## Learning Outcomes

After reading this article, you will be able to explain the scope and objectives of the ISSB’s sustainability standards (IFRS S1 and S2), define their connectivity with financial statements, and apply key principles such as materiality and consistent reporting. You’ll recognise how sustainability-related risks and opportunities affect financial statements and disclosures, and be prepared to address related ACCA SBR exam requirements.

## ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand sustainability-related disclosures and their linkage with financial statements. Focus your revision on:

- The scope and objectives of ISSB IFRS S1 (General Requirements) and IFRS S2 (Climate-related Disclosures)
- The meaning and importance of connectivity between sustainability reporting and financial statements
- How materiality is determined for sustainability-related information
- The principles for consistent, comparable, and coherent disclosures
- How sustainability risks and opportunities are reflected in, or linked to, financial statements
- The requirement for management to provide entity-specific, decision-useful information

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. What is the purpose of the ISSB's IFRS S1 and S2 standards?
2. Define "connectivity" in the context of sustainability-related and financial reporting.
3. What is the recommended approach under IFRS S1 for determining if a sustainability issue is material for disclosure?
4. Give one example of how a climate-related risk may affect the amounts in financial statements.

## Introduction

The International Sustainability Standards Board (ISSB), established by the IFRS Governing Body, has issued IFRS S1 and IFRS S2 to create a consistent global baseline for sustainability-related reporting. These standards aim to provide investors and other stakeholders with clear, comparable information on an entity’s significant sustainability-related risks and opportunities, closely linked (‘connected’) to the financial statements. This article explains what this connectivity means, why it matters, and how it applies in practice.

> **Test Tip:**
> When revising Connectivity with financial statements, connect each definition, method, or rule to the kind of question the assessment is likely to ask.

### The Role of Sustainability-related Reporting

Sustainability issues such as climate change, social responsibility, and governance can affect a company’s ability to create value over time. Investors increasingly demand information that goes beyond historical financial performance and addresses how these factors may influence future cash flows, strategies, and risk.

The ISSB standards aim to make sustainability-related information decision-useful by aligning it with financial reporting and ensuring disclosures are consistent, comparable, and material.

> **Key Term: ISSB**
> The International Sustainability Standards Board: an IFRS Governing Body entity responsible for developing global sustainability-related disclosure standards.
> **Key Term: IFRS S1**
> An international standard that sets general requirements for the disclosure of sustainability-related financial information.
> **Key Term: IFRS S2**
> An international standard focused on climate-related disclosures, requiring entities to report relevant risks and opportunities in this area.
> **Key Term: Connectivity**
> The principle of linking sustainability information clearly and consistently to information in the financial statements, ensuring users understand the relationship between the two.

### Principles of Connectivity

Connectivity means showing how sustainability-related risks and opportunities are tied to a company’s current and future financial performance and position. This ensures that disclosures:

- Allow users to see how sustainability matters could impact cash flows, performance, or asset and liability values
- Are aligned in terms of assumptions, time horizons, and scenarios with those used in the financial statements
- Help investors understand both qualitative and quantitative links between sustainability and financial results

### Example Areas of Connectivity

- Climate-related impairment of assets
- Provisions for environmental remediation
- Revenue impacts from regulatory or reputational risks
- Capital expenditure plans relating to decarbonisation

> **Key Term: Materiality (in ISSB reporting)**
> Information is material if omitting, misstating, or obscuring it could reasonably be expected to influence decisions of primary users of the entity’s financial reports.

### Disclosures under IFRS S1 and S2

IFRS S1 requires information about all material sustainability-related risks and opportunities. IFRS S2 requires disclosures specifically related to climate change, including governance, strategy, risk management, and metrics and targets.

![Sustainability-related disclosure process from issue identification and user-decision assessment to materiality judgement, linked financial statement disclosure, or ongoing monitoring.](https://static.pastpaperhero.com/images/acca-sbr-sustainability-related-reporting-issb-ifrs-s1-s2-connectivity-with-financial-statements_00.png)

_Material sustainability matters are evaluated for primary-user relevance, then either disclosed with entity-specific links to financial statements or monitored._

Reporting must:

- Clearly link to financial statement impacts or cross-reference where appropriate
- Use consistent definitions, data sources, and measurement bases where practical
- Explain any significant differences in assumptions or estimates compared to the financial statements

### Worked Example 1.1

> **Question:**
> A manufacturing group operates a fleet of diesel-powered delivery vehicles. New emissions legislation will come into effect within two years, requiring replacement of all non-compliant vehicles. At year-end, management recognises the need for accelerated depreciation and potential asset impairment. How should this be reported?
>
> **Answer:**
> The company should disclose in its sustainability report (under IFRS S2) the risk posed by the legislation, the expected impact on asset lives, and the link to accelerated depreciation/impairments recognised in the financial statements. This demonstrates connectivity and helps users understand the financial effect of climate-related changes.

### Worked Example 1.2

> **Question:**
> A retail company receives a fine for failing to meet waste disposal regulations. Management has identified sustainability risks related to waste but did not previously provide comprehensive disclosures. Now, the fine also requires a provision for costs and future compliance investments. What are the reporting implications?
>
> **Answer:**
> The company must disclose the non-compliance incident, explain the nature of the sustainability risk, and show how it affects provisions and asset values in the financial statements. Under ISSB guidance, disclosures should indicate the cross-reference to the related financial impact.
>
> **Exam Warning:**
> When explaining linkages between sustainability disclosures and financial statement items in the exam, always state clearly whether an impact has already been recognised (e.g., impairment, provision) or is only a potential risk for future periods. Marks are awarded for precise cross-referencing and clear explanation of the relationship.

### Determining Materiality and Entity-specific Reporting

Materiality for sustainability-related information follows the same principles as for financial reporting, but with a focus on what could influence economic decision-making for primary users.

- Judgement is required: not every sustainability risk needs disclosure—focus on those that could affect cash flow, value, or financial reporting decisions.
- Disclosures must go beyond generic language, giving specific details on how particular risks or opportunities relate to business activities.

Information that materially affects both sustainability disclosures and financial statements should be consistent unless there is a justified reason for difference, which must be explained.

### How Connectivity Is Shown in Practice

### Cross-referencing

Entities may clearly direct users from sustainability disclosures to the relevant parts of the financial statements and vice versa. For example, if a significant climate-related provision is made in the financial statements, the sustainability report should explain where and why.

### Consistent Assumptions

Where scenario analysis, timeframes, or measurement approaches (such as discounted cash flows or carbon prices) are used, they should match between financial and sustainability reporting or differences should be justified.

### Clear Explanations

Users need to see not only the direct numerical effects (like asset write-downs) but also qualitative impacts (such as changes to strategy or business model).

## Summary

ISSB sustainability reporting (IFRS S1/S2) is designed to be fully connected with financial statements. This requires clear linkages, cross-references, and consistent assumptions in disclosures. Materiality must be assessed as for all financial information, ensuring that users receive useful, entity-specific details about sustainability-related risks and opportunities and their actual or potential impact on financial performance.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Explain the scope and objective of ISSB IFRS S1 and S2
- Define the concept of connectivity with financial statements
- Identify how materiality is assessed for sustainability disclosures
- Apply the principles of consistent and comparable coherent reporting
- Illustrate how sustainability risks impact financial reporting and disclosures

## Key Terms and Concepts

- ISSB
- IFRS S1
- IFRS S2
- Connectivity
- Materiality (in ISSB reporting)


Sustainability-related reporting (ISSB IFRS S1/S2) - Connectivity with financial statements