ESGNexus.lk · Policy & Regulation
Two new sustainability standards are now mandatory for Sri Lanka’s largest listed companies. One covers every sustainability risk that is financially material to your business. The other covers climate — always. Here is what they require, in plain English, without the jargon
By the ESGNexus Editorial Team · June 2026 · Estimated reading time: 6 minutes
KEY TAKEAWAYS
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Sri Lanka’s top 100 listed companies are already in their first year of mandatory compliance with SLFRS S1 and SLFRS S2. All main board listed companies follow from 2026. If you have been meaning to understand what these standards actually require — not the regulatory language, but the practical reality — this article is written for you.
The two standards are often discussed as if they were one. They are not. They have different purposes, different scopes, and different starting points. Understanding the distinction between them is the first step to building a credible compliance programme.
This article is designed to be shared with your finance team as a starting point for a briefing document. It complements our earlier article on compliance timelines and consequences — linked in the sources below.
Related: ESGNexus — ‘Sri Lanka’s Mandatory Sustainability Reporting Is Here — What Every Listed Company Must Know’
Where These Standards Come From
SLFRS S1 and S2 are Sri Lanka’s localised versions of two global standards published by the International Sustainability Standards Board (ISSB) in June 2023 — IFRS S1 and IFRS S2. The ISSB was created by the IFRS Foundation, the same body that oversees international financial accounting standards, specifically to establish a global baseline for sustainability disclosure.
The ISSB’s mandate was to create sustainability disclosure standards for investors — focused on financially material information, using the same logic and language as financial accounting. This distinguishes them from earlier sustainability frameworks such as the GRI, which are broader, stakeholder-facing documents. IFRS S1 and S2 are investor-grade standards, designed to sit alongside the financial statements in the annual report.
CA Sri Lanka adapted these as SLFRS S1 and S2 following a thorough review, and issued them with mandatory application effective 1 January 2025. Sri Lanka became one of the first jurisdictions in South Asia — and one of the first globally — to mandate adoption. The IFRS Foundation’s jurisdiction profile for Sri Lanka confirms this status.
Source: ISSB, IFRS S1 and S2, June 2023 — ifrs.org; CA Sri Lanka, Sustainability Disclosure Standards — casrilanka.com; IFRS Foundation, Sri Lanka Jurisdiction Profile — ifrs.org
SLFRS S1 — The General Standard
SLFRS S1 sets out general requirements for the disclosure of sustainability-related financial information. The word ‘general’ is important — this standard is not limited to climate, or environmental matters, or any particular sustainability topic. It covers everything.
The core principle of SLFRS S1 is materiality. The standard requires companies to disclose sustainability-related risks and opportunities that could reasonably be expected to affect the company’s cash flows, access to finance, or cost of capital — whether in the short, medium, or long term. If a sustainability matter could affect the financial value of your business, it must be disclosed.
What sustainability matters could be financially material? The answer differs by company and sector. For a tea plantation company, water stress and biodiversity loss may be highly material. For a bank, supply chain labour practices in its lending portfolio and governance quality of its borrowers may be the critical issues. For a manufacturer, GHG emissions, energy costs, and transition risk from carbon pricing could all be material. SLFRS S1 does not prescribe the list — it requires each company to work it out for itself through a rigorous materiality assessment.
Four disclosure areas under SLFRS S1:
- Governance. How does the company oversee sustainability-related risks and opportunities? Which board committee or individual is responsible? How does the board stay informed?
- Strategy. How do material sustainability risks and opportunities affect the company’s business model, strategy, and financial planning over the short, medium, and long term?
- Risk Management. How does the company identify, assess, and manage sustainability-related risks? How are these processes integrated into the overall risk management framework?
- Metrics and Targets. What metrics does the company use to track performance on material sustainability matters? What targets has it set, and what is the progress against them?
The disclosure must be included in the company’s general purpose financial reporting package — meaning the annual report, published at the same time as the financial statements. A standalone sustainability report does not satisfy the requirement.
Source: CA Sri Lanka, SLFRS S1 — General Requirements for Disclosure of Sustainability-Related Financial Information; IFRS Foundation, IFRS S1, June 2023
SLFRS S2 — The Climate Standard
SLFRS S2 is a climate-specific standard. It applies the same four-pillar structure as SLFRS S1 — governance, strategy, risk management, metrics and targets — but focuses entirely on climate-related risks and opportunities. It is directly based on the framework developed by the Task Force on Climate-related Financial Disclosures (TCFD), the most widely adopted voluntary climate disclosure framework globally.
The most important thing to understand about SLFRS S2 is that it is not optional for companies that decide climate is not their primary material issue. Climate disclosures are required regardless of how the materiality assessment under SLFRS S1 is concluded. Every company subject to SLFRS S2 must disclose climate-related information.
The four pillars of SLFRS S2 in practice:
- Governance. Describe the board’s oversight of climate-related risks and opportunities. Which committee oversees climate risk? What is the process for escalating climate issues to the board? This governance structure must exist, be documentable, and be disclosed.
