Environmental, Social and Governance (ESG) risks and opportunities, as well as their effect on long-term value creation for both public and private companies, continue to be front of mind for investors and other stakeholders. When considered in line with the definition of material information under IFRS, being information which if omitted, misstated, or obscured could reasonably be expected to influence decisions that primary users of financial statements make on the basis on those financial statements, the continued stakeholder focus on ESG highlights its increasing importance for consideration by Audit Committees.
The Audit Committee considerations with respect to ESG can be broadly split across two key areas: sustainability reporting, and impact on the financial statements.
The sustainability reporting landscape continues to develop quickly with some major changes seen in the past 18 months as the sector moves towards maturity. Most notably we have seen; the release of the International Sustainability Standards Board’s (ISSB), an IFRS foundation, inaugural standards IFRS S1 and S2; the disbandment of the Taskforce for Climate Related Financial Disclosures (TCFD) as they passed the torch to the ISSB; and both the ISSB and European Sustainability Reporting Standards (ESRS) become effective from 1 January 2024.
With regards to the impact on the financial statements, we are seeing an increasing interest from stakeholders who want to understand how the risks and opportunities relating to climate and other sustainability areas translate to an impact on the financial performance. This impact could be seen through the estimates and judgements used, impairment of assets, changes to useful life, or impacts on fair value.
These topics are covered in greater detail as part of our report - ESG Guide for Audit Committees.
The purpose of this guide is to provide a current analysis of the various elements of ESG reporting that may be within the Audit Committee’s mandate. Takeaways from the guide include the following:
- The current state of the main ESG reporting standards and regulatory requirements.
- The potential climate-related impacts on financial statements and internal controls.
- The different forms of external assurance that can be provided to stakeholders.
From a Crown Dependencies (CDs) perspective, there currently exists no mandatory sustainability reporting requirements however we do note that the Guernsey Financial Services Commission has issued a discussion paper on the future of sustainability reporting which focuses on the ISSB standards, the Jersey Government's consultation on how the jurisdiction wants to position itself with respect to sustainable finance had positive results which could open the door for sustainability reporting requirements, and the Isle of Man Government is expected to release its sustainable finance roadmap later this year.
Additionally, even without local regulatory requirements, CDs entities may find themselves falling under the scope of mandatory requirements imposed by other jurisdictions, such as the UK or EU, due to listing status or organisational structure. It is therefore important for Audit Committees to be aware of the current reporting regulations, their scope, and any impact these could have on their entities’ reporting requirements.
It is also noted in our report above that the TCFD identified the finance sector as one of five sectors that are expected to be most affected by climate-related risks. As the finance sector is a large part of the CDs economy, it is important for Audit Committees to be aware of the impact that both physical and transitional climate related risks can pose and ensure that sufficient information is included within the financial statements for users to understand their impact where material.
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