Pathways to IFRS sustainability reporting success 

Wed 03 Apr 2024

As an approach, sustainability reporting offers organisations a framework to re-envisage and repurpose the business model. Importantly, by helping to improve company and investor-specific information, sustainability reporting can be used to inform and enrich strategy. Sustainability information helps organisations analyse broader risks and opportunities that consider how business operations impact people and the planet, as well as what impact social and environmental factors have on the business. 

There are now several disclosure standards to support sustainability reporting. One set of standards growing in popularity is the International Financial Reporting Standards Sustainability Disclosure Standards (IFRS SDS). Seen as a cost-effective approach that can be implemented ‘out of the box’, IFRS SDS is intended as a global baseline to meet the information needs of the primary users of financial statements, such as investors and credit suppliers. In contrast, the Global Reporting Initiative (GRI) standards and European Sustainability Reporting Standards (ESRS) are designed for more comprehensive stakeholder needs, albeit the implementation challenges are similar. 

For organisations now looking to implement IFRS SDS, addressing the main benefits and challenges can smooth the path ahead and help tackle the practicalities of using it as a strategic driver. 

What challenges and benefits does IFRS SDS present?

As with any new set of standards, the cost and complexity of implementing IFRS SDS will depend on where you are on your sustainability reporting journey. Plus, any ongoing and potentially rising costs relating to assurance should be factored in, particularly as we move from a limited to reasonable  assurance landscape over the coming years. As organisations broaden their approach to information published, the risk of sustainability goals being challenged also comes with a greater risk of litigation. 

A further challenge is that IFRS SDS presents another sustainability standard alongside the GRI and ESRS. While the global aim is for standards to become interchangeable, different standards continue to evolve. A periodic assessment of which standards are required, overlap or present the best fit is advisable, particularly where choice is available. 

A big benefit of sustainability standards is the ability to inform strategy. In terms of IFRS SDS, working with such an information-rich framework should also give investors and credit suppliers more assurance, potentially increasing access to and reducing the cost of capital. At the same time, improving the quantity and quality of data over time can be used to engage with wider stakeholders more effectively and confidently. 

Primary implementation considerations

It’s important to first determine which reporting standards apply to which entities. As a starting point, companies should identify the entity’s reporting requirements, including any extra-territorial impacts of the requirements of regulations like the CSRD in Europe and developments in the US. Entities need to consider whether there are any year-on-year changes in the group structure that impact reporting boundaries and how best to aggregate and disaggregate sustainability reporting to reflect the difference between sustainability risks and opportunities and the financial position. 

Identifying material risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term is a further consideration. Not only because it’s new for many companies, but because it requires thinking beyond the short term. Framing sustainability risks and opportunities across the short, medium, and long term in a meaningful way to investors and credit suppliers must be approached comprehensively across the entire environmental, social and governance (ESG) spectrum.  

The other significant consideration is the value chain. In particular, working out where your value chain begins and ends. This isn’t necessarily obvious, particularly if you are a global organisation that operates across many sectors. So, defining your value chain is vital. Then, it’s a question of being realistic about how deep you go into the value chain in the early years until you build up enough credible data. As well as setting up systems and processes to extract data from within your value chain, offering support and guidance to suppliers will help them understand the importance of providing reliable and consistent data to support sustainability disclosures.  

Adopting a work-in-progress mentality

It’s important to understand that the ability to comply with sustainability standards is often a work in progress, from defining objectives to sourcing reliable data that pass assurance tests. In the early years, it’s better to explain why data is either estimated, poor or unavailable than to supply data without explanation and likely to present a false sustainability picture. 

There should also be a distinction between numerical sustainability data and narrative information. In terms of sustainability reporting, there’s a big emphasis on narrative information. Indeed, organisations may find they already hold valuable information that can form the basis of narrative sustainability disclosures. While sourcing sustainability data remains a top challenge, it’s important to remember that robust and mature financial systems already in place can help underpin the processes and controls needed for new sustainability data requirements. It’s about finding the right balance between new data requirements and leveraging the expertise of financial teams to reduce the burden.   

The report itself has to be a fair and reasonable representation. In this respect, tone and balance are essential. Vague statements that can lead to accusations of greenwashing should be avoided. Information should be clear, authentic and backed by positive actions if it’s to be trusted by report readers.  

Regarding the next steps organisations need to take, timing is a big issue. While reporting transition periods allow organisations some grace, timing is now critical when required connectivity and consistency of sustainability disclosures with financial accounts and annual reports are considered. In addition, documentation and evidence for statements need to be in place for

Implement the four Es

Finally, organisations can take several steps to ensure they are fighting fit and ready to implement IFRS SDS. Namely, by focusing on the four Es: educate, establish, engage and explore. 

The first step is to educate the board and management responsible for sustainability reporting. Identify any knowledge gaps to improve skills and understanding of sustainability issues. Secondly, establish a transparent governance structure so that it’s clear where responsibility for sustainability sits and that there’s appropriate cross-function collaboration between the board, finance, risk management and sustainability teams. The next step is to engage across the organisation to identify where processes need to improve to manage sustainability requirements effectively. Then, assess the maturity of those processes, controls and data models to create a roadmap. Finally, explore your options to transform the reporting function and prepare for assurance.  

Taking the time to assess sustainability choices and requirements ensures organisations are on the right pathway at the outset, improving sustainability reporting success and gaining a strategic advantage. 

More comprehensive information on IFRS Sustainability Reporting Standards: implementation challenges for preparers is available here.