Businesses are facing increasing pressure to operate more responsibly. Investors, regulators, consumers, and other stakeholders are demanding greater transparency from companies about their sustainability performance. This trend has also made its way to organizations in Nigeria and Africa, especially with Nigeria being the first African country to adopt the IFRS I and II standards.
To respond to these growing demands across the globe, several new sustainability reporting standards have been developed in recent years. These standards aim to provide a consistent and comparable framework for companies to report on their environmental, social, and governance (ESG) performance. One of the most important of these new standards for Nigeria is the IFRS Sustainability Disclosure Standards (IFRS SDS), which were issued by the International Financial Reporting Standards (IFRS) Foundation in 2023.
The Financial Reporting Council (FRC) of Nigeria, the International Sustainability Standards Board (ISSB) and NGX Regulation Limited (NGX RegCo) on Monday, June 26, launched the first two IFRS Sustainability Disclosure Standards (IFRS S1 and IFRS S2 Standards). The recent issuance of two International Financial Reporting Standards (IFRS) sustainability disclosure standards marks a significant development, poised to usher in mandatory sustainability reporting for Nigerian companies.
Interestingly, some early adopters have proactively conducted gap assessments and formulated plans within their organizations for impending sustainability disclosures, while others have yet to initiate this crucial process. I recommend that organizations embark on this journey early to keep infractions at bay and stay ahead of the competition. Outside of scoring “sustainability” points from stakeholders, it also presents an opportunity to improve existing processes and operations, as the journey to sustainability is one of value creation and value protection for organizations.
First of All, the Context of the New Sustainability Disclosure Standards?
The IFRS Sustainability Standards (IFRS S1 and S2) from the International Sustainability Standards Board (ISSB) integrate sustainability into financial reporting, effective for annual reporting periods starting January 1, 2024.
- IFRS S1 outlines general disclosure requirements for conveying sustainability-related risks and opportunities across short-, medium-, and long-term horizons to investors.
- IFRS S2, focusing on climate-related disclosures, provides detailed information to complement IFRS S1.
Both standards incorporate guidance from the Task Force on Climate-related Financial Disclosures (TCFD), emphasizing “sustainability-related risks and opportunities” and “climate-related risks and opportunities.” The former relates to a company’s cash flow in connection to its engagement with stakeholders, society, the economy, and the environment. The latter addresses how climate change and related efforts can impact businesses, industries, and financial markets.
In addition to the IFRS SDS, there are a number of other sustainability disclosure standards that companies may need to consider. These include the Sustainability Accounting Standards Board (SASB) standards, Task Force on Climate-related Financial Disclosures (TCFD) recommendations, and the Global Reporting Initiative (GRI) Standards. Concurrently, with the writing of this article, the Global Reporting Initiative (GRI) unveiled plans to establish a new Sustainability Innovation Lab (SIL), in collaboration with the IFRS Foundation as its Convening Partner. This novel initiative is designed to assist companies in navigating the evolving landscape of sustainability disclosure requirements.
Now What Does this Mean for Business and Effective Corporate Governance?
To implement the IFRS Sustainability Standards, companies are advised to adopt the Federal Reporting Council of Nigeria (FRCN) standards, which offer industry-specific metrics. Disclosure requirements, covering governance, strategy, risk management, and metrics/targets, align with the Nigerian Climate Change Act 2021.
The Climate Change Act applies universally, requiring organizations to address governance needs in line with the Act. For instance, the Act mandates the appointment of a climate change or environmental sustainability officer responsible for reporting climate-related actions to the National Council on Climate Change. This officer also plays a role in preparing and presenting sustainability and climate-related disclosures, along with financial reports, to investors and stakeholders.
The new Sustainability Disclosure Standards (SDS) issued by the International Sustainability Standards Board (ISSB) are expected to have a significant positive impact on business and effective corporate governance in several ways:
- Increased transparency and accountability: The SDS will require companies to disclose more comprehensive and comparable information about their sustainability performance, including their environmental, social, and governance (ESG) risks and opportunities. This will help investors and other stakeholders to understand better and assess the long-term viability of companies and make more informed decisions about where and how to invest or engage.
- Improved risk management: By requiring companies to disclose their ESG risks, the SDS will encourage them to identify and manage risk more effectively. This can help companies to avoid costly scandals and other reputational damage.
- Enhanced long-term value creation: Companies that effectively manage their ESG risks and opportunities are likely to be more successful in the long term. This is because they will be better equipped to adapt to changing environmental and social conditions, attract and retain talent, and build strong relationships with customers and other stakeholders.
- Stronger corporate culture: The SDS can help foster a more sustainable and responsible corporate culture by setting clear expectations for ESG performance. This can lead to a more engaged and motivated workforce, which can contribute to improved financial performance.
- Executive compensation: The SDS will encourage companies to link executive compensation to ESG/sustainability performance. This can help to align the incentives of executives with the long-term interests of the company and its stakeholders.
- Audit and assurance: The SDS will require companies to have their sustainability disclosures audited and assured. This will help to ensure that the disclosures are accurate and reliable.
Final Thoughts
In conclusion, companies in Nigeria should take proactive steps to adopt these standards early, as beyond compliance, embracing sustainability disclosures presents an opportunity for value creation and protection, impacting processes and operations positively.
Embracing the journey to sustainability is not just about scoring points with stakeholders; it’s a strategic move towards resilience, adaptability, and responsible corporate citizenship in the evolving landscape of global business. As sustainability becomes a key driver of corporate governance, companies that seize the opportunity early will likely enjoy a competitive advantage and contribute to building a more sustainable and resilient business ecosystem.
In line with our drive to promote best practices in Nigeria, the Society for Corporate Governance Nigeria(SCGN) is collaborating with NGX Regulation Limited (NGX RegCo) to formulate Campaigns, Events, and other initiatives geared toward promoting sound ESG practices for organizations in Nigeria. I encourage you to be on the look out for updates in this regard.