The introduction of the IFRS Sustainability Disclosure Standards (IFRS SDS) and, separately, the European Sustainability Reporting Standards (ESRS) might seem like yet more new sets of standards in the crowded sustainability reporting scene but there are opportunities that companies can harness to improve their business performance. Swift adoption, regardless of the phased timing allowed, can offer substantial benefits, for both reporting companies and their stakeholders. In addition, the IFRS SDS are based on existing frameworks and standards (including the recommendations of the Task-force on Climate-related Financial Disclosures (TCFD) the International Integrated Reporting Framework and standards issued by the Sustainability Accounting Standards Board (SASB)) meaning that the structure and requirements of reporting will be familiar to many of the companies that already publish sustainability reports.
Improved transparency and accountability – for all stakeholders
These regulations will foster enhanced transparency and accountability, yielding universally comparable sustainability reports regardless of a company's geographic location. Through IFRS SDS or CSRD, companies gain a platform to communicate their ESG contributions and impacts to stakeholders, emphasising their role in advancing critical sustainability agendas. Mandatory assurance of information will instil confidence and encourage responsible investment, channelling resources towards organisations excelling in ESG performance and compelling others to reevaluate their practices.
Crucially, these regulations aim to counter the risk of greenwashing, ensuring the accuracy and reliability of sustainability claims.
Excellence
Embracing ESG principles can lead to operational excellence, improved talent attraction and retention, and potential eligibility for government incentives. Furthermore, aligning with international value chains can yield advantages, buoyed by demands from major international buyers.
The process of crafting sustainability reports will foster engagement across all business areas, offering valuable team-building and educational opportunities. Clients, staff, and other stakeholders will have greater insights into the sustainability performance of companies, empowering them to make informed decisions and support businesses that align with their values.
Assessing climate change impacts
Arguably one of the most important benefits, through implementing IFRS SDS or CSRD companies can manage their risk by assessing their exposure to climate change, prompting greater board involvement in steering sustainability strategies throughout the organisation.
A comprehensive and standardised framework to guide sustainability reporting will enable companies to establish an objective baseline, benchmark their performance, and set sustainability goals.
As more companies begin to integrate various ESG elements into their operations, we will likely see improved risk management, greater cost savings and operational efficiencies. In time, ESG won’t be thought of us as a separate business agenda item – it will be fully integrated into an organisation’s operations, as it should be.
Competitive advantage
Currently, ESG might be seen as a competitive advantage depending in which industry an organisation operates. Companies with a strong client/consumer focus or where employee mobility is a concern will benefit from the current competitive elements. There is still a focus on price in many industries, with consumers more worried about what a product will cost, rather than the environmental impact. Viola Möller from BDO in Germany believes this is where a focus on the value chain is important because managing the entire supply chain responsibly will ultimately ensure a more competitive end-product. However, in time, it will simply be a requirement of running a business. For companies making disclosures on biodiversity and human rights issues a competitive advantage over their industry partners who are not doing so is a distinct advantage, as well as being ahead of the curve for when these disclosures become mandatory.
The converse of this is that in a few years’ time when firms must report they could well find themselves at a disadvantage if they do not provide the required information. Hence the push for early voluntary adoption of the standards as well as adoption by companies that are not compelled to report under either the IFRS SDS or the CSRD.
Positive impact on investor perceptions
The 2023 Edelman Trust Barometer Trust 2023, shows that stakeholders, including investors, expect companies to play a more active role in ESG factors. These include:
Increasingly, investors and capital providers are recognising that ESG issues can have a material impact on a company’s long-term performance and are therefore incorporating ESG factors into their investment analysis of risks and opportunities. This will only increase in time as climate-risk (both transition and physical risks) will affect the financial performance of an entity. Investors will want to be sure that the organisation is actively managing all risks – include material ESG issues – to generate better returns in the long-run. A common reporting framework will allow investors to make decisions with easily comparable information. Digital tagging will also make for easier comparison.
“If companies want to remain a sustainable option for investors and clients, they need to adopt ESG into their core strategy and decision-making.”
Benjamín Ayala Raineri, Sustainability Manager, BDO in Chile
Josephine Tam says in Singapore there might be a greater call in the future for companies to disclose their strategies in mitigating their impacts on biodiversity and human rights issues, as we have seen with the call from Blackrock’s CEO, Larry Fink in 2021 to get companies to disclose their sustainability matters. While there are no requirements currently for Singapore companies to disclose sustainability information, the sustainability landscape is constantly evolving, and Singapore companies are expected to be required to report using the International Sustainability Standards Board (ISSB)-aligned Climate-Related Disclosures (CRD) starting from the financial year 2025 (FY 2025). The CRD requires companies to disclose financial performance pertaining to sustainability matters which is similar to the requirements of companies that are required to report in accordance with the ESRS.
In fact, the impact on the entire value chain should be considered as suppliers and clients of a company are also important stakeholders that will benefit from having access to this increased level of reporting.