ASSESSING THE INTEROPERABILITY BETWEEN SUSTAINABILITY-RELATED FINANCIAL DISCLOSURES AND IFRS IN THE CONTEXT OF IFRS S1

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In the contemporary global economy, the boundaries of corporate reporting are undergoing a fundamental transformation. For decades, the primary focus of accounting was the historical reflection of financial transactions. However, the 21^st century has introduced a paradigm shift where financial stability is inextricably linked to environmental and social sustainability. Today, investors, regulators, and a broad range of stakeholders demand more than just a snapshot of a company’s past performance; they require a forward-looking perspective on how environmental, social, and governance (ESG) factors influence the entity’s long-term value creation. This surging demand is not merely driven by ethical considerations but by the hard reality of financial risk. The realization that climate change, resource scarcity, and social inequality can materially impact an entity’s financial position, cash flows, and access to capital has moved sustainability from the periphery of corporate social responsibility (CSR) to the core of financial reporting [1]. Despite this, the reporting landscape has remained fragmented for years. Until recently, the field of sustainability reporting was characterized by what many professionals called the "alphabet soup" of frameworks and standards. Organizations such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-related Financial Disclosures (TCFD) developed in relative isolation from traditional financial reporting frameworks like IFRS or GAAP. While these frameworks provided valuable insights, their lack of integration led to significant informational inconsistencies, weak comparability across industries, and a general lack of reliability that hindered efficient capital allocation [2]. To address this systemic fragmentation and provide a "Global Baseline" for investors, the IFRS Foundation established the International Sustainability Standards Board (ISSB) during the COP26 summit in 2021. The primary mandate of the ISSB was to create a unified set of standards that would bring the same level of rigor to sustainability disclosures as that applied to financial statements. The culmination of this effort was the publication of IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) [3]. IFRS S1, in particular, serves as the vital conceptual bridge for this integration. Its primary objective is to ensure interoperability - the ability of sustainability data to function seamlessly alongside IFRS Financial Statements. This is not merely a technical alignment but a structural requirement that sustainability risks be assessed using the same reporting periods, the same organizational boundaries, and the same fundamental assumptions as financial data. Specifically, IFRS S1 mandates connectivity of information, ensuring that the narrative in sustainability reports is reflected in the numbers of the financial statements. Focusing on risks and opportunities that could reasonably be expected to affect the entity’s prospects and future cash flows [4]. Despite the clear conceptual advantages, the transition to an integrated reporting model poses significant practical challenges. The objective of this article is to assess the potential of IFRS S1 to enhance the reliability and transparency of corporate reporting. By examining the technical linkages between S1 and core IFRS standards, this study aims to identify both the opportunities for superior data integration and the hurdles - such as data quality and managerial subjectivity—that must be overcome to achieve true interoperability.

Literature review and research methodology

The evolution of sustainability reporting has been marked by a continuous struggle to define the "intended user" and the "scope of information". To understand the significance of IFRS S1, it is essential to analyze the conceptual foundations of its predecessors.

For over two decades, the Global Reporting Initiative (GRI) has been the most widely used framework. Its approach is rooted in the principle of impact materiality, focusing on how an organization impacts the economy, environment, and people (the "outside-in" perspective). While GRI provided transparency for a broad range of stakeholders, including NGOs and local communities, it often failed to provide information that was directly "decision-useful" for financial investors [5].

Conversely, the Sustainability Accounting Standards Board (SASB) developed industry-specific standards focused on financial materiality. SASB’s philosophy was that ESG issues are only relevant to investors if they affect a company's financial performance (the "inside-out" perspective). However, even with SASB, a significant gap remained: sustainability disclosures were often presented in separate "Sustainability Reports" that were not reconciled with the audited financial statements, creating a "dual-track" reporting system [6].

The establishment of the ISSB and the introduction of IFRS S1 represent a conceptual synthesis. Recent academic discourse emphasizes that IFRS S1 adopts a "Financial Materiality" lens, but with a significantly broader scope than traditional accounting. According to Adams (2017), the integration of sustainability and financial information requires "Integrated Thinking," where managers do not view ESG risks as separate from operational risks [2].

Furthermore, the emergence of the European Sustainability Reporting Standards (ESRS) has introduced the concept of "Double Materiality," which combines both impact and financial materiality. This has led to intense debate regarding interoperability. Scholars argue that without a global baseline, multinational corporations would face an overwhelming reporting burden. IFRS S1 is designed to be that baseline - a "plug-and-play" foundation that can be supplemented by regional requirements like ESRS, while ensuring that the core financial disclosures remain consistent worldwide [7, 13].

