The Role of IFRS S1 and S2 in Enhancing Transparency and Accountability of ESG Reports: A Systematic Review

The introduction of IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) by the International Sustainability Standards Board (ISSB) is a response to the growing demand for transparency and accountability in sustainability reporting. These standards aim to provide clear, consistent, and comparable guidance for companies to disclose relevant environmental, social, and governance (ESG) information, particularly for investor decision-making. While IFRS S1 covers general sustainability disclosures, IFRS S2 specifically addresses climate-related risks and opportunities. The implementation of these standards is expected to enhance the quality of ESG reports, though challenges such as differing interpretations and companies' preparedness remain.

IFRS S1 and S2 are designed to improve the disclosure of non-financial information, specifically ESG aspects. IFRS S1 mandates disclosures about sustainability-related risks and opportunities that could impact an entity's cash flows, access to finance, or cost of capital. IFRS S2 focuses on climate-related risks and opportunities with similar financial implications. Key metrics required under IFRS S2 include absolute greenhouse gas (GHG) emissions, measured according to the GHG Protocol Corporate Standard, and financed emissions for companies with investment-related emissions. These standards aim to equip stakeholders with transparent and accountable information for better decision-making.

Transparency in ESG disclosures means companies provide adequate and accessible information, while accountability implies taking responsibility for the impact of their actions on ESG factors. IFRS S1 and S2 are crucial for standardizing these disclosures, ensuring clarity and accountability, and accurately reflecting a company's commitment to sustainability. Corporate reporting serves as a mechanism for accountability, particularly to company owners who focus on financial performance and capital development. The standards support intra-organizational visibility, which is necessary for managing the complex interplay of environmental, social, economic, legal, and technological considerations in ESG reporting.

IFRS S1 and S2 are integral to ESG disclosures, as they are specifically designed to enhance the quality and consistency of sustainability reporting. Their implementation simplifies the reporting process and provides investors with better information for investment decisions, where sustainability is a key consideration. By adhering to these standards, companies can systematically disclose information on their ESG policies, strategies, related impacts, and risks that influence long-term business sustainability. This leads to more relevant, measurable, and accountable information for stakeholders, fostering greater transparency and informed decision-making in the context of sustainability.

This study employs a Systematic Literature Review (SLR) approach to analyze the role of IFRS S1 and S2 in improving ESG disclosure transparency and accountability. The methodology involves four stages: literature search, article selection, data extraction, and analysis and synthesis. The literature search was conducted using reputable academic databases like Scopus, with keywords such as “IFRS S1,” “IFRS S2,” “transparency in ESG,” and “accountability in ESG.” Inclusion criteria focused on articles published in Scopus-indexed international journals within the Business, Management, and Accounting category, published in English, with no year limitation to ensure broad coverage and identify novel insights.

The SLR identified 35 relevant articles. Research methods showed archival methods as the most prevalent (49%), followed by analytic and interview methods (14% each), case/field studies (9%), survey and other methods (6%), and simulation (3%). Prior research highlights a significant gap in integrating climate-related sustainability topics in accounting education. Increasing ESG transparency in the supply chain, supported by digitization and strong signal characteristics, can reduce the bullwhip effect. Audit quality positively affects ESG transparency, especially with higher media exposure. A key challenge identified is the lack of common standards for measuring impact in impact investing, leading to 'litigation bombs' due to differing expectations and accountability. Mapping of research topics using VOS viewer software indicated that while ESG disclosure is a prevalent issue, research concerning transparency and accountability in conjunction with IFRS S1 and S2 is still emerging.

The study concludes that IFRS S1 and S2 have significant potential to enhance the quality of sustainability reporting by providing clear and standardized guidance, thereby improving transparency and accountability in ESG disclosures. These standards are crucial for building trust among investors and the public. However, challenges persist, including varying interpretations across countries, companies' unpreparedness, lack of standardized data and methodologies, and limited resources/expertise. The study's limitations include its reliance solely on a literature review, potential bias from selecting only reputable international journals, and a lack of detailed discussion on the financial performance impact of IFRS S1 and S2 implementation. Nonetheless, it offers practical and theoretical contributions to developing policies and best practices in sustainability reporting.