New standards guide sustainability disclosures, but the proof will be in adoption
The new requirements mean that companies in sectors reliant on fossil fuel may have to conduct strategic reviews
IN JUNE, the International Sustainability Standards Board (ISSB) announced its inaugural standards – the IFRS S1 and S2 – and, in its words, ushered in “a new era of sustainability-related disclosures in capital markets worldwide”.
The ISSB’s work has received support from governments and central banks in over 40 jurisdictions, including Singapore. Hot on the heels of the announcement, Singapore’s Accounting and Corporate Regulatory Authority and the Singapore Exchange Regulation launched a public consultation on related recommendations.
The plan is to require listed issuers to report ISSB-aligned climate-related disclosures from financial year 2025, with large non-listed companies to follow suit in FY 2027.
The IFRS S1 and S2 standards have significant potential to unify the fragmented landscape of sustainability-related standards. They can enhance the transparency, comparability, and consistency of sustainability reporting around the world, making it easier for investors and stakeholders to assess the sustainability practices of different companies.
The new standards
Under the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, companies must disclose their sustainability-related risks and opportunities to investors, lenders and other creditors.
As recommended by the Task Force on Climate-Related Financial Disclosures, many companies in industries or geographies with high exposure to climate-related risks may already have been disclosing not only their boards’ oversight of climate-related risks and opportunities, but also the management’s role in assessing and dealing with such risks.
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However, the IFRS S1 covers a broader spectrum of sustainability elements besides climate change. Disclosure requirements are also heightened. These include how the board oversees target-setting and monitors progress; whether dedicated controls and procedures are applied to the management of sustainability-related risks and opportunities; and how these controls and procedures are integrated with other internal functions.
To reap the full potential of IFRS S1, companies need to rethink their processes and procedures, redesign controls and strengthen their governance.
Meanwhile, the IFRS S2 Climate-related Disclosures standard is to be implemented for annual reporting periods beginning on or after Jan 1, 2024. It requires companies to disclose information about their climate-related risks and opportunities that is useful to investors.
Like IFRS S1, the requirements of IFRS S2 are structured around four core elements: governance, strategy, risk management, as well as metrics and targets. In particular, IFRS S2 mandates the disclosure of Scope 1, Scope 2 and – if material – Scope 3 emissions, offering a broader view of a company’s climate impact.
Both standards provide a structured framework for companies to assess and disclose their resilience to sustainability-related risks, allowing investors to understand the company’s long-term prospects better.
Companies have to elaborate upon how sustainability-related risks and opportunities affect their financial statements, thus enhancing the coherence between sustainability disclosures and financial reporting.
Impetus for change
However, efforts to deliver sustainability-related financial disclosures required by the standards will vary. It depends on whether companies have already embedded sustainability measures within their businesses and operating models, with the necessary measurements in place.
The ISSB standards require companies to disclose their approach to managing sustainability-related risks and opportunities, and the resilience of their strategy and business model to those risks. This means that companies in sectors with a heavy reliance on fossil fuels and large carbon footprints may have to conduct a significant strategic review and adapt their business practices.
This can involve optimising energy usage, switching to energy-efficient devices, adopting renewable technologies, and finding new uses for by-products in their manufacturing process. Companies will also need to respond to consumers’ growing demand for eco-friendly alternatives.
Regardless of sector, companies will need to match their commitments with the necessary expertise and experience of leadership teams as well as sustainability professionals.
There will be increased expectations and responsibilities for audit and sustainability committees, chief executive officers, chief financial officers and chief sustainability officers, as well as the compliance, internal audit, and sustainability teams.
Companies should set aside a budget to implement ISSB’s standards; engage with regulators; conduct a maturity assessment and gap analysis; and develop competencies in sustainability-related financial reporting.
Challenges to regional adoption
According to a 2022 report by the Global Reporting Initiative, 70 per cent of the top 600 companies in Asean countries have sustainability reports. However, only 34 per cent of these reports include information on climate-related risks and opportunities, just 31 per cent disclose Scope 1 and 2 emissions, and a mere 15 per cent disclose Scope 3 emissions.
A separate study by EY and CPA Australia found that Singapore-listed companies have made progress in climate-related disclosures ever since the Singapore Exchange mandated this on a “comply or explain” basis – but most provided only high-level observations on the potential impact of climate risks and opportunities. Few quantified and disclosed the range of financial impact.
These findings highlight opportunities to improve current sustainability reporting practices in the region, and underscore the need for the adoption of ISSB standards.
Asean’s diverse regulatory landscape presents a challenge in implementing the ISSB standards. Regulatory autonomy – where each Asean country has its own sustainability reporting requirements – means the decision to adopt the standards lies with each regulator. Regulators will then need to grapple with integrating these standards into existing frameworks.
Yet despite the short-term challenges, the implementation process can deliver long-term benefits for companies and users of their financial reports. These benefits include a better understanding of the company’s rights and obligations and its risks and opportunities, especially for those operating in an inherently vulnerable region such as Asean.
Ultimately, it is essential that regulators provide clear guidance on the requirements of ISSB’s standards, defining materiality and implementing a phased approach. Governments can also consider providing incentives to help companies build capability in sustainability-related financial reporting.
The adoption of ISSB’s standards represents a significant step forward in enhancing the transparency and comparability of sustainability reporting. However, some challenges must be addressed and overcome, with the commitment of the entire business ecosystem.
With the right strategies and support, businesses can enhance their sustainability practices, improve their sustainability-related financial disclosures, and contribute to a more sustainable future.
The writers are partners in climate change and sustainability services at Ernst & Young (EY). The views in this article are theirs and do not necessarily reflect the views of the global EY organisation or its member firms.
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