New IFRS sustainability standards: The tail sometimes needs to wag the dog

IFRS new sustainability standards were published earlier this week. Experts explain that, while not mandatory, there is a strong business case for using them. 

- New IFRS sustainability standards S1 and S2 were published on Monday.

- Although optional in South Africa, investors, activists, and banks may pressure firms into applying the new standards. 

- Experts believe there’s a strong business case for taking the standards seriously. 

Accountants started this past week with news of the publication of two new sustainability standards IFRS S1 and S2.

“You will find in IFRS S1 notions that you are very familiar with because we want as much as possible that connection to the financial statements,” Emmanuel Faber, Chair of the International Sustainability Standards Board (ISSB) told a conference on Monday.

IFRS S2 gives out specific climate-related disclosures and is designed to be used with IFRS S1, according to the ISSB. 

The standards attempt to create a common language on sustainability issues, Faber says.

The new standards concern not only numbers but the methodology used for disclosures. For instance, when reporting climate-related targets, firms must explain how it sets the targets, if a third party vets this methodology, and how it and by what metrics it reviews these. 

Jayne Mammatt, an ESG partner at Deloitte, says: “I think the envisaged auditor role helps because the auditor will check those processes and methodologies. At the moment, the auditor often just checks the data. But using these standards the auditor would look at the process in the materiality assessment as to what’s included, and, more importantly, what’s not included.”

All the cool kids are doing it

Critics of the standards may argue that they may be difficult and expensive for firms to apply. As yet, the standards are optional for South African companies. 

However, the standards make some allowance for lack of resources, including the concept of “undue cost or effort” 16 times across the two standards. This provides companies with some flexibility, according to Ronel Fourie, Partner at PwC.

Mandating the standards in South Africa may take time as it will require amending the Companies Act. Yet South African firms that do business abroad or are owned by multinationals in jurisdictions which are implementing the new standards will have to comply.

It’s also dangerous for companies to simply sit and wait. “There is investor pressure, there’s market pressure,” says Renitha Dwarika, reporting lead for PwC Africa, “You know, we have Just Share, which is a shareholder activist body that’s been putting a lot of pressure on companies.” 

This week, Just Share published a scathing analysis of mining giants Thungela and Exxaro’s recent climate disclosures, including the firms’ alleged lack of scientific rigour regarding reduction targets. 

“Banks are also interested in what they’re funding so it’s important that companies start somewhere,” says Dwarika. 

Box ticking exercise or smart strategy

There is also a strong business case for applying the standards, which are couched in traditional accounting metrics. For instance, S1 states that it requires disclosures about “risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium, or long term.”

Mammatt says, “It’s not about collecting information for the sake of it that you don’t need, which is just arbitrary or tick box. From a materiality point of view, it’s about what you should be using to manage your business on a monthly basis anyway. It’s about useful information.

“Yes, there’s a cost, but if it’s key to achieving your business strategy, then it’s not really a cost of compliance because it’s part of running your business.”

Fourie says, “It’s a little bit of a tail-wagging-the-dog situation because, in a perfect world, you want time to sit and reflect on the risks and have the proper discussions at board level, but there’s pressure for urgency. So you almost need to tackle it from two ends: ‘What do I need to report on, but also how does it practically affect my business and elevate it to board level?’

“If it’s not driven at a board or a governance level, then it will never work, and it won’t be sustainable. It has to become part of the business’s DNA to succeed.”

“We owe it to ourselves, our kids and our pension fund to make this an important issue.”

CIBA CEO, Nicolaas van Wyk shared CIBA’s view on the ISSB standards, read more here.