Sustainability governance: how IFRS S1 and S2 are driving the agenda

April 29, 2026 / Raissa Urzedo and Aisha Capanema

The growing incorporation of sustainability and climate issues into the corporate agenda is transforming not only what companies report, but, above all, how they make decisions. In this context, the adoption of IFRS S1 and S2 represents a significant step forward by setting a new standard for the disclosure of related financial information, with a focus on investors.

More than just a push for transparency, the standards explore companies’ actual ability to establish connections between their financially material issues, their management of risks and opportunities, and their business strategy. This points to the need for structured governance capable of sustaining and leveraging the agenda in practice.

From structure to effectiveness: what the standards now require

In Brazil, ESG practices have advanced significantly in recent years. Consequently, most large companies, especially publicly traded ones, already incorporate the topic into their reports and have formal governance structures, such as committees and board-level responsibilities.

However, the maturity of these structures remains uneven. A study conducted by IBGC¹ in 2025 shows that, although many companies already report some level of governance regarding sustainability and climate, there is still little transparency regarding how this oversight influences concrete actions. For example, only 41% of companies publicly disclose the processes for consolidating their risk matrices — including those responsible and their duties. This percentage is even lower (26%) when considering transparency regarding the impacts of risks and opportunities on value creation over time and their effective use in decision-making.

In contrast to this scenario, IFRS S1 and S2 shift the focus from structure to execution, stipulating that governance — in addition to formalizing bodies and guidelines — must be anchored in processes, controls, and responsibilities that enable proper monitoring of risks and opportunities, thereby facilitating informed decision-making. The expectation, therefore, is for governance with capillarity — connecting different functions and organizational levels — ensuring that the company’s strategy and operations provide mutual feedback:

At the strategic level, the standards require active and qualified oversight by governance bodies. Companies must specify which senior management body (such as the Board, committees, a specific body, or an individual) is responsible for overseeing sustainability and climate issues and how reporting flows are established. Additionally, they must detail management’s role in setting and monitoring targets, as well as in managing risks and opportunities, highlighting, above all, the link between the outcomes of these processes and decision-making (for example, how risk-related trade-offs are considered).

To support such bodies, the standards indicate the possible delegation of authority to management levels, which will be responsible for the tactical and operational execution of the agenda — that is, the day-to-day management of the reported risks and opportunities and the established targets. In addition to transparency regarding the policies and procedures guiding these activities, the standards analyze the degree of integration with other areas, indicating that issues related to climate and sustainability must be addressed in a cross-cutting manner.

With a focus on ensuring effective engagement, the standards also examine how the components of this governance assess whether they possess the necessary skills to address the issues at hand and what mechanisms are adopted to ensure that knowledge is continuously developed and updated. Technical capacity, in this context, ceases to be a desirable attribute and becomes a fundamental requirement for information to be reliable.

Finally, a key driver of the issue comes into play: incentives. Companies must report whether their performance in sustainability and climate is linked to compensation policies and how this is done. More than the simple inclusion of indicators, what is assessed is the ability of variable compensation to translate the ESG strategy into recurring decision-making behavior, demonstrating whether this agenda, in fact, influences how the organization allocates resources, sets priorities, and measures its own results.

Some of these initiatives can already be observed in the Brazilian context. The Vale Group² , for example, adopts a multilevel governance structure in which the Board of Directors — supported by advisory committees, such as the Sustainability Committee — incorporates socio-environmental risks and opportunities into strategic decision-making, including the approval of resources and guidelines.

At the executive level, bodies such as the Executive Committee on Sustainability Risks implement the agenda, monitoring issues such as climate change, human rights, and biodiversity. Additionally, technical forums, such as the Low Carbon Forum, connect experts and leadership in driving the decarbonization strategy, with periodic reporting to the Board. The company also links part of executives’ variable compensation — both short-term and long-term—to emissions reduction targets and sustainability performance indicators.

Similarly, Lojas Renner³ has an integrated governance model that involves the Board of Directors, the Sustainability Committee — which is required to report on risks to the Board on a quarterly basis — and an executive team dedicated to sustainability. Furthermore, the company aligns ESG goals with leadership incentives (executive board, management, coordination, specialists, and supervision), with weights that can reach up to 55%, depending on the hierarchical level. This arrangement reinforces the cross-cutting nature of the agenda and its incorporation into day-to-day decision-making.

Between requirement and practice: the challenges of implementation

The shift in focus driven by the standards — from mere structure to effectiveness — imposes a new level of demand on companies. Demonstrating how governance is designed is no longer sufficient; it is now necessary to prove how it operates in practice, in a consistent, integrated, and externally verifiable manner. This shift has direct implications for how procedures, responsibilities, and information flows are organized. The requirement for auditable information demands that, in addition to implementing robust routines and controls, companies produce evidence supporting the actions of the relevant bodies, such as policies, bylaws, and meeting minutes.

The demand for traceability reflects a broader challenge: will the very governance structure for sustainability and climate be responsible for ensuring the rigor of the metrics to be disclosed and for coordinating the preparation of the IFRS S1 and S2 reports? Ultimately, reporting well depends directly on managing well — and on being able to prove it.

The standards further emphasize the importance of disclosing information concisely and without duplication. In this regard, it is recommended that companies report on governance in a consolidated manner, rather than presenting separate disclosures for each sustainability and climate topic, which underscores the relevance of non-fragmented arrangements.

Finally, it is worth noting that there are no transition reliefs or proportionality mechanisms4 applicable to the Governance dimension in S1 and S2. However, the standards do not prescribe a single model to be adopted; it is up to each company to define the structures and level of complexity most appropriate to its context. The requirements focus on ensuring transparency regarding the bodies and responsibilities involved, including in cases where governance is still evolving.

This content is part of a series of five monthly articles that our experts are preparing on these standards. Follow along each month in the WayCarbon newsletter. Sign up.