Currently the sustainability reporting requirements for companies pose a range of challenges to both the preparers of financial statements and its users. The sheer number of available standards and frameworks has made it particularly difficult for the users to compare the results between entities within the same industry and across industries. The lack of a unified framework of compliance has made the sustainability disclosures less valuable for the users and more difficult for assurance providers to verify.
In the UAE, listed companies are required by law to either issue separate sustainability reports alongside their annual and/or periodic reports, or integrate financial and non-financial data in their annual reports.
The local regulatory bodies mandate that the content of these reports will be based on internationally recognized standards such as those issued by the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), International Integrated Reporting Council (IIRC), Task Force on Climate-related Financial Disclosures (TCFD) and the Climate Disclosure Standards Board (CDSB). There are currently no explicit requirements to have assurance over this information.
What is new?
The IFRS foundation through its newly established board—the International Sustainability Standards Board (ISSB) issued two new sustainability standards on 26 June 2023: IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures). Traditional IFRS has been the default set of standards for companies for financial reporting in the UAE with its application entrenched in UAE laws. However the lack of a definitive set of standards around the reporting of sustainability related issues has necessitated the need for the IFRS Foundation to venture into the realm of sustainability reporting.
The ISSB standards resulted from the demand of such a global standard by the participants in COP 26 as the world collectively acknowledged the urgency of addressing pressing global climate challenges and the need for a comprehensive sustainability reporting framework.
However, the ISSB standards do not try to address the entire spectrum of sustainability reporting and its users. Their primary focus is on the information needs of the investor, and consequently they are issued with the financial statements and exist within the financial reporting ecosystem (preparation, submission of returns, audit, investor communication, etc).
Since the release of the final standards last month, the ISSB standards have become a key talking point for organizations, investors, regulators, and other stakeholders. So, what differentiates ISSB from the other frameworks and standards available today?
Consistency is an important factor in how companies report globally and is vital to supporting investor decisions. The current frameworks applied locally has not allowed an “apples-for apples” comparison.
The ISSB has not started from scratch in developing these standards – they are based on existing frameworks and standards, including TCFD and SASB. The ISSB is also committed to working with the Global Reporting Initiative (GRI) to ensure its new investor-focused standards are complementary to and compatible with the existing GRI standards – which have a different objective of meeting wider stakeholders’ information needs.
The ISSB has also been working closely with jurisdictional standard setters to maximize interoperability between its standards and incoming mandatory reporting frameworks – e.g. the European Commission and EFRAG (European Financial Reporting Advisory Group) in the EU, and the SEC (Securities and Exchange Commission) in the US.
Connecting sustainability and financial reporting
In the future, connected financial and sustainability reporting will be a requirement, rather than a feature, of good-practice reporting. The ISSB refers to the information disclosed as ‘sustainability-related financial disclosures’ – demonstrating that disclosures need to be connected with information in the financial statements, not a disconnected exercise.
Finance and sustainability teams will need to work closely together to ensure the information disclosed is complementary and based on the same facts and circumstances. Although the sustainability-related information may differ in nature from information presented in the financial statements, it needs to be consistent to the extent possible. This is required regardless of whether financial statements are prepared under IFRS Accounting Standards or other generally accepted accounting principles.
Companies will need processes and controls in place so that they can provide sustainability-related information of the same quality, and at the same time, as their financial statements.
What’s next for reporting entities?
We recommend that each reporting entity should start at least understanding the new standards, because we believe that it is more a matter of “when” these standards will apply as opposed to “if” they will apply. There should also be dialogue with regulators, audit committees, and boards on an urgent basis to determine how the adoption of these standards will occur.
In the UAE, as is the case with other jurisdictions, the final endorsement of the ISSB standards rests with the relevant regulators.
If the local regulators adopt the standards as they are, this will mean that entities would have to comply with these requirements for annual periods beginning on 1 January 2024. This means that their annual financial statement for 2024 would have to comply with IFRS S1 and IFRS S2 - the additional information would have to be presented on the same basis as the financial reports. Fortunately, there will be no requirement for comparatives in 2023 and interim reports would not include sustainability information.
The extent of the adaptation efforts will depend on each entity’s maturity level in terms of sustainability reporting, so organizations will need to create tailored sustainability reporting strategies which consider the required system, team, data and other processes.
It is vital that reporting entities start now, build on what they have and do all they can to meet the requirements of the new standards.