Another critical element discussed in recent professional literature is the quality of non-financial data. Unlike financial accounting, which is governed by the double-entry bookkeeping system, sustainability data often relies on estimates, proxies, and "Scope 3" calculations (value chain emissions). PricewaterhouseCoopers (2024) notes that the "Reliability" of these disclosures is currently the weakest link in the reporting chain [11]. IFRS S1 addresses this by importing the qualitative characteristics of the IFRS Conceptual Framework – specifically, Relevance and Faithful Representation – and applying them to sustainability information [9]. This theoretical alignment is intended to force a higher degree of discipline in data collection, moving ESG reporting from "marketing-led" to "finance-led."

By mandating that sustainability disclosures be published alongside the financial statements, IFRS S1 effectively ends the era of "isolated reporting." This structural change forces an internal interoperability within the firm, requiring CFOs and sustainability officers to align their assumptions regarding asset lives, discount rates, and future cash flow projections [12].

Analysis and Results

The core strength of IFRS S1 lies in its ability to transform sustainability reporting from a discretionary narrative into a disciplined financial disclosure. This is achieved through three primary mechanisms that ensure interoperability and, consequently, enhance the reliability of the information provided to capital markets [3, 4].

1. Application of the same information framework and asumptions one of the most transformative requirements of IFRS S1 is the mandate for internal consistency. Paragraph 23 of the standard requires that an entity use the same data and assumptions for its sustainability disclosures as it does for its financial statements.This creates a "logic check" for auditors and investors. For example, if a company identifies a high risk of climate-related regulation in its S1 disclosure, it must reflect those same risks in its IFRS reporting – specifically in the growth rates, discount rates, and future cash flow projections used for impairment testing or asset valuations. If the sustainability report predicts a 2030 phase-out of certain technologies, the financial statements cannot continue to depreciate those assets until 2040 under IAS16. This forced alignment significantly reduces the risk of "information silos" where the sustainability team and the finance team provide conflicting views of the entity's future.

 

Table 1. The linkage between IFRS S1 and Accounting Standards (IFRS)

IFRS Standard	Linkage with IFRS S1	Impact on financial reporting
IAS 1	IFRS S1 requires reporting to be presented within the same timeframe and the same organizational boundaries.	Ensures comparability and completeness of the information.
IAS 16	Sustainability risks (e.g., new energy efficiency regulations) affect the useful life of an asset.	Accelerated depreciation calculations and revision of residual values.
IAS 36	Climate scenarios disclosed under IFRS S1 must be integrated into cash flow projections.	Recognition of asset impairment driven by the "green transition."
IAS 37	Environmental obligations and penalties must be assessed and recognized as liabilities.	Accurate representation of liabilities and forecasting of potential costs.
IFRS 7	Impact of sustainability risks on the entity's creditworthiness and liquidity.	Expansion of financial risk disclosures to incorporate ESG factors.

 

As shown in Table 1, the integration is particularly critical for IAS 36 (Impairment). If IFRS S2 (Climate-related Disclosures) reveals that a transition risk – such as a carbon tax – will significantly reduce the future cash flows of a cash-generating unit (CGU), then that same information must be used in the impairment tests. Without IFRS S1, such risks might remain hidden in a separate sustainability report, never reaching the financial statements until the loss has already occurred.

3. Reporting Boundaries and the "Same Reporting Period" RequirementTraditionally, sustainability reports were published months after the annual financial statements, often using different reporting boundaries (e.g., including or excluding certain subsidiaries). IFRS S1 eliminates this time lag by requiring sustainability disclosures to be presented simultaneously with the financial statements.This requirement has profound implications for Faithful Representation. By forcing the reports together, IFRS S1 makes the Board of Directors and the Audit Committee responsible for the entire package. It prevents "selective disclosure" where companies might report positive financial results while delaying the reporting of significant sustainability-related liabilities or risks.

