The value of sustainability reporting

IFRS S1 defines sustainability risks and opportunities as below:

An entity’s sustainability-related risks and opportunities arise out of the interactions between the entity and its stakeholders, society, the economy and the natural environment throughout the entity’s value chain. These interactions—which can be direct and indirect—result from operating an entity’s business model in pursuit of the entity’s strategic purposes and from the external environment in which the entity operates. these interactions take place within an interdependent system in which an entity both depends on resources and relationships throughout its value chain to generate cash flows and affects those resources and relationships through its activities and outputs—contributing to the preservation, regeneration and development of those resources and relationships or to their degradation and depletion. these dependencies and impacts might give rise to sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s cash flows, its access to finance and cost of capital over the short, medium and long term.¹

As the impact of climate change becomes more severe, there is an increased need for reporting entities to address these risks and utilize the opportunities that they may present. Formally disclosing how these risks and opportunities are managed can also ensure that the entity is monitoring and considering them in its strategic plans.

In such situations, sustainability reporting can act as a trigger event – by asking management to disclose such information, the reporting entity will ensure that management teams will go through the risk process to generate the required disclosures.

There are also internal operational advantages to any reporting entity focusing on sustainability practices. For example, a strong sustainability strategy leads to cost reduction through sustainable sourcing and financial arrangements. It can help with streamlining operations, lowering expenses and ensuring long-term sustainability. Moreover, sustainable strategies can boost employee satisfaction, leading to higher productivity and a more motivated workforce. However, these initiatives cannot be quantified for improvement if the entity’s reporting policies are not considered. Sustainability reporting provides a wide range of frameworks, guidelines and tools, enabling entities to quantify their benchmarks and KPIs (key performance indicators).

Investors are now demanding greater transparency in sustainability policies, management, and the entity’s impact on its prospects. Sustainability reporting allows companies to showcase their commitment to sustainable practices and create a more sustainable world. It also gives them the opportunity to share their story and demonstrate their progress towards sustainability targets.

By embracing sustainability reporting, organizations can gain competitive advantage. Consumers who seek green alternatives are always on the lookout for brands who want to showcase their commitment to environmental and social responsibilities. As customers become increasingly aware of sustainable practices, having a larger emphasis on sustainability reporting can have a beneficial impact on brand popularity and reputation.

This can also reflect positively on the entity’s access to capital, improve its investment returns and help businesses avoid risks associated with stranded investments.

The urgency of the need to address sustainability related issues is reflected through several international initiatives, including the United Nations General Assembly’s sustainable development goals which are designed as a blueprint to achieve a better and more sustainable future for all. The signing of The Paris Agreement² in 2015 at the UNFCCC'S COP 21 also offers a robust framework to drive sustainable development globally.

As a result, many countries have started regulating sustainability related reporting including De Nederlandsche Bank, the first central bank to sign the principles for responsible investment (PRI). Banque de France is also the first central bank to publish information about its climate-related risks' exposures in line with TCFD recommendations. Countries are now considering the recommendations of the TNFD (Taskforce on Nature-related Financial Disclosures) and we expect that countries will gradually start recommending reporting in line with the TNFD.