- Strategy. Explain how climate-related risks and opportunities affect the company’s business model and financial planning. Critically, this requires climate scenario analysis — testing the business strategy against different climate futures. At minimum, two scenarios are expected: one consistent with a lower-temperature pathway and one incorporating physical climate risks. For most Sri Lankan companies, this analysis has never been done.
- Risk Management. Describe the processes used to identify, assess, prioritise, and manage climate-related risks. How do these processes connect to the company’s overall risk management framework and the board risk committee?
- Metrics and Targets. Disclose Scope 1 and Scope 2 GHG emissions as a minimum. Scope 3 emissions reporting is encouraged but not yet mandatory in Sri Lanka’s current implementation phase. Any climate-related targets must be disclosed, along with the metrics used to track progress against them.
Source: CA Sri Lanka, SLFRS S2 — Climate-Related Disclosures; IFRS Foundation, IFRS S2, June 2023; CFA Society Sri Lanka, ESG Essentials Handout, November 2024
The Critical Distinction — Side by Side
The comparison table below captures the most important differences between the two standards. Print it. Share it with your finance and sustainability teams. It is the starting point for any honest conversation about where your company’s compliance programme currently stands.
| SLFRS S1 | SLFRS S2 | |
|---|---|---|
| Purpose | Disclose ALL financially material sustainability risks and opportunities | Disclose climate-related risks and opportunities specifically |
| Scope | Defined by your materiality assessment — any sustainability topic that could affect financial value | Fixed by the standard — climate is always in scope regardless of materiality |
| Key test | Is this sustainability issue financially material to our business? | Does our business face climate-related risks or opportunities? |
| Starting point | Conduct a sustainability materiality assessment | Measure Scope 1 and Scope 2 GHG emissions |
| Where to disclose | In the general purpose financial reporting package — the annual report | In the annual report, as part of SLFRS S1 disclosures |
| Key data required | Varies by materiality — water, human rights, supply chain, governance, etc. | GHG emissions (Scope 1 and 2 mandatory), climate scenario analysis, targets |
| Board governance required | Oversight of all material sustainability risks | Specific oversight of climate-related risks and opportunities |
| Think of it as… | The broad sustainability lens — covers everything material | The mandatory climate layer — always required, regardless of S1 scope |
Source: CA Sri Lanka SLFRS S1 and SLFRS S2; IFRS Foundation IFRS S1 and S2; CA Sri Lanka Preparers’ Guide, November 2025
Think of SLFRS S1 as the broad lens: it covers everything financially material, and you define the scope. Think of SLFRS S2 as the mandatory climate layer: it applies to every company, every year, regardless of what your materiality assessment concluded about climate.
Scope 1, Scope 2, and Scope 3 — What They Mean
SLFRS S2 requires GHG emissions disclosure, and understanding the three scopes is essential for finance teams new to this area.
Scope 1: Direct emissions. Greenhouse gas emissions from sources that are owned or controlled by the company. Examples: fuel burned in company-owned vehicles and machinery, fuel combustion in company-owned boilers or generators, industrial process emissions at company-owned facilities. These are the emissions you produce directly.
Scope 2: Indirect emissions from purchased energy. GHG emissions from the generation of electricity, steam, heat, or cooling that the company purchases and consumes. Even though the electricity is generated elsewhere, the emissions are attributed to the company that consumes it. For most Sri Lankan businesses, electricity from the national grid is the primary Scope 2 source.
Scope 3: All other indirect emissions. Emissions that occur in a company’s value chain — upstream (suppliers, raw materials, business travel) and downstream (use of sold products, end-of-life disposal). Scope 3 is typically the largest source of emissions for most businesses but is also the hardest to measure. SLFRS S2 in Sri Lanka currently encourages Scope 3 disclosure but does not yet mandate it.
For most Sri Lankan companies, building a Scope 1 and Scope 2 measurement system is the single most time-consuming compliance task. The CA Sri Lanka bi-monthly GHG certification programme was designed specifically to build this capability. Start there.
What Scenario Analysis Actually Requires
Climate scenario analysis is one of the most misunderstood requirements of SLFRS S2 — and the one that most Sri Lankan companies are least prepared for. Here is what it actually means in practice.
Scenario analysis is the process of testing your business strategy against plausible climate futures. It is not a prediction. It is a structured exercise in asking: if the world warms by 1.5°C, what happens to our business? If it warms by 3°C, what happens? If a carbon tax is introduced, how does that affect our cost base?
SLFRS S2 requires companies to use climate scenarios that are consistent with the latest international climate science and policy frameworks. In practice, most companies use scenarios developed by the Network for Greening the Financial System (NGFS) or the Intergovernmental Panel on Climate Change (IPCC). The key output of a scenario analysis is an honest assessment of which climate risks are most significant to the business — transition risks (policy changes, technology shifts, changing consumer preferences) and physical risks (extreme weather, sea level rise, changing rainfall patterns).
For Sri Lankan companies, the physical risks are particularly relevant. Sri Lanka faces significant exposure to flooding, drought, coastal erosion, and extreme heat — all of which affect agriculture, tourism, infrastructure, and supply chains. The scenario analysis requirement is, in many ways, a mechanism for forcing companies to quantify risks they already know exist but have not formally assessed.
