IFRS S1 and S2 in Malaysia: What Companies Should Be Doing Now, Not in 2027

Malaysia’s National Sustainability Reporting Framework (NSRF) has deliberately provided companies with a phased pathway towards adoption of the IFRS Sustainability Disclosure Standards.

That phased approach is important. It gives companies time to build capabilities, strengthen systems and progressively improve the quality of their sustainability-related financial disclosures.

But there is a potential trap.

For many of the more challenging requirements under IFRS S1 and IFRS S2, waiting until the year in which disclosure becomes mandatory may already be too late.

The reason is simple: IFRS S1 and S2 are not just reporting standards. They require information about how sustainability-related risks and opportunities are governed, identified, assessed, managed, monitored and integrated into existing risk management processes; and how they may affect an organisation’s financial prospects.

Much of that information needs to be created through actual business processes before it can be reported.

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Understanding Malaysia’s phased timeline

Under the NSRF, adoption is being implemented progressively, with the groups phased in over three years so that every in-scope company is reporting under the standards for annual reporting periods beginning on or after 1 January 2027.

The NSRF also provides important transition reliefs. For Groups 1 and 2, companies may initially focus on climate-related risks and opportunities under IFRS S2, while disclosure of broader sustainability-related risks and opportunities and Scope 3 greenhouse gas emissions is deferred for the first two reporting periods. For Group 1, these requirements therefore expand from 2027; for Group 2, from 2028; and for Group 3, from 2029. Full adoption of the complete requirements across every group therefore arrives in 2029, four years after Group 1 began.

These reliefs are valuable.

However, they should be used as a preparation period, not a waiting period.

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Work backwards from the reporting year

One of the most useful ways to approach IFRS readiness is to work backwards from the year in which a disclosure will be required.

If information needs to appear in the Sustainability Statement for that year, the underlying processes and data collection generally need to be operating during that reporting period.

That means the methodology, responsibilities, systems and controls may need to be established before the year starts.

For some requirements, even one year in advance can be cutting it finely.

Scope 3 is a good example

Scope 3 greenhouse gas emissions can involve information held across Procurement, Human Resources, Finance, Logistics, Operations and other functions, as well as information from suppliers and other parties in the value chain.

Companies first need to determine which of the 15 Scope 3 categories are relevant, establish calculation methodologies, identify appropriate emission factors, determine what activity data are required and assign responsibility for collecting that data.

Only then can systematic data collection really begin.

Imagine starting this process in January of the year in which full Scope 3 disclosure is required and discovering that several departments were never instructed to capture the information needed for the preceding months.

Some information may be reconstructed retrospectively. Some may not.

This is why the penultimate reporting year should arguably be viewed as the latest sensible point to establish Scope 3 methodology and data collection.

The better approach is to calculate Scope 3 emissions earlier, identify the weaknesses in the first inventory and use the following reporting cycle to improve data quality and controls.

The NSRF’s transition period gives companies precisely this opportunity. The Securities Commission’s own capacity-building programme now includes dedicated support on calculating and reporting emissions, as well as climate risk identification and scenario analysis.

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Before risks can be disclosed, they need to be identified

The same issue applies to sustainability-related risks and opportunities.

IFRS S1 requires companies to disclose material sustainability-related risks and opportunities that could reasonably be expected to affect their prospects, while IFRS S2 applies specifically to climate-related risks and opportunities.

But where do those risks come from?

They should not simply be created when the Sustainability Statement is being drafted.

Companies need a structured process for identifying, assessing and validating them. Two exercises can provide particularly useful inputs.

1. Double materiality assessment

A robust double materiality assessment can provide a broader view of sustainability matters across the organisation and its value chain.

Impact materiality considers how the organisation affects people, society and the environment. Financial materiality considers how sustainability-related matters may affect the company’s financial prospects.

Although IFRS S1 is concerned with financial materiality rather than double materiality itself, the process can provide a valuable starting point for identifying sustainability-related risks and opportunities that warrant further financial assessment.

2. Climate scenario analysis

Climate scenario analysis provides another important input, particularly for IFRS S2.

It allows companies to consider how physical and transition risks could develop under different plausible climate futures and across different time horizons.

Physical risks might include flooding, extreme heat, water stress, storms or other climate hazards affecting facilities, employees, suppliers and logistics networks.

Transition risks may arise from regulation, carbon pricing, technology, changing customer expectations, energy costs or shifts in markets.

