IFRS S1 and S2 Sustainability Standards and ESG Investment Outcomes: Empirical Evidence From Listed Companies in Bangladesh

Abstract

ABSTRACT With the International Sustainability Standards Board's (ISSB's) release of IFRS S1 (General Requirements for Disclosure of Sustainability‐Related Financial Information) and S2 (Climate‐Related Disclosures), the global need to align corporate reporting with environmental, social, and governance (ESG) principles has grown even more urgent. This study is the first empirical panel analysis to test whether the implementation of these standards affects the ESG investment outcomes of listed companies in Bangladesh, an emerging economy where sustainability‐reporting institutions are in their early stages, and capital markets are changing rapidly. The study is based on stakeholder theory and legitimacy theory and uses partial least squares structural equation modeling (PLS‐SEM) to examine secondary data from 200 firms listed on the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE) for the period from 2023 to 2025. The results show that the implementation of IFRS S1 and S2 has strong positive effects on environmental sustainability investment ( β = 0.441; p < 0.001) and social sustainability investment ( β = 0.586; p < 0.001), with the latter being the most significant. Surprisingly, IFRS S1 and S2 implementation shows a statistically significant negative association with governance sustainability investment ( β = −0.520; p < 0.001), indicating that, although disclosure compliance has improved, it has not yet translated into substantive governance transformation in the Bangladeshi corporate context—a finding that should be interpreted with caution given the governance construct's modest measurement reliability ( α = 0.624; AVE = 0.414). The study highlights key implementation hurdles, such as low levels of professional knowledge, poor regulatory controls, a lack of data systems, and a lack of sustainability‐reporting culture, as well as opportunities for increased environmental transparency, expansion of socially responsible investment, and increased adoption of sustainable finance. The results not only extend the theories of stakeholders and legitimacy in the context of IFRS adoption in developing economies but also provide practical policy recommendations for the Financial Reporting Council (FRC) and the Bangladesh Securities and Exchange Commission (BSEC), which should be read as indicative given the model's modest explanatory power ( R 2 = 0.194–0.344) and the 3‐year, single‐country scope of the data.