CA Sri Lanka’s Preparers’ Guide provides practical guidance on conducting scenario analysis. For companies starting from zero, the most pragmatic approach is to engage an external sustainability consultant for the first assessment, use the output to build internal capability, and integrate scenario analysis into the regular risk management cycle going forward.
Source: CA Sri Lanka Preparers’ Guide to SLFRS S1 and S2, November 2025 — casrilanka.com; NGFS Climate Scenarios — ngfs.net
Five Questions to Ask Your Finance Team Today
Use this table as a diagnostic. If the answer to any of these questions is ‘no’ or ‘we’re not sure’, that question defines your first priority.
| Question to ask your finance team | Why it matters |
|---|---|
| Have we completed a sustainability materiality assessment? | Without this, SLFRS S1 compliance cannot begin. It defines the entire scope of your disclosure. |
| Do we have Scope 1 and Scope 2 GHG emissions data? | The single most common gap. Both are mandatory under SLFRS S2 and building measurement systems takes 6–18 months. |
| Does our board have a defined process for overseeing climate risk? | SLFRS S2 requires you to describe board-level governance of climate risk. If no structure exists, one must be established. |
| Have we conducted climate scenario analysis? | Required under SLFRS S2 Strategy disclosures. Most Sri Lankan companies have never done this. |
| Is our external auditor engaged on sustainability assurance? | Assurance requirements are coming. The pool of qualified auditors is small. Early engagement is essential. |
The Resources CA Sri Lanka Has Built for You
In November 2025, CA Sri Lanka launched two resources specifically designed to help Sri Lankan companies navigate SLFRS S1 and S2 compliance.
The Preparers’ Guide to SLFRS S1 and S2 is a practical, Sri Lanka-specific document that walks companies through the disclosure process step by step. It covers the materiality assessment process, the four disclosure pillars for both standards, and practical guidance on building the internal systems needed for compliance. It is available free of charge at casrilanka.com. There is no reason for any company to approach this process without using it.
The Certified Sustainability Reporting and Strategy Adviser Course is a three-tier training programme designed to build sustainability reporting capability at different levels — from awareness for board members and senior management, to technical proficiency for sustainability officers and finance managers. The course is designed for Sri Lankan professionals in the Sri Lankan regulatory context. Details are available at casrilanka.com.
CA Sri Lanka has also established a bi-monthly GHG emission certification programme specifically to address the capacity gap in emissions measurement — the single largest practical barrier to SLFRS S2 compliance for most Sri Lankan companies.
Source: CA Sri Lanka, ‘CA Sri Lanka introduces comprehensive SLFRS S1 & S2 framework’, November 2025 — casrilanka.com; Daily FT, 4 November 2025
The tools exist. The resources are free. CA Sri Lanka has built the infrastructure for compliance. The only remaining variable is whether companies choose to use them or wait until the consequences of non-compliance make the choice for them.
The Bottom Line
SLFRS S1 and SLFRS S2 are not conceptually complicated. S1 asks: What sustainability matters could affect your financial value, and how are you managing them? S2 asks: What are your climate risks and opportunities, and what are your emissions? Both ask: who at the board level is responsible?
The complexity lies in the data, the systems, and the governance structures needed to answer those questions credibly. Building that infrastructure takes time — which is why the companies that start now are in a fundamentally different position to those that wait.
ESGNexus will be tracking compliance quality across the top 100 CSE companies as annual reports are published through 2025 and 2026. Subscribe to the ESGNexus Weekly to follow this work.
Sources & Further Reading
CA Sri Lanka — SLFRS S1 and S2 Sustainability Disclosure Standards: casrilanka.com/casl (search ‘SLFRS S1 S2’)
CA Sri Lanka — Preparers’ Guide to SLFRS S1 and S2, November 2025: casrilanka.com
CA Sri Lanka — ‘CA Sri Lanka introduces comprehensive SLFRS S1 & S2 framework’, November 2025: casrilanka.com
IFRS Foundation — IFRS S1 and IFRS S2, June 2023: ifrs.org
IFRS Foundation — Sri Lanka Jurisdiction Profile: ifrs.org
CFA Society Sri Lanka — ESG Essentials: Governance and Reporting for Sustainable Success, November 2024: cfasocietysrilanka.org
Greenplaces — SLFRS S1 & S2 Sustainability Reporting compliance summary: greenplaces.com
ESGNexus — Sri Lanka’s Mandatory Sustainability Reporting Is Here: esgnexus.lk
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ESGNexus is Sri Lanka’s independent platform for ESG, CSR, and sustainability intelligence. We track ESG performance, regulatory developments, and sustainability data across Sri Lanka’s listed companies, large unlisted corporates, and state-owned enterprises. All editorial content is independently produced. Sponsored content is clearly labelled. Data disclaimer: Information in this article is sourced from publicly available documents. ESGNexus does not independently verify company disclosures. Errors and omissions excepted. |