Scenario analysis can help move the discussion beyond a single statement, “Climate change is a risk”, to a set of far more useful questions:

• Which operations are exposed?
• When could the risk become material?
• How significant could it become?
• What could it mean for revenue, operating expenditure, capital expenditure, assets, financing or cash flows?
• And what can management do about it?

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Integrating sustainability risks into the corporate risk register

Double materiality and climate scenario analysis should not sit in isolation.

Their findings should provide inputs into the company’s existing enterprise risk management process. A practical sequence might look like this:

There is an important distinction here.

An organisation is not IFRS-ready simply because a consultant has prepared a list of climate risks for inclusion in its Sustainability Statement.

Those risks ultimately need to become part of the way the organisation manages risk and makes decisions.

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Financial effects are another reason to start early

Identifying a risk is only part of the journey.

IFRS S1 and S2 increase the emphasis on the connection between sustainability matters and financial performance.

Companies therefore need to start considering how material risks and opportunities could affect the numbers. Eight areas deserve attention, and the first four are usually where the effects show up soonest:

Not every effect can immediately be quantified with precision.

The ISSB standards and NSRF recognise this through proportionality mechanisms, including the use of reasonable and supportable information available without undue cost or effort and, in certain circumstances, qualitative rather than quantitative information.

But companies still need to develop the process. And this is where Finance needs to become involved.

Sustainability teams may understand the environmental or social issue. Risk teams may understand likelihood and impact. Operations may understand exposure. Finance is needed to help translate these matters into potential financial consequences.

Building those connections takes time.

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Disclosure readiness is not the same as organisational readiness

This may be the most important distinction of all.

It is possible to produce disclosure that resembles IFRS S1 and S2. That does not necessarily mean the organisation itself is ready.

The second question is ultimately much more important.

A company’s Sustainability Statement should increasingly become the output of its sustainability governance and risk management systems, not the place where those systems are created retrospectively.

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So what should companies be doing now?

The answer depends on where the company sits within the NSRF timeline and its existing level of maturity. However, a sensible sequence would be:

1. 1

   Conduct an IFRS S1 and S2 gap assessment

   Understand what is already in place, what can be improved through disclosure and what requires new processes or systems.

2. 2

   Review sustainability governance

   Clarify Board oversight, management responsibilities, committee mandates, reporting lines and how sustainability-related matters enter strategic and investment decisions.

3. 3

   Identify sustainability-related risks and opportunities

   Use existing risk processes, stakeholder and materiality assessments, industry information and other relevant sources.

4. 4

   Conduct climate scenario analysis

   Assess physical and transition risks across appropriate scenarios, locations and time horizons and identify potential financial and strategic implications.

5. 5

   Integrate material risks into ERM

   Validate identified risks through the organisation’s existing risk management structure and incorporate relevant risks into the corporate risk register.

6. 6

   Start Scope 3 before it becomes mandatory

   Determine relevant categories, calculation methodologies, data requirements and responsibilities. Complete an initial inventory early enough to improve it before mandatory disclosure.

7. 7

   Bring Finance into the process

   Begin assessing how material sustainability-related risks and opportunities could affect financial performance, position and cash flows.

8. 8

   Strengthen data and controls

   Establish clear data owners, methodologies, evidence trails, review procedures and internal controls over sustainability information.

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Don’t aim for perfection. Aim for progression.

Companies should not interpret this as a requirement to implement every aspect of IFRS S1 and S2 perfectly from day one. That is not the purpose of the NSRF’s phased approach.

The better strategy is to start early, use the available transition reliefs intelligently and progressively build capability.

For a Group 1 company, that means using the current transition period to prepare for broader sustainability-related disclosures and Scope 3 requirements from 2027.

For a Group 2 company beginning its IFRS journey in 2026, it means concentrating on getting IFRS S2 climate-related disclosure right while already starting the work that will be needed for full IFRS S1 reporting and Scope 3 from 2028.

For a Group 3 company, whether an ACE Market issuer or a large non-listed company, reporting begins in 2027. That makes the remainder of 2026 the year to settle governance, risk processes and data collection, so that the first reporting period draws on systems that are already running, with the transition period then used to prepare for full IFRS S1 reporting and Scope 3 from 2029.

The organisations likely to find the transition most difficult will not necessarily be those with the most complex sustainability issues.

They will be those that start too late.

Ace CSR supports Malaysian companies with IFRS S1 and S2 gap assessments, sustainability and climate risk identification, double materiality assessments, GHG accounting, climate scenario analysis and sustainability reporting.