Navigating the NSRF: 5 Key IFRS S1 & S2 Challenges for Malaysian Finance Leaders

Picture this: You’re sitting in your weekly management meeting. The CEO turns to you and asks, “Are we ready for the new climate reporting standards?” You nod confidently, but internally you’re calculating the gap between your current ESG data and what IFRS S1 & S2 compliance actually requires.

If this scenario feels familiar, you are not alone. Across Kuala Lumpur and beyond, finance leaders are grappling with a significant shift in corporate reporting. The days of treating sustainability reporting in Malaysia as a marketing exercise are over. With the introduction of the International Sustainability Standards Board (ISSB) standards, sustainability is now a rigorous financial discipline.

For Malaysian companies, particularly those listed on Bursa Malaysia, this isn’t just another compliance box to check. It is a fundamental change in how value is defined and measured. While the move towards climate-related financial disclosures promises greater transparency and global competitiveness, the road to implementation is paved with practical hurdles.

In this guide, we look past the jargon to explore the five real-world challenges Malaysian CFOs face in adopting these standards—and more importantly, how to overcome them.

What Are IFRS S1 & S2?

Before diving into the challenges, let’s strip away the technical language.

Before diving into the challenges, it helps to be clear about what these standards actually require in the Malaysian context.

IFRS S1 sets the baseline for sustainability-related financial disclosures. It requires companies to disclose sustainability-related risks and opportunities that could reasonably be expected to affect enterprise value. In practical terms, this means issues that may impact cash flows, access to financing, cost of capital, or long-term asset value over the short, medium, and long term.

IFRS S2 focuses specifically on climate-related risks and opportunities. It requires companies to explain how climate change could affect their business model, strategy, and financial performance, supported by decision-useful metrics such as greenhouse gas emissions, climate risks, and transition planning.

In Malaysia, these standards are implemented through the National Sustainability Reporting Framework, with Bursa Malaysia embedding them into its Listing Requirements on a phased basis. This is not a voluntary alignment exercise. For listed issuers, it is becoming part of mainstream corporate reporting, sitting alongside financial statements and subject to governance and assurance expectations.

Challenge 1: Getting Your Data House in Order

The first and perhaps most daunting hurdle is the data itself. Financial data is structured, audited, and sits neatly in your ERP system. ESG data? It is often messy, scattered, and unverified.

For many Malaysian CFOs, ESG challenges are primarily about availability. You might have electricity bills for your HQ, but do you have fuel consumption data for your logistics fleet in Johor? Do you have water usage statistics for your manufacturing plant in Penang?

Common data pitfalls include:

• Siloed Information: HR holds diversity data, operations holds energy data, and procurement holds supply chain data. None of these systems talks to the others.
• Manual Processes: Relying on Excel spreadsheets that are prone to human error.
• Inconsistency: Different departments use different metrics or timeframes.

If you attempt to build IFRS sustainability standards implementation on shaky data, you risk reporting inaccurate figures to the market. This isn’t just embarrassing; it carries reputational and legal risks.

Practical First Step: Conduct a data gap analysis. Map out exactly what data points IFRS S1 & S2 require, identify who owns that data currently, and acknowledge where the zeros are. You cannot manage what you do not measure.

Challenge 2: Finding the Right People for the Job

There is a significant talent crunch in the corporate sustainability reporting framework space. We are currently facing a situation where demand for ESG expertise vastly outstrips supply.

As a CFO, you might look at your current finance team and wonder if they can handle this. The reality is, your accountants are trained to balance books, not calculate carbon footprints. Asking them to suddenly become sustainability experts is a recipe for burnout and error.

The cost dilemma is real:

• Hiring: Senior sustainability managers command high premiums due to scarcity.
• Training: Upskilling internal teams takes time you might not have.
• Outsourcing: Consultants provide immediate expertise but can be costly if used for every single function.

Smart Approach: Consider a hybrid model. Use external consultants to establish the framework and strategy, while simultaneously upskilling your internal finance team to handle recurring data collection and reporting. This builds long-term capability without stalling immediate progress.

