Discover how these groundbreaking standards are shaping the future of business, investments, and our world economy. Explore key features, requirements, benefits, and challenges.
Over the years, sustainability reporting has evolved, and resilient organizations have learnt to satisfy the expectations of various stakeholder groups like investors, regulatory bodies, customers, etc.
Now, sustainability reporting and financial reporting are being placed on the same pedestal by business stakeholders. This has helped to ensure that material non-financial information like Environmental, Social and Governance (ESG) practices and impacts are effectively communicated to stakeholders, enabling the assessment of the organization's sustainability journey and ethical practices.
In response to these growing expectations, different bodies have released various standards and guidelines to aid the preparation of sustainability reports. Some of these standards include the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD), and the newly released IFRS Sustainability Disclosure standards.
This article explores the IFRS Sustainability Disclosure Standards' significance and impact on businesses, investors, and the global economy. The article highlights some key features, requirements, potential benefits and challenges in implementing the standards.
The Need for Sustainability Disclosure
Companies that prioritize sustainability and disclose their ESG activities have proven to be more attractive to investors looking to align their investments with their values. The Global Sustainable Investment Alliance reported that sustainable investment assets had reached $35.3 trillion globally as of 2020, and Bloomberg predicted that they would surpass $53 trillion by 2025.
To future-proof their investments, investors are now more interested in understanding the nexus between business models and ESG metrics, especially with climate change considerations and consequent regulatory requirements. This has therefore presented a unique opportunity for forward-thinking businesses to reposition their business model in alignment with sustainability-related factors and report on their efforts with the same level of transparency and quality shown in financial statements. Organizations that fail to disclose their ESG activities risk facing reputational damage, market share loss, decreased investor confidence, and increased regulatory scrutiny.
IFRS Sustainability Disclosure Framework
Since the announcement of the formation of the International Sustainability Standards Board (ISSB) by the Trustees of the IFRS Foundation at the 26th session of the Conference of the Parties (COP26), the board has made commendable efforts towards the release of a set of global standards that meets the information needs of investors, global capital markets and other stakeholders.
In March 2022, the ISSB published Exposure Draft IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures, which provide general and specific requirements for an entity to disclose sustainability-related financial information and climate-related risks and opportunities, respectively. Leveraging on international support as well as building on the work of other standard-setting organizations like the Climate Disclosure Standards Board (CDSB), the TCFD, the Value Reporting Foundation's Integrated Reporting Framework, SASB, GRI, as well as the World Economic Forum's Stakeholder Capitalism Metrics, the ISSB released the IFRS S1 and S2 standards on Monday, June 26, 2023.
IFRS S1: The IFRS S1 discloses information on the "General Requirements for Disclosure of Sustainability-related Financial Information". It provides a tailored guide to help with the disclosure of material sustainability-related financial information in a bid to further understand general-purpose financial reporting.
Sustainability-related financial information is broader than information currently disclosed in financial reports; hence the IFRS S1 standard is a suitable disclosure guideline. Entities are required to disclose all material information relating to Governance, Strategy, Risk Management, and Metrics and targets. This would inevitably provide users with a complete picture of enterprise value.
IFRS S2: Building on the recommendations of the TCFD and SASB standards, the IFRS S2 Climate-related Disclosures provides a guide to disclosing climate-related risks and opportunities. Climate change is an unavoidable factor that affects every organization. The IFRS S2 assists stakeholders with all material information regarding the organization's climate risk structure, exposure, and mitigation plan.
Similarly, the IFRS S2 also focuses on four major areas: Governance, Strategy, Risk Management, and Metrics and targets. These requirements will help organizations appropriately disclose information that would enable investors to assess the effect of climate-related risks and opportunities on its enterprise value.
Benefits of IFRS sustainability disclosure
- Builds on Existing Guidelines and Standards: The standards leverage on efforts from existing efforts from the TCFD, SASB, and GRI, among others, making it easier for organizations already adopting these standards to build on existing data.
- Clearer and Enhanced Sustainability Reporting Experience: Aside from providing a comprehensive framework adaptable to various entities, the IFRS sustainability disclosure standards will aid entities with communicating and presenting sustainability information.
- Fosters Transparency and comparability: The standards aid in maintaining transparency between organizations and their stakeholders, as well as aid comparability amongst various entities and industries.
- Global Baseline for Reporting: Amidst several existing guidelines and reporting standards, the IFRS Sustainability Disclosure standards provide a global baseline for the standardization of sustainability disclosure.
- Unlocks Long-term Value Creation: Integrating sustainability into financial reporting would enable organizations to effectively communicate their sustainability journey in a way that aligns with their financial performance, ultimately contributing to long-term value creation.
Effective Date and Transition Relief
The IFRS S1 and S2 are applicable for annual reporting periods beginning on or after January 1, 2024, which means that investors can access information in 2025 if companies use the Standards for their 2024 reporting cycle. Early application of the Standards is permitted if an entity applies both the S1 and S2 Standards concurrently and declares that it applied the standard early. The mandatory application of IFRS Sustainability Disclosure Standards, on the other hand, will be contingent on each jurisdiction's endorsement or regulatory processes.
So far, the global response to the adoption of these two (2) Standards has been mixed, with some jurisdictions already declaring their willingness to be early adopters. Nigeria, Ghana, and Zimbabwe are among the countries that have publicly indicated their intent to be early adopters, with Nigeria taking the lead as the first African country to do so, with the strong backing of the Financial Reporting Council of Nigeria.
