materiality expands reporting beyond what affects the company financially to also include the company's impacts on the economy, environment and society. A company reports both issues that are financially material to itself (the ISSB view) and the impacts and dependencies it has on the outside world — an "inside-out" as well as "outside-in" view.
Corporate reporting is extending beyond the financial statements to sustainability. Investors want ESG data for both value and values, and the new ISSB provides a global baseline: IFRS S1 sets general requirements around four pillars — governance, strategy, risk management, and metrics and targets — and IFRS S2 applies them to climate, distinguishing physical from transition risk and requiring Scope 1/2/3 emissions (Scope 3 value-chain emissions usually dominate). The ISSB anchors on financial materiality; the EU's CSRD goes further with double materiality, also reporting the company's impact on society and the environment. The area is young — the skill is understanding the framework before the data history exists.