Despite the robust framework of IFRS S1, true interoperability faces several "real-world" barriers that can undermine reliability. A primary example is the Scope 3 Measurement Gap: while IFRS transactions are based on hard data (such as invoices), sustainability data (e.g., Scope 3 emissions) often relies on estimations across a complex value chain. This introduces a level of measurement uncertainty that traditional IFRS accounting is not accustomed to handling [11]. The Subjectivity of Scenarios: Sustainability risks are often assessed using multi-decade scenarios. The choice of a "2-degree Celsius" vs. a "3-degree Celsius" scenario can radically change the financial projections. This gives management significant discretion, which, if not properly disclosed, could lead to a new form of "Greenwashing" within the financial statements.To assess the overall effectiveness of these mechanisms, we summarize the shift in reporting quality in the following table 2.

 

Table 2. Impact of IFRS S1 Interoperability on Reliability

Criterion	Before IFRS S1	After IFRS S1 Implementation	Impact on Reliability
Accountability	Voluntary	Mandatory, based on financial materiality	Increased. Management assumes responsibility.
Integration	Separate reports	Interoperability with IFRS	Increased. Information is consistent
Judgments applied	Differs from IFRS	Aligned with IFRS judgments	Increased. subjectivity is reduced

 

It can be observed that, conceptually, by mandating integration, IFRS S1 is a powerful tool for enhancing the reliability of financial information.

Conclusions and recommendations

Conclusions and RecommendationsThe introduction of IFRS S1 marks a definitive end to the era of "siloed" sustainability reporting. By shifting the focus from broad social impact to financial materiality, the ISSB has successfully integrated sustainability into the language of capital markets. Our analysis demonstrates that IFRS S1 is not merely a disclosure standard; it is a governance catalyst that mandates a structural transformation in how corporate value is measured and reported.The conceptual power of IFRS S1 lies in its "mandated integration." By requiring that sustainability disclosures be based on the same assumptions, reporting periods, and organizational boundaries as financial statements, the standard effectively eliminates the "credibility gap" that has long plagued ESG data. When climate risks are translated into impairment indicators under IAS 36 or provisions under IAS 37, they move from the realm of marketing to the realm of fiduciary responsibility.However, the path to true interoperability is fraught with practical hurdles. As discussed, the inherent subjectivity in long-term climate scenarios and the data quality issues associated with Scope 3 emissions remain significant threats to the reliability of these disclosures. To maximize the positive impact of IFRS S1 and ensure that it serves the needs of global investors, we propose the following multi-level recommendations:

1. Strategic Recommendations for Organizations Establishment of Cross-Functional ESG Committees: Organizations should move away from isolated sustainability departments. A permanent task force involving the CFO, Chief Sustainability Officer (CSO), and Internal Audit is essential to ensure that the narrative in the S1 report is numerically reconciled with the IFRS financial statements.Investment in Digital Reporting Infrastructure: IFRS S1 is designed for the digital age. Entities should adopt XBRL tagging and integrated ERP systems that can collect ESG data with the same "audit trail" rigor as financial transactions.
2. Operational and Professional RecommendationsIntegrated Professional Development: There is an urgent need for "cross-training." Accountants must understand climate science and carbon accounting, while sustainability professionals must become familiar with IFRS valuation and impairment concepts. Strengthening internal control frameworks: organizations should apply the COSO Framework or similar internal control models to sustainability data. Reliability cannot be achieved through year-end "clean-ups"; it must be built into the daily data-collection processes of the entity.
3. Regulatory and assurance recommendations transition to mandatory external assurance: to achieve the same level of trust as financial statements, sustainability disclosures must eventually undergo Reasonable Assurance (audit). Regulators should provide a clear roadmap for transitioning from "Limited Assurance" to "Reasonable Assurance" to give markets time to adjust.Future Research DirectionsFuture studies should focus on the quantitative impact of IFRS S1 adoption on the cost of capital. Furthermore, empirical research is needed to examine how auditors navigate the "subjectivity gap" when verifying forward-looking sustainability scenarios. As the global baseline continues to evolve, the interaction between IFRS S1 and regional standards (like ESRS in Europe) will remain a critical area for academic and professional inquiry.In conclusion, while IFRS S1 provides the necessary "interoperability" framework, its success will ultimately depend on the integrity of the data and the commitment of corporate leadership to move beyond compliance toward true transparency.

About the authors

L. A. Grigoryan

Armenian State University of Economics

Author for correspondence.
Email: arpinehakobyan111@gmail.com

Doctor of Economic Sciences, Professor

Armenia, Armenia, Yerevan

A. S. Hakobyan

Armenian State University of Economics

Email: arpinehakobyan111@gmail.com

Candidate of Economic Sciences

Armenia, Armenia, Yerevan

References

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