Read also: How Strategic Accounting Outsourcing Delivers Robust Compliance

Challenge 3: Figuring Out What Actually Matters

One of the most misunderstood aspects of sustainability reporting in Malaysia is materiality.

Under IFRS S1 & S2, materiality is investor-focused. The core question is simple: would this information reasonably influence the decisions of investors, lenders, or other providers of capital?

This is where many organisations struggle. Some attempt to report on every sustainability topic imaginable to avoid criticism. Others under-report, assuming that limited disclosure reduces risk. Both approaches are problematic.

For example, biodiversity and land use are clearly material for a Malaysian plantation or infrastructure group because they directly affect regulatory risk, asset value, and financing. For a technology or services company, those same topics may be immaterial, while data security, energy use, or talent retention may have clearer financial implications.

A disciplined approach works best:

• Engage investors and key business stakeholders to understand which sustainability issues influence capital allocation and risk perception.
• Use industry benchmarks to validate expectations rather than starting from a blank page.
• Translate sustainability topics into financial impacts, such as cost exposure, revenue resilience, asset impairment risk, or access to financing.

Materiality is not about reporting more. It is about reporting what matters to enterprise value.

Challenge 4: Tracking Emissions Beyond Your Front Door

Climate disclosure becomes significantly more complex once you move beyond what you directly control.

IFRS S2 requires disclosure of greenhouse gas emissions across:
Scope 1, which covers direct emissions from owned or controlled sources.
Scope 2, which covers indirect emissions from purchased electricity or energy.
Scope 3, which covers value chain emissions such as suppliers, logistics, business travel, and product use.

For many Malaysian groups, Scope 3 emissions account for the largest share of total emissions. The challenge is that this data sits outside your organisation, often with suppliers that lack measurement capability.

Malaysia’s framework recognises this reality. Both IFRS S2 and the NSRF allow transitional reliefs, including phased Scope 3 reporting and the use of reasonable estimates in early years. This is designed to support credible progress rather than perfect data on day one.

Challenge 5: Making the Business Case to Your Board

Finally, there is the challenge of mindset. When you present the budget for IFRS S1 & S2 Malaysia implementation, a board member will inevitably ask: “Why are we spending this money? Is it just for compliance?”

If you frame this solely as a compliance cost, you will face resistance. The transition to IFRS S1 and S2 is resource-intensive. It requires software, consultants, auditors, and staff time.

Shift the narrative from cost to opportunity:

• Access to Capital: Global funds are increasingly mandated to invest only in ESG-compliant companies. Better ratings can mean a lower cost of debt.
• Operational Efficiency: Tracking energy and waste often identifies cost-saving opportunities.
• Risk Mitigation: Understanding climate risk protects long-term asset value.

Progressive Malaysian companies are already seeing that strong ESG credentials act as a competitive moat. They win contracts with multinationals who need low-carbon suppliers to meet their own Scope 3 targets.

What CFOs Should Do Next

The adoption of these standards is a marathon, not a sprint, but you do need to start running.

1. Prioritise Materiality: Don’t try to boil the ocean. Identify the 3-5 sustainability issues that critically impact your financial value, and focus your data collection on them first.
2. Establish a Cross-Functional Team: This cannot sit solely with Finance or a siloed Sustainability Officer. Create a working group involving Finance, Operations, HR, and Risk.
3. Start with “Limited Assurance”: You don’t need perfect data on day one. Aim for “limited assurance” (data is plausible) before moving toward “reasonable assurance” (audit-grade data) in later years.

Conclusion

Adopting IFRS S1 & S2 is undoubtedly challenging. It requires unearthing new data, learning new skills, and paying for new resources. However, for Malaysian CFOs, it is also a strategic pivot point.

By tackling these challenges head-on, you move your finance function from being a backward-looking scorekeeper to a forward-looking strategic partner. You ensure your company remains investable and competitive in a changing global market.

If you need support navigating the complexities of sustainability reporting in Malaysia, InCorp Global Malaysia is here to help. From navigating regulatory frameworks to strategic implementation, we can ensure your transition is seamless.