Businesses are facing increased pressure to deliver shareholder value sustainably and a business that manages risks (including climate change) and disruptions well is expected to be resilient as environmental and social risks materialise.
According to the World Economic Forum “expectations of the purpose of business, as well as how companies operate and deliver is evolving, but the lack of a universal reporting standard poses an obstacle to tackling climate change.”
Comparability and transparency of the information reported by companies about their sustainability efforts is becoming an imperative to enabling stakeholders (mainly investors) in assessing a company’s performance in the context of creating sustainable business value.
EY estimates that 600 sustainability frameworks, methodologies and metrics exist globally. These sustainability frameworks, methodologies and metrics have historically been developed to meet investor needs and in response to broader public expectations of the role of businesses in society. This has resulted in the existence of multiple frameworks and methodologies with different perspectives hence the need to set a global baseline with the issuance (in June 2023) of the first two international sustainability standards IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 – Climate Related Disclosures.
According to a survey by KPMG international in 2022, top companies have been reporting under three key reporting standards i.e. Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and country stock exchange guidelines. IFRS S1 and S2 disclosure requirements are designed to leverage existing standards and frameworks to achieve interoperability i.e. reduce the risk of double reporting and identifying key areas of intersections between the new baseline standards and the existing reporting standards that have long been used by most of the top companies. Interoperability aims to overcome the challenges of using multiple frameworks, and involves establishing compatibility and harmonisation between new and existing standards. See below for a summary of how existing frameworks and standards have been consolidated or have influenced the new global baseline standards.
What is the adoption status of IFRS S1 and IFRS S2 across local jurisdictions? (Source ISSB – as of October 2023)
Now that the ISSB has issued the two inaugural standards, the standard process is to have these issued standards adopted in local jurisdictions and below is a summary of adoption status:
Several jurisdictions will begin public consultations on disclosure requirements and roadmaps towards the adoption of ISSB Standards, either encompassing disclosure of all sustainability-related risks and opportunities – such as Singapore and UK – or encompassing just climate-related disclosures – such as Australia and Hong Kong.
Additional jurisdictions plan to publish consultations on proposed requirements and/or a proposed roadmap – such as Japan and Korea.
A few jurisdictions have made public statements that they will fully adopt S1 and S2 – ✔️ Brazil announced full endorsement of S1 and S2, with two years for voluntary application, followed by mandatory application in 2026. ✔️ Kenya, Nigeria and Zimbabwe and Sri Lanka have also announced full adoption, with details to be finalised, such as potential phase-ins and the scope of preparers affected.
The two jurisdictions with consultations that took place at the same time as the S1 and S2 consultation last summer – the EU and US – are at different stages: EU has finalised its first 12 European Sustainability Reporting Standards (ESRS). There is a very high degree of alignment in the ESRS and the ISSB climate disclosure standards. The US SEC has not finalised their climate disclosure requirements and there is not a definitive timeline to do so. California recently passed legislation to require climate risk disclosure with permission to use ISSB.
What should your immediate considerations be regarding the baseline reporting needs for your company?
1.Has your local jurisdiction adopted the newly issued ISSB standards? Zambia context – The Zambia Institute of Chartered Accountants (ZICA) expects to provide adoption guidance in November 2023.
2.Are the ISSB issued standards the only standards your company’s stakeholders expect you to report on? Are there additional requirements expected by regulators (e.g. the Securities and Exchange Commission and the Central Bank).
3.Does your company belong to a group whose parent entity will be required to report under standards other than the ISSB issued standards? For example if your parent entity is domiciled in the EU and is also required to report under the newly issued ESRS.
4.If your company is already reporting under an existing framework, how interoperable is this framework with the newly issued standards?