A climate cataclysm looms over most living things on Earth. If left unchecked, climate change would be completely and utterly devastating to life on the planet as we know it. To forestall this, we must limit global warming to one point five-degrees Celsius (1.5°C) above pre-industrial levels. To achieve this, human beings, who are the chief causative agents of climate change, need to learn, unlearn and relearn the various ways through which they can reduce their carbon emissions and adopt other practices that may slow down or hopefully avert climate change.
Climate mainstreaming has been touted as one of the most effective ways of combating climate change. It requires the systematic integration of climate considerations of individuals’, organisations’ and governments’ strategies and operations.
In today’s world, embracing sustainability is no longer a matter of preference, it is a legal imperative. A striking example lies within the Climate Change Act, 2016 (the Act), which assigns critical climate change duties to private entities. What is even more eye-opening is that the Act arguably breaks through the corporate veil, leaving no room for individuals like directors, partners or officers to escape accountability. They now shoulder direct accountability for any failure in fulfilling the climate change duties of the entities they oversee. The era of sustainability in governance is here, and it is not just a choice – it is the law.
Further, research has demonstrated the existence of a fundamental scalar quantity that fully defines the concept of “natural capital stock” in principle. This principle presupposes that at this point, the equilibrium point, both human and non-human life will thrive. In recognition of this equilibrium point, together with other principles of sustainability, governments around the globe have started introducing a carbon tax and professional accounting bodies have started developing standards for making disclosures relevant to sustainability and climate change.
The Standards
At the twenty-sixth Conference of the Parties (COP 26), held in Glasgow, Scotland in 2021, the Trustees of the International Financial Reporting Standards (IFRS) announced the formation of the International Sustainability Standards Board (ISSB). The ISSB was mandated with developing global sustainability disclosure standards. On 26th June, 2023 the ISSB issued its first two (2) sustain- ability disclosure standards, namely the General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and Climate-related Disclosures (IFRS S2) (together, the Standards). On 4th September, 2023 the Institute of Chartered Public Accountants of Kenya, in conjunction with the Pan African Federation of Accountants, unveiled and adopted these Standards.
IFRS S1
IFRS S1 unveils a pivotal shift in financial reporting, beckoning entities to disclose information about their sustainability-related risks and opportunities, that are useful to the primary users of their financial reports. Financial reporting is no longer just about the numbers; it is about transparency, responsibility and foresight. This standard mandates organisations to open their books, not just on profits and losses, but on sustainability-related risks and opportunities. It is a call to arms for businesses to reveal how sustainability-related risks and opportunities might affect their cash flows, financing access or capital costs over the short, medium or long term. IFRS S1 demands that disclosures stay true to the core principles of fairness and materiality. No critical nugget of information should be left unshared, if it could influence stakeholders’ decisions. Additionally, from reports and statements that adhere to this standard, one should clearly identify the financial statements to which the sustainability-related financial disclosures relate; and the entity’s performance in relation to its sustainability-related risks and opportunities, including progress towards any targets the entity has set, and any targets it is required to meet by law or regulation.
This standard is structured on the TCFD four-pillar approach, which is founded on governance, strategy, risk management, and metrics and targets. From the disclosures under this standard, one should understand; (i) the governance processes, controls and procedures an entity uses to monitor, manage and oversee sustainability-related risks and opportunities; (ii) the entity’s strategy for managing sustainability-related risks and opportunities; and (iii) the entity’s pro- cesses to identify, assess, prioritise and monitor sustainability-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process and its overall risk profile.
The IFRS S1 (which is the general standard that governs a range of sustainability topics, including those which pertain to the environment, society and governance) is more than just another accounting rule; it is a compass which guides financial reporting into the realm of sustainability. The standard illuminates the path to a more responsible and informed financial world.