The following transition relief has been granted to entities for the first year of application:
- Entities applying the standards in the first year need not disclose sustainability-related risks and opportunities beyond climate-related information.
- Entities applying the standards in the first year need not provide annual sustainability-related disclosures at the same time as the related financial statements.
- Entities need not use the Greenhouse Gas Protocol methodology while measuring scope 1, 2 and 3 emissions if they already employed alternative methods in the period preceding the initial application of IFRS S2.
- Entities need not disclose Scope 3 emissions.
- Entities that only report on climate-related risks and opportunities in the first year need not provide comparative information.
- Entities are given the provision for later reporting and can provide annual information with half-year interim reports if required to provide such an interim report.
Challenges and Solutions
Implementing the disclosure requirements of the IFRS sustainability standards might seem initially daunting for businesses, particularly those without existing structures. Some of the challenges which we predict organizations may struggle with include the following:
- Data availability and quality: Sustainability reporting requires reliable, accurate, and consistent data, which can be challenging due to data collection and reporting complexity, as well as the short timeframe for adopting the standards. These challenges can be mitigated by building a robust data management system, engaging with stakeholders, seeking experts' opinions, and leveraging technology.
- Integrating sustainability reporting with financial reporting: Integrating sustainability and financial information in a cohesive report can be challenging for organizations due to the different datasets, reporting processes and techniques. Large organizations, however, often have robust data collection infrastructure in place, which can be leveraged and enhanced to accommodate sustainability-related disclosures.
- Understanding the standard's requirements: Businesses may face challenges in understanding the IFRS Sustainability disclosure standards, its requirements, and adoption techniques. To navigate this challenge, seeking the opinion of experts like Mazars can help develop strategies, identify performance indicators, evaluate disclosure effectiveness, and provide relevant training to build internal capacity.
- Scalability across varied entity sizes: Implementing and complying with the IFRS S1 and S2 standards can present significant challenges for entities of different sizes. Larger entities with established systems and structures may find implementing the standards easier than Micro, Small, and Medium Enterprises (MSMEs) with limited resources and absence of information systems. The issue of scalability requires that careful consideration be given to entities of various sizes. For smaller entities, leveraging on the Standards' transition relief, adopting a phased implementation process and seeking expert support can help bridge resource and knowledge gaps and aid the implementation process.
Key steps organizations may take to prepare for the adoption of the standards
Some of the key steps businesses may take to prepare for the adoption of the IFRS sustainability disclosure include:
- Gain a Comprehensive Understanding of the IFRS Sustainability Disclosure Standards: This will entail a detailed study and analysis of the standards and a thorough assessment of how they apply to the organization.
- Conduct a Gap Analysis and Readiness Assessment: This will help identify inconsistencies in sustainability reporting practices, assess current systems and processes, and determine necessary changes to meet the requirements of the standards.
- Establish a Dedicated Team to Oversee the Adoption of the Standards: It is very crucial to ensure that there is a dedicated team with responsible parties assigned to oversee the adoption and implementation of the standards. It is recommended that the team is diverse, comprising representatives from relevant departments like finance, sustainability, legal, and communications, among others.
- Develop a Clear Project Plan for Adoption and Implementation: The project plan will define clear timelines and milestones, outlining the standards' adoption and implementation plan, resources required, and the responsibility of every team member.
- Build Internal Capacity through Training: The IFRS S1 and S2 standards require relatively new procedures, so training on the standard requirements will ensure a smooth adoption process.
- Developing a Clear Communication Strategy for Stakeholders: To effectively communicate your efforts to stakeholders, develop a clear communication strategy to inform stakeholders about the adoption and implementation process and its impact on the organization. This should include engaging with investors, customers, employees, and other key stakeholders.
- Seek Professional Support: Finally, organizations may need to seek professional support from sustainability experts to ensure the adoption and implementation process is seamless. This may include consulting with sustainability reporting organizations like Mazars to ensure seamless adoption of the standards.
The newly released IFRS Sustainability Disclosure Standards provide a global baseline for sustainability reporting, creating significant advancement in sustainability reporting with far-reaching implications for businesses, investors, and the broader global economy. The standards enable organizations to communicate their sustainability journey in alignment with their financial performance, ultimately contributing to long-term value creation.
The implementation of the disclosure requirements, however, comes with some challenges, including data availability and quality, integration of sustainability reporting with financial reporting, limited understanding of compliance requirements, and scalability across varied entity sizes. Organizations can, however, overcome these hurdles by developing advanced data management systems, understanding integration requirements, adopting a phased implementation approach, and seeking the opinion of experts.
The IFRS sustainability disclosure standards present opportunities for future-proof investments, improved sustainability performance, and greater transparency. The journey towards a sustainable future demands a collaborative approach, and it is imperative that organizations immediately begin to evaluate their current structures and systems in preparation for the adoption of these standards. As Nigeria takes the lead as an early adopter of the standards in Africa, entities looking to leverage the first mover advantage opportunities that come with being early adopters have begun declaring their commitments towards immediately adopting the standards.
At Mazars, we are committed to supporting businesses in navigating their journey through understanding the requirements of the IFRS Sustainability disclosure standards and providing guidance through the adoption, implementation and review phase.