The first two International Financial Reporting Standards (IFRS) sustainability disclosure standards were issued in June 2023 and they are expected to pave the way for mandatory sustainability reporting for Nigerian companies, having been adopted by Nigeria and launched by the Nigerian Exchange Group Regulation Limited (NGX Co) and the Financial Reporting Council (FRC) of Nigeria.
Some organizations have prepared for sustainability disclosures with gap assessments and plans, while others haven’t started yet. The advice is to begin early, as this process can take time. Embrace continuous improvement and view it as an opportunity to strengthen existing processes. This article provides guidance for organizations and for the government.
So, how do you get started?
The first thing is to understand the features and scope of the ISSB sustainability standards.
What are the standards?
The IFRS Sustainability Standards – IFRS S1 and IFRS S2 – were issued by the International Sustainability Standards Board (ISSB) to integrate sustainability with financial reporting of companies, and they are applicable for annual reporting periods beginning on or after 1 January 2024. The ISSB standards require a company to disclose information about all sustainability and climate-related risks and opportunities that could reasonably be expected to affect its prospects.
IFRS S1 General Requirements encompasses disclosure guidelines aimed at facilitating companies in conveying pertinent sustainability-related risks and opportunities they encounter across short, medium, and long-term horizons to investors.
IFRS S2 Climate-related Disclosures, on the other hand, furnishes explicit and more intricate climate-related disclosures, meant to complement IFRS S1.
Both sets of standards comprehensively integrate the guidance proposed by the Task Force on Climate-related Financial Disclosures (TCFD). The key terms in the standards are “sustainability-related risks and opportunities” and “climate-related risks and opportunities.”
Sustainability-related risks and opportunities refer to how a company’s capacity to produce cash flow is closely tied to its engagement with stakeholders, society, the economy and the environment across its value chain.
On the other hand, climate-related risks and opportunities refer to the ways in which climate change and efforts to address it can impact businesses, industries, and financial markets.
Getting it right from a business standpoint
Upon understanding the scope of the standards, the next step to embark on is identifying sustainability and climate-related risks and opportunities within your business value chain after which you identify material information for disclosure. This means the company must disclose or report all relevant sustainability and climate-related risks and opportunities in its operations. Information is material when its omission, misrepresentation, or concealment might reasonably be anticipated to affect the judgments made by the primary users of corporate reports and investors. For the purpose of implementing the standards, The IFRS advises companies to adopt the SASB (Sustainability Accounting Standards Board) standards because they are industry-based metrics.
An organization’s disclosure requirements (whether sustainability or climate-related) should address governance, strategy, risk management, and metrics and targets. These requirements are interoperable with the Nigerian Climate Change Act 2021.
The Climate Change Act (the Act) applies to every organization regardless of the type of business. Hence, the governance requirement under the standards may be extrapolated from the Act. For instance, the Act provides that every entity should have a climate change officer or environmental sustainability officer who will be in charge of sending reports of their climate-related action implementation to the National Council on Climate Change. In the same vein, the climate change officer will be involved in preparing and presenting the organization’s sustainability and climate-related disclosures, alongside financial reports, to investors, other financiers and stakeholders
Getting it right from the government’s standpoint.
After the launch of the two standards by the Financial Reporting Council of Nigeria and the Nigerian Exchange Group Exchange Limited in Lagos, a greater and much better achievement would be evidence of the government’s commitment to implementing the standards. I believe this is where the National Council on Climate Change should display its regulatory administrative functions.
The Council should design a framework to assess the suitability of IFRS S1 and IFRS S2 for implementation in Nigeria and for a possible mandatory requirement for companies. Perhaps, the Council should establish a Nigeria Sustainability Disclosure Policy and Implementation Committee comprising members from financial institutions and other sectors of the economy (considering that banks already have some sustainability principles they adhere to). The eventual Nigerian Sustainability Disclosure Standards would then form the basis for any future regulations for Nigerian companies to report on risks and opportunities relating to sustainability and climate-related activities of a business.
This implies that the government has more work to do in this regard than a mere adoption and ceremonial launch. As emphasized by the Director General of the Securities and Exchange Commission, “the adoption sends a strong message to the global community that Nigeria is committed to transparent and responsible business practices that prioritize environmental stewardship, social well-being as well as good governance. What more? Nigeria begins to attract the needed capital to fund its energy transition plans.”
Beyond regulatory compliance, implementing the standards holds some benefits for your business/organization because it enables you to tell a story. The SASB metrics help you set up management systems in your organization to navigate the associated risks and opportunities. Your ability to tell that story to the capital markets is rewarded with additional capital to fund your organization’s transition. Companies that tell their stories more effectively are likely to draw more capital at a lower cost.
Fortrose anticipates that these disclosures will become mandatory over time. We advise your organization to get started with these steps:
i. Identify material sustainability and climate-related risks and opportunities relevant to your organization
ii. Set a climate change and sustainability ambition in accordance with Nigeria’s net-zero targets
iii. Formulate a climate change and sustainability strategy
iv. Adjust corporate governance or organizational structure
v. Appoint a climate change officer
vi. Strengthen organizational capacity to segue to renewables
Okediya is an energy policy analyst at Fortrose Consulting and a sustainable finance thought leader with a background in law