IFRS S2
The IFRS S2 is a topic-specific standard that focuses on climate change. This standard requires an entity to disclose information about its physical or transitional climate-related risks and opportunities that is useful to the users of their financial reports. Like the IFRS S1, this standard is founded on the pillars of governance, strategy, risk management, metrics and targets. The users of reports and statements that adhere to this report should understand; (i) the governance processes, controls and procedures an entity uses to monitor, manage and oversee climate-related risks and opportunities; (ii) the entity’s strategy for managing climate-related risks and opportunities; (iii) the entity’s processes to identify, assess, prioritise and monitor climate-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process; and (iv) the entity’s performance in relation to its climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation.
More specifically, on governance, the standard requires the disclosure of information relating to the governance body responsible for climate-related risks and opportunities within the entity. This information may encompass the body’s mandate, how it oversees strategies designed to respond to climate-related risks and opportunities, its decisions on major transactions, its setting and monitoring of targets related to climate-related risks and opportunities, together with the entity’s climate-related risk management processes and related policies. Information relating to the entity’s management’s role in the governance processes, and the controls and procedures used to monitor, manage and oversee climate-related risks and opportunities, should also be disclosed.
With regard to risk management, an entity should disclose information about how the entity uses climate-related scenario analysis to inform its identification of climate- related risks; the nature, likelihood and magnitude of the effects of those risks; and how the risks are prioritised and monitored.
On strategy, an entity discloses the current and anticipated effects of those climate-related risks and opportunities on the entity’s financial performance and cash flows, business model, value chain, overall strategy and decision-making. The climate resilience of the entity’s business model should also be disclosed. The disclosures on climate-related risks may be categorised into climate-related physical risks and climate-related transition risks. They may also be categorised in accordance with their expected occurrence horizons, whether the risk is expected to occur in the short, medium or long term. While disclosing under this pillar, an entity should disclose anticipated changes to its business model, and direct and indirect mitigation and adaptation efforts made in response to climate-related risks and opportunities. The entity’s detailed assessment of its climate resilience should also be provided.
With regard to risk management, an entity should disclose information about how it uses climate-related scenario analysis to inform its identification of climate-related risks; the nature, likelihood and magnitude of the effects of those risks; and how the risks are prioritised and monitored. An entity should also disclose the processes it uses to identify, assess, prioritise and monitor climate-related opportunities, including information about whether and how the entity uses climate-related scenario analysis to inform its identification of climate-related opportunities; and the extent to which and how the processes for identifying, assessing, prioritising and monitoring climate-related risks and opportunities are integrated into and inform the entity’s overall risk management process.
On metrics and targets, an entity is required to disclose the cross-industry and intra-industry metric categories, and the targets set by the entity. Specific to metrics, an entity should disclose; (i) their green- house gas emissions and the approach used to measure them; (ii) the amount and percentage of assets or business activities vulnerable to climate-related transition risks and climate-related physical risks, aligned with climate-related opportunities and deployed towards climate-related risks and opportunities; and (iii) internal carbon prices; and remuneration. Specific to targets, an entity is required to disclose; (i) the metric used to set the target; (ii) the objective of the target (for example, mitigation, adaptation or conformity with science-based initiatives); (iii) the part of the entity to which the target applies (for example, whether the target applies to the entity in its entirety or only a part of the entity, such as a specific business unit or specific geographical region); (iv) the period over which the target applies; (v) the base period from which progress is measured; (vi) any milestones and interim targets; (vii)if the target is quantitative, whether it is an absolute target or an intensity target; and (viii) how the latest international agreements on climate change including jurisdictional commitments that arise from those agreements, have informed the target. An entity whose sustainability and climate-related disclosures comply with the Standards is required to make an explicit and unreserved statement of compliance with the Standards.
Conclusion
The Standards present a notable advancement in the global establishment of harmonious environmental, social and governance standards. Reports and statements that adhere to the Standards are comparable, verifiable, timely and understandable. While the Standards may pose a formidable challenge for some, prudent entities are advised to embrace innovation and adopt new systems and processes to gather and disclose the required information. Should they do so, they may reap the benefits of improved access to capital, enhanced reputation and reduced exposure to sustainability and climate-related risks. Further, they will not only boost their profile as responsible global citizens, but perhaps our planet might also just be spared!
