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Amidst the growing awareness of sustainability, driven by the tangible effects of climate change in our daily lives, the importance of environmental responsibility has surged to the forefront.
In June 2023, the IFRS announced the release of ISSB’s first two International Sustainability Disclosure Standards, IFRS S1 and IFRS S2. This marked a pivotal moment in the world of sustainability standards and frameworks.
Prior to this, the landscape of sustainability standards was highly fragmented, causing confusion and discouragement among companies and financial institutions (FIs) regarding their engagement in sustainability disclosure practices.
Now, a clearer path has emerged for companies and FIs to navigate their sustainability disclosure practices. While there may still be some uncertainties and potential future changes, this development represents a positive step towards standardized sustainability reporting.
In this article, REANGLE discusses the following issues related to ISSB:
Mandatory ISSB-aligned climate reporting
Implications for reporting entities and financial institutions
Importance and challenges of sustainability reporting for SMEs
Evolving Sustainability Disclosure Standards and the Emergence of ISSB
ISSB is not just an additional player in the sustainability landscape.
It has emerged as the central pillar of the global sustainability standard discussion. It replaces and incorporates elements from various prior reporting standards, and is compatible with both GAAP and IFRS accounting standards.
Starting from 2024, ISSB will also take over TCFD’s responsibility of monitoring progress towards climate-related disclosures. Published in 2017, the TCFD recommendations has been the most widely used framework for sustainability reporting for a few years.
IFRS S1 also requires reporting entities to refer to the Sustainability Accounting Standards Board (SASB) standards when identifying sustainability-related risks and metrics. SASB standards consist of 77 industry-specific standards which helps identify financially material sustainability-related risks and metrics.
Most importantly, ISSB places a heavy emphasis on quantitative financial disclosure, addressing the needs and expectations of financial stakeholders. By doing so, it propels the momentum of green finance to new heights.
Mandatory ISSB-aligned Climate Reporting is Fast Approaching
The ISSB standards are set to take effect for annual reporting periods starting on or after January 1, 2024.
In Singapore, climate reporting is already mandatory for issuers in the financial; agriculture, food and forest products; as well as energy industries for the current financial years. By 2025, it will be mandatory for all listed issuers to disclose ISSB-aligned sustainability disclosures; and by 2027 large non-listed companies will be subjected to the same requirement too. This signifies the government’s commitment to the expansion of sustainability reporting in the country. Listed and large non-listed companies are thus under pressure to adapt ISSB in a timely manner.
In several other countries, the adoption of ISSB standards is also on the horizon for listed companies. Notably, in countries like Australia, Switzerland, and Hong Kong, listed companies will soon be subject to mandatory climate-related disclosures, with this requirement set to take effect starting next year.
However, this impact extends beyond just large corporations. Small and medium-sized enterprises (SMEs) and local businesses must also be prepared to consider whether the ISSB standards will become a reporting requirement within their respective local jurisdictions.
Benefits and Costs to Reporting Companies
High Initial Adoption Costs
One notable requirement of IFRS S2 is the disclosure of Scope 3 GHG emissions. This is very challenging and costly. Companies need to collect complex, often externally-sourced, data using different methodologies. Furthermore, companies would need to establish or modify their internal systems and hire new staff to ensure it remains compliant with the ISSB standards.
Nonetheless, companies already engaged in sustainability reporting and familiar with SASB and TCFD are likely to encounter fewer challenges when transitioning to the ISSB standards.
Early Adoption of ISSB Standards Allows Companies to Reap Benefits
Adopting ISSB early will enable companies to comply with regulations more smoothly. This avoids disruptions arising from last-minute compliance efforts, potential fines from failure to comply with regulation requirements, and reputational damage.
Internally, early adoption provides companies with a clearer understanding of their environmental impact and sustainability performance. Access to data enables more informed decision-making, potentially leading to cost savings and business opportunities.
Benefits for Financial Institutions
Current sustainability reports are insufficient and inefficient for FIs. ISSB aims to combine sustainability-related and financial information, meeting the needs of investors and the financial market. Wide adoption of ISSB standards is favorable to FIs.
Benefits for FIs include:
Enhanced comparability, especially between companies within the same industry
Automation of sustainability analysis, increasing efficiency and reducing costs
While the ISSB standards do not mandate auditing, they make sustainability reports assurable, potentially improving their reliability and accuracy in the long run
Forward-looking statements allows better understanding the companies’ future prospects
Scenario analysis enables enhanced risk management through better understanding of the companies’ climate resilience
Disclosure of scope 3 emissions, which is often the largest source of GHG emissions, provides a better picture of the company’s overall sustainability-related performance
With access to more quantitative, standardized, and comprehensive sustainability-related data, FIs will be able to better integrate environmental factors into various financial tools and models for company analysis.
Importance of Sustainability Disclosures for SMEs
The initial cost of adopting sustainability disclosure practices can be high. However, it could be an investment instead of a burdensome cost.
If done right, sustainability reporting could bring in a plethora of benefits for SMEs:
Ability to sustain business relationships with big company customers obliged to disclose Scope 3 emissions
Improved brand reputation, leading to top line growth in regions where sustainability is a top priority for consumers
Easier access and lower costs of capital, especially as FIs seek to meet their net-zero goals
Cost reduction stemming from more efficient energy and water usage
Access to sustainability-related government grants and funding
Minimize costs and effort needed to comply with potential mandatory sustainability disclosure requirements in the future
Conversely, failure to adapt sustainability disclosure could negatively impact SMEs’ business growth, and even continuity, due to:
Loss of current and potential business with big corporations
Limited access to funding; or even they are able to secure funding, it typically comes at higher costs
Increased insurance premiums
Difficulty adopting sustainability disclosure practices when it becomes mandatory in the future
Hence, SMEs should recognize that neglecting to account for their carbon footprint can have substantial repercussions. Early adoption of sustainability disclosure standards like those established by the ISSB offers SMEs a competitive edge.
Adoption Challenges Unique to SMEs
Large companies can afford hiring new staff and the necessary resources to collect and disclose sustainability-related data. However, SMEs often do not have that privilege.
With no specific metrics required by ISSB and no specified methodology for scenario analysis, SMEs are burdened with the task of identifying material sustainability-related risks and opportunities, as well as coming up with a suitable approach to scenario analysis.
This has deterred SMEs from starting sustainability disclosure, even if they want to and are aware of the benefit to early adoption and repercussions of failing to do so. This is where REANGLE can help, by providing consulting services assisting SMEs in navigating green finance related regulations.
About REANGLE
REANGLE offers Green Finance Consulting services to institutional investors and corporations in Southeast Asia, Japan, and beyond by leveraging Singapore’s talent. Currently, REANGLE provides Green Finance Analysis and Green Data Analytics services, as well as conducts Greenwashing Risk Assessments to drive authentically sustainable businesses and investments.
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