In June 2023, the International Sustainability Standards Board (ISSB) issued two sustainability standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. As the names suggest, IFRS S1 outlines the general requirements for disclosing sustainability-related financial information, while IFRS S2 focuses specifically on disclosures related to climate-related matters. Additional standards are expected to be introduced in the coming months to provide guidance on disclosures related to other key sustainability topics such as biodiversity and human resources.
These new standards intend to integrate a plethora of other sustainability disclosure standards (CDSB, SASB, IIRC, WEF, and more) under one umbrella and would bring in the much-needed standardization in sustainability reporting – a big relief for the investors.
Sustainability has been a hot topic in most public and private forums for quite a while now. Many large firms are voluntarily disclosing sustainability-related information that would be of interest to various stakeholders. Many regulators have already mandated sustainability related disclosures to their subjects. Quite a few of the prevailing standards are investor focused. However, ISSB’s latest releases, S1 and S2 have taken sustainability reporting requirements to the next level.
The IFRS S1 and S2 standards have brought sustainability reporting at par with financial reporting. This means it would require the same rigor as financial reporting does and will have to be done in parallel. Reporting firms will also have to ensure complete reconciliation of the numbers being reported, fully mapped to the information being disclosed in the financial statements.
What is more interesting is that unlike financial reporting, IFRS S1 and S2 reporting requires information outside the boundaries of the reporting organization. This information needs to be obtained from the source systems upstream as well as downstream within the value chain extending outside of the organization. This aspect makes sustainability compliance even more complex in terms of augmenting the information from external sources and validating and reconciling it to align with the financial statements period of the reporting entity.
Sustainability risk management has become a key topic in BFSI boardrooms as large parts of their balance sheets are impacted by sustainability risks. Accordingly, mitigation actions have been incorporated into day-to-day operations and decision-making processes. While this is underway, it is equally important to ensure disclosure and reporting compliances as well.
As such the compliance effort will have to be significantly elevated to meet the requirements of the new IFRS S1 and S2 standards. The compliance frameworks and operating models being put in place will also have to be scalable to cater to upcoming standards that will be unveiled in due course.
BFSI CFOs will need to put in place comprehensive governance, processes and controls, systems and tools and data and reporting mechanisms to ensure thorough compliance with the new mandates. Most importantly it is necessary to extend internal assurance charters to sustainability disclosures as well. This is because sustainability reporting, in addition to the facts and numbers, will also involve disclosure of forward-looking information, based on assumptions, estimates, judgements, and so on. Additionally, for comprehensive reporting, a lot of information needs to be gathered from sources outside of the reporting firms’ boundaries. We see the involvement of other internal stakeholders like sales, procurement, operations, legal, and HR to be much higher in this endeavor as compared to financial reporting.
Considering the rising awareness about and the passion for sustainability as a subject among all stakeholders, particularly investors, it is amply clear that businesses that can effectively show their commitment to the cause are preferred as allies over the ones that fare a shade lower. Hence, the urgency and the value of sustainability compliances are increasing by the day.
Keeping up with changing regulations and successfully delivering on-time compliances will require financial institutions to collaborate with various stakeholders within and outside their firms and roll out best-fit operating models, coupled with a strong governance framework replete with policies, procedures, systems, and data control and assurance mechanisms.
To publish a true and fair state of affairs, and do that scrupulously quarter after quarter, is what CFOs of financial institutions across the globe will be tested on. It goes without saying that the complex and ever-expanding sustainability compliance landscape will pose new challenges for CFOs but a comprehensive and critical approach to compliance management will enable them to sail through.