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5 days ago

Advancing sustainability reporting with IFRS standards

Courtesy: Accountants Today
Courtesy: Accountants Today

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In recent years, the global shift towards sustainability has become increasingly evident, prompting a growing recognition of the critical importance of transparent and consistent reporting. As investors demand clearer insights into how companies are managing their sustainability risks and opportunities, the need for decision-useful disclosures has never been more pressing. To address this vital requirement, the International Sustainability Standards Board (ISSB) has developed the IFRS Sustainability Disclosure Standards S1 and S2. These standards provide a comprehensive framework aimed at establishing a global baseline for sustainability-related financial reporting, ensuring that companies can offer comparable and reliable information across markets.

A UNIFIED APPROACH TO SUSTAINABILITY REPORTING: At the heart of this framework lies IFRS S1, which serves as the foundational standard for sustainability reporting. It requires companies to disclose material sustainability-related risks and opportunities that could significantly impact their financial prospects. By incorporating the well-established architecture of the Task Force on Climate-related Financial Disclosures (TCFD), IFRS S1 aligns closely with existing best practices in the field. Additionally, it integrates industry-specific guidance from the Sustainability Accounting Standards Board (SASB), ensuring that the standards are applicable across various sectors and contexts.

Complementing IFRS S1, IFRS S2 delves deeper into climate-related disclosures, building on the recommendations set forth by TCFD while introducing additional granularity tailored to investors' needs. Together, these two standards emphasize four essential core content areas that companies should focus on:

Governance: Companies are expected to provide insights into how they oversee and manage sustainability risks and opportunities. This includes detailing the roles and responsibilities of various governance bodies and decision-makers in the organization.

Strategy: A crucial aspect of reporting involves integrating sustainability considerations into core business strategies. Companies should articulate how sustainability factors shape their business models, influence financial planning, and contribute to resilience against future challenges.

Risk management: Companies must outline their processes for identifying, assessing, and monitoring sustainability-related risks. This includes demonstrating an understanding of the key risks they face and how they are prepared to address these challenges.

Metrics & targets: Finally, companies are encouraged to establish robust methods for tracking performance against defined targets. This area focuses on quantifying progress, including metrics related to greenhouse gas (GHG) emissions and other relevant sustainability goals.

KEY BENEFITS FOR COMPANIES AND INVESTORS: The introduction of the ISSB sustainability standards brings with it a multitude of benefits for both companies and investors. One of the most significant advantages is global consistency in reporting. By consolidating various fragmented frameworks into a single, investor-oriented baseline, the ISSB standards simplify the reporting landscape and provide a clear structure for companies to follow. Moreover, these standards offer interoperability with other major sustainability reporting frameworks, such as the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP), and the European Sustainability Reporting Standards (ESRS). This alignment helps reduce duplication of efforts, thereby enhancing clarity and allowing stakeholders to make better-informed comparisons.

From a strategic perspective, the standards encourage companies to draw connections between sustainability risks and their long-term financial outcomes. This linkage enables businesses to articulate their value creation strategies more effectively, ultimately improving their appeal to investors who are increasingly focused on sustainability factors in their decision-making processes.

IMPLEMENTATION CHALLENGES AND SOLUTIONS: However, the adoption of these standards is not without its challenges. Companies face several key tasks to successfully implement IFRS S1 and S2. First, they must conduct thorough gap analyses to identify any missing disclosures that could hinder their compliance with the new standards. This process requires an honest appraisal of current reporting practices and a commitment to improvement.

Next, companies need to develop integrated processes for data collection and validation. This involves ensuring that they have the necessary infrastructure in place to gather accurate sustainability data and confirm its reliability. Companies must also establish a clear connection between their sustainability disclosures and their financial statements, promoting coherence and transparency.

To support these efforts, the ISSB has provided practical tools such as the SSE Gap Analysis Checklist and the IFRS Knowledge Hub, which offer valuable guidance for companies navigating the complexities of sustainability reporting. Additionally, digital reporting taxonomies can enhance accessibility and comparability, making it easier for stakeholders to understand the information disclosed.

THE PATH FORWARD: As jurisdictions around the world move towards mandatory adoption of the IFRS Sustainability Disclosure Standards, it is imperative for companies to take proactive measures. Aligning reporting practices with IFRS S1 and S2 is essential not only for achieving compliance but also for seizing opportunities to strengthen investor confidence, refine strategic decision-making, and contribute positively to a sustainable global economy.

By embracing these standards, businesses can transform sustainability challenges into competitive advantages. This proactive stance ensures that they are well prepared to meet the evolving expectations of investors, regulatory bodies, and society as a whole.

To surmise, the IFRS Sustainability Disclosure Standards represent a pivotal advancement towards harmonising global sustainability reporting. For companies, early adoption and effective planning will be vital to ensure their success in this new reporting landscape. By taking the initiative to integrate these standards into their corporate practices, companies position themselves as forward-thinking leaders in sustainability, ready to address the demands of a rapidly changing market.

For investors, these standards promise a new era of clearer and more reliable data that will enhance the decision-making process. With information that is consistent and comparable, investors can better assess the sustainability performance of potential investments, ultimately driving more informed choices that align with their values and risk appetites.

Together, the IFRS Sustainability Disclosure Standards pave the way for a future where financial and sustainability reportings are not only interconnected but also serve as a complementary framework for fostering trust and accountability in the markets. As businesses and investors embrace this holistic approach to reporting, they contribute to the development of a more sustainable global economy, capable of addressing the pressing challenges of our time, from climate change to social equity.

The journey towards enhanced sustainability reporting is one that requires collaboration, commitment, and adaptability. By aligning with the IFRS standards, companies can not only meet regulatory expectations but also seize the opportunity to drive change, creating value for themselves, their investors, and society at large. This transformational approach marks a significant step forward in bridging the gap between financial performance and sustainable practices, ultimately leading to a more resilient and sustainable future.

 

Touhidul Alam Kha, Phd specialises in research focused on credit and sustainability risk assessment under global reporting initiative for banking sector in Bangladesh. He is now working as Managing Director & CEO of NRBC Bank PLC. touhid1969@gmail.com

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