The future of international sustainability standards in South-east Asia
WE HAVE seen major changes this year in sustainability reporting standards and frameworks globally and in the region, and will likely continue to do so.
Among the most closely watched standard-setters is the International Financial Reporting Standards’ (IFRS) International Sustainability Standards Board (ISSB).
In May 2023, the ISSB announced that it was seeking feedback on its priorities for its next two-year work plan. It has identified three potential sustainability-related research projects – one on biodiversity, ecosystems and ecosystem services; a second on human capital; and a third on human rights. A fourth potential project will explore integration in reporting.
The ISSB has already launched its first two standards (the first covering general requirements and the second covering climate), which are expected to be finalised in June 2023. While the ISSB has adopted a “climate-first” approach, it is important to note that it is predominantly focused on the impacts of climate-related issues within an organisation.
We are also cognisant of the launch of the new Taskforce on Nature-related Financial Disclosures (TFND) framework in September, and how that might compare with the existing Task Force on Climate-Related Financial Disclosures (TCFD) and impact the implementation of ISSB.
With the ISSB planning to develop additional standards in the future and as nature-based solutions as part of the next priorities, we will soon understand the alignment the ISSB has with TFND.
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Jurisdictions in the Asia-Pacific and South-east Asia have started to mandate disclosures in alignment with the TCFD recommendations in recent years. We expect that some regulators will continue to strengthen their regulatory requirements and mandate the ISSB standards in the foreseeable future.
Over time, we anticipate that South-east Asia will continue to align mandatory climate disclosure requirements with major global markets, including the United Kingdom and the European Union, and that the ISSB standards will become a regulatory requirement. This will also help build further trust and credibility of the disclosure framework.
A complex landscape
Businesses are committing to measuring and reporting their climate and sustainability performances now more than ever. The pressure to provide more clarity on these measurements by increasing the scope of reporting comes from all stakeholders – customers, investors, and even employees.
However, making the commitment towards providing more clarity has been difficult, given the disparate and complex global landscape of climate and sustainability reporting. To mitigate this challenge, IFRS launched the ISSB as an international body tasked with developing a consistent global baseline for sustainability-related financial disclosures.
The ISSB was launched at COP26 in Glasgow in November 2021. Since its inception, the ISSB has been hard at work to create a universal reporting standard, with first exposure drafts of the standards released in April 2022. The proposed standards leverage the existing TCFD framework’s four pillars of governance, strategy, risk management, and metrics and targets.
These draft standards require organisations to disclose the effects of climate-related risks and opportunities on their financial position, financial performance, and cash flows, along with how they expect their financial position and performance to change over time given their decarbonisation strategy.
Historically, requirements have been complex and difficult to communicate across industries and sectors. The ISSB is designed to give stakeholders – particularly investors – clear, consistent, and comparable information about a company’s sustainability and climate-related risks and opportunities. The ISSB has also proposed that this information be disclosed as a part of general-purpose financial reporting.
South-east Asia steps up
As we have noted above, we anticipate that regulators in South-east Asia will strengthen their climate disclosure mandates over the next few years, and will likely include the ISSB standards as part of their mandatory ESG disclosure requirements for listed companies.
Currently, several regulatory bodies have already expressed interest and support for the ISSB, although there are no current plans to mandate disclosures in alignment with the ISSB standards in the region.
Existing frameworks may also influence South-east Asian businesses and country regulations, as more jurisdictions in the Asia-Pacific and South-east Asia are mandating disclosures in alignment with TCFD recommendations.
The TCFD is now mandatory for certain industries in several Asia-Pacific jurisdictions, including Singapore. Some businesses also practise voluntary sustainability reporting using the TCFD, while the Global Reporting Initiative (GRI) standards are increasingly commonplace amongst larger listed entities. Larger companies are therefore better positioned to adopt the proposed ISSB standards.
However, many – particularly smaller listed entities – are less well placed. Education, tools, and clear guidance will be required to upskill professionals in the region on the implementation of ISSB standards, and how that may affect their reporting procedures.
Challenges in implementation
South-east Asian countries and businesses based in the region will need to make some adjustments and modifications to any regulations, to ensure enforceability and ease of implementation. There are increasing expectations for climate-related issues to be reflected in financial statements, which organisations must adapt to.
Data integrity, transparency and verification are also major challenges, not least when considering value chain and Scope 3 reporting. It will be challenging for companies to report comprehensive and high-quality data in alignment with the ISSB standards if organisations do not invest in and implement the right monitoring and reporting systems, along with new models and methods for data sharing.
We also anticipate that businesses in the region may face issues with the preparation of ESG disclosures assurance. We predict that, over time, assurance over sustainability-related disclosures will become mandatory, starting with limited assurance, and eventually moving into reasonable assurance.
Regulators across the region are closely watching the ISSB developments, and several have welcomed the new standards and their efforts to consolidate the climate reporting landscape to investors.
Becoming ISSB-ready
Taking tangible steps towards climate action should be a priority for all organisations. Besides working towards decarbonisation, there are some additional steps organisations can take for climate-led transformation.
First, to commit to a climate change and sustainability target; second, to develop a climate change and sustainability strategy and to align this with their organisational goals. Organisations could also enhance organisational capabilities to deal with sustainability targets and finally, regularly monitor and report on the progress of these goals.
Tackling climate change and sustainability issues will deliver significant benefits to an organisation, but it cannot be realised without re-allocation of capital and new investment. To become ISSB-ready, organisations need to focus on new priorities, starting with diagnosing and assessing the gaps and impact the draft ISSB standards will have on their existing processes.
From there, they should put in place strategic plans and road maps to operationalise measurement and review. Finally, organisations need to communicate the implications of these standards to stakeholders, including the C-suite and board.
By staying ahead of the regulatory curve and aligning with global best practices, organisations can become climate-resilient and invest in the economic opportunity of the global transition to the low-carbon economy – all while becoming ISSB-ready.
Brian Ho is the sustainability and climate assurance leader at Deloitte Asia Pacific. Fredrik Andersen is the lead for the Centre of Excellence for Sustainability and Climate at Deloitte Asia Pacific.
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