As our journey towards a more sustainable future gains momentum, the corporate realm is under growing pressure to play a pivotal role. Reflecting this shift, the International Sustainability Standards Board (ISSB) made a significant move on June 26th by introducing the International Financial Reporting Standard S-1, the General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S-2, Climate-related Disclosures. This initiative focuses on elevating the consistency and depth of disclosures pertaining to Environmental, Social, and Sustainability aspects—a vital stride towards aligning global businesses with comprehensive and impactful reporting practices. Investors, companies, policymakers, market regulators and other organisations around the world (including the G20 and G7 Leaders) have all signalled their support for the standards. The standards are designed to be phased in, with companies being able to focus on climate disclosures only in year 1.

Under this framework, companies are required to disclose material information about sustainability and climate risks as well as opportunities that could impact the business. Specifically, companies must provide details about how these risks and opportunities could influence the company’s business model, strategic plans, and consequently, cash flows, ability to raise funding, or cost of capital over the short, medium and long term. The goal is to give users a clear understanding of how environmental and social factors may affect the company financially, both now and in the future. This emphasises how sustainability issues can directly impact a company’s financial performance. 

Kenya has previously been at the forefront of such efforts. In November 2021, the Nairobi Securities Exchange in collaboration with the Global Reporting Initiative launched an ESG Disclosures Guidance Manual to guide the market towards improvement and standardisation of reporting by listed entities. Similarly, the Institute of Certified Public Accountants of Kenya (ICPAK) has partnered with the Pan African Federation of Accountants to launch the inaugural Sustainability Reporting Standards IFRS S1 and IFRS S2, slated for September 5. The adoption of IRFS S1 and IFRS S2 is expected to usher in a phase where companies will have mandatory reporting standards and timelines for sustainability-related disclosures. The Standards will for the first time create a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects. The launch of the standards locally is expected to address the challenge of non-standardised reporting on matters of ESG. 

The global trade agenda is quickly shifting from stakeholders such as investors and consumers being primarily concerned with financial performance, products and prices. The conversation now incorporates a more holistic approach where a company’s values and purpose in today’s world are intertwined and a big part of decision-making. The intricate landscape of the ESG framework has been interpreted broadly resulting in a myriad of sustainability reporting mechanisms, raising issues regarding the reliability and comparability of the information in sustainability reports. The harmonisation of these reporting standards will better align markets and allow for the fair comparison of ESG-related financial information.

Additionally, these new rules will result in disclosures that are relevant for investment and decision-making, providing corporates with a platform to showcase performance as well as the commitment to driving sustainable value creation. Adopting the Standards will produce more consistent and reliable corporate sustainability disclosures, thereby better informing capital allocation decisions and corporate strategies flowing from the top. In essence, it is an avenue for enterprises to not only unveil their sustainability endeavours but also to vie for investment and consumer devotion in an increasingly discerning marketplace. 

The adoption of these standards will help fill the data gap with comparable and reliable information about sustainability risks to companies, chiming in useful information to data-driven sustainability efforts. Through enhancing comparability, the convergence of sustainability standards will enable more agile, efficient, and evidence-based decision-making and can better measure progress in a way that is both inclusive and fair. Using data to drive change helps make decisions that guide measurable and responsible business practices. 

Sustainability reporting is increasingly becoming a critical lever of corporate governance. The reprieve permitting companies to focus on climate disclosures within the first year of implementation provides room to build a strong foundation for comprehensive sustainability reporting, gradually incorporating all relevant aspects over time. By actively embracing these global reporting standards, companies gain a competitive advantage in terms of transparency and credibility. 

The adoption of IFRS S-1 and IFRS S-2 presents a unique opportunity for corporations to enhance transparency, attract sustainable investments, and demonstrate their commitment to a more responsible and resilient future. By proactively embracing these standards and integrating sustainability into their corporate strategies, companies can not only meet regulatory requirements but also gain a competitive edge in a world where sustainability is increasingly becoming a focal point of decision-making for investors and consumers alike.