Go green or go bust

Boards in South Africa need to be aware of impending changes to the Environmental, Social and Governance (ESG) reporting landscape, which will make sustainability more than just a tick-box exercise.

This is according to Webber Wentzel’s Dalit Anstey, who said that ESG reporting has significantly evolved globally, with integrated reporting becoming common.

“The global reporting landscape has undergone a tectonic shift over the last decade, fueled by the recognition that ESG or sustainability issues have the potential to impact financial value,” she said. 

“Integrated reporting practices have become popular, allowing companies to report on material information about their strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which they operate.”

She said South Africa was one of the first countries to adopt the Integrated Reporting Framework as part of its corporate governance framework.

There has been a movement towards standardising ESG disclosures, with the International Financial Reporting Standards (IFRS) Foundation forming the ISSB in 2021 to develop these standards. 

The IFRS Foundation used to be concerned only with the global convergence of accounting standards. However, in November 2021, it expanded its focus to sustainability-related disclosure standards by forming the International Sustainability Standards Board (ISSB). 

The ISSB aims to complement existing IFRS Accounting Standards to provide consistent and comparable sustainability reporting.

According to the IFRS Foundation, the IFRS Accounting Standards and the ISSB Standards are meant to complement each other to create high-quality, transparent and comparable information in financial statements.

It should also contain sustainability disclosures that are useful to investors and other world capital market participants in making economic decisions.

Last year, the ISSB published its inaugural standards (IFRS S1 and IFRS S2), which aim to promote consistency and comparability in sustainability reporting and disclosure. 

The ISSB Standards broadly incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Anstey said various countries, including Canada, Japan, Singapore, Australia, and Malaysia, are consulting or have ended consultations on incorporating sustainability-related disclosures in their respective regulatory frameworks through the adoption or other use of the ISSB Standards. 

Brazil, Costa Rica, Sri Lanka, Nigeria, and Turkey have already indicated their intention to adopt or otherwise use the ISSB Standards. 

In June 2022, the European Union’s Corporate Sustainability Reporting Directive (CSRD) maintained that the ISSB Standards be incorporated into the European Sustainability Reporting Standards to the greatest extent possible. 

The USA Securities and Exchange Commission’s (SEC) climate disclosure rule also has similarities with the ISSB Standards.

Anstey explained that the way the ISSB Standards are adopted in a particular jurisdiction ultimately depends on the regulatory framework operating in that jurisdiction. 

According to the IFRS Foundation’s Jurisdictional Guide for the adoption or other use of ISSB Standards, it usually begins with a policy decision to adopt ISSB.

This identifies the policy rationale and defines which entities are in scope and the date of the application. This is usually followed by a regulatory implementation programme, which would include transitional arrangements.

In South Africa, the Companies Act and the Companies Regulations require certain companies to prepare their financial statements in accordance with the IFRS. 

The Companies Regulations define the IFRS as “the International Financial Reporting Standards as issued from time to time by the International Accounting Standards Board or its successor body”.

Sustainability-related or ESG disclosures and reporting are currently addressed in the King IV Code on Corporate Governance, which is a set of voluntary principles but is mandatory for JSE-listed entities by virtue of the JSE Listing Requirements. 

However, King IV does not provide detailed guidance on what sustainability or ESG disclosure standards should be adopted.

In 2022, the JSE issued Sustainability and Climate Disclosure Guidance documents that draw on and align with influential global initiatives on sustainability, ESG and climate change disclosure, including the ISSB’s prototype disclosure requirements. 

On 10 May 2024, South Africa’s Prudential Authority issued guidance notes to banks and insurers on climate-related disclosures, governance, and risk practices, which also draw on the ISSB Standards and recommendations of the TCFD.

Anstey said many JSE-listed companies have already been reporting on sustainability-related matters in their integrated reports or as part of their annual reporting suite. 

The IFRS Foundation notes that the transition to ISSB Standards may be easier in jurisdictions where guidance has been established on the Integrated Reporting Framework or the TCFD’s recommendations.

This is because important elements of these reporting frameworks and standards are built into ISSB Standards. 

“Nevertheless, the adoption of mandatory ESG disclosures, prepared in accordance with the ISSB Standards, would require significant changes to the existing regime,” she said.

Firstly, it would require a shift in the mindsets of many South African companies, which do not currently perceive sustainability-related or climate-related disclosures as financial in nature.

Secondly, it would require changes to the existing regulatory regime, which would need to be made to cater to a policy decision to adopt ISSB Standards on a mandatory basis. 

Thirdly, in terms of application, a mandatory ESG reporting regime would likely apply to a wider range of companies than currently captured, create more specificity around the content of disclosures, and could have implications for legal liability for non-compliances, non-disclosures or misstatements.

“In March 2024, the Chair of the ISSB met with leaders in Kenya, Nigeria and South Africa to discuss considerations for the implementation of the ISSB Standards in Africa,” Anstey said. 

“Although the path towards adopting the ISSB Standards and/or mandatory ESG disclosures in South Africa has not yet been clearly paved, boards should keep up with developments taking place globally and should ensure that companies have robust ESG practices in place.” 

“Sustainability should not be relegated to a tick-box exercise.”