2023 will bring more changes for corporate reporting. The tumult of the past few years has
seen the rise of international sustainability reporting standards and the falling away of some
beloved reporting organisations in the midst of the industry consolidation. This year, we can
expect the finalisation of the first international standards, a scramble to push their inter-
operability, and a major thrust for their early adoption.

The International Sustainability Standards Board (ISSB) will release its first two standards on
IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information
and IFRS S2 Climate-related Disclosures this year – expected in June. The standards are likely
to carry a delayed effective date and the date currently being mooted is for financial years
starting on or after 1 January 2024 with early adoption allowed. The next exposure draft due
out from the ISSB – maybe late this year – could be biodiversity/nature as there is plenty of
existing sustainability guidance material from which the ISSB can draw (human rights is another possible exposure draft. Also significant is that the ISSB will – around April this year – seek stakeholders’ input on determining its line-up of new standards to be worked on over the next two years (i.e. what matters most).

The ISSB will also be hard at work on other projects too, such as its arrangement with the
GRI to enhance inter-operability between the two sets of standards, as well as with other
regional sustainability reporting initiatives such as the EU’s European Sustainability
Reporting Standards (ESRS) and the SEC’s climate disclosure requirements.
Both projects feed into its building blocks approach whereby the ISSB standards are positioned as the global baseline and facilitate inter-operability with each country’s specific requirements to meet
multi-stakeholder information needs (see this as a sort of layered cake approach).

And then there’s its major thrust to encourage the early adoption of its standards in the 145
countries that use the IFRS Accounting Standards issued by the International Accounting
Standards Board (IASB), its sister standard-setting body under the IFRS Foundation.

In Europe, the EU’s first set of twelve sustainability standards (ESRS) should come into play
under a phased-in approach that will see the first companies getting ready to report in their
2024 financial year. The second set of draft standards should be released in exposure draft
form later this year too – these will notably include sector-specific standards and
proportionate standards for SMEs.

And what’s in store for integrated reporting in 2023? Well, its carry on as usual in
integrated reporting and applying the Integrated Reporting Framework. But know that some
changes could be on the cards. The prime change could stem from the IASB and ISSB’s
moves to try and reconcile the widely used Integrated Reporting Framework with the newer
and untested management commentary exposure draft.

And perhaps on the cards too, is a joint IASB and ISSB project looking at the overall
corporate reporting structure – but no guesses on the timing of this one. (And hey, they
could just look at our octopus model to corporate reporting which has worked well in
South Africa over our ten years of integrated reporting).

Things are moving quickly in international corporate reporting … and there’s more change afoot.

On 31 March 2022, the International Sustainability Standards Board (ISSB) released its first two IFRS Sustainability Disclosure Standards Exposure Drafts – a general requirements draft standard and a climate draft standard. (The link to these is on the home page of this website.)

On 29 April 2022, the European Union’s EFRAG released the European Sustainability Reporting Standards (ESRS) Exposure Drafts. The range of draft standards offer general principles and a general standard, as well as specific ESG topics (including climate). (The link to these is on the home page of this website.)

The two sets of standards have a different focus. The ISSB draft standards are designed to meet the information needs of investors and call for the disclosure of material information about all of a company’s sustainability-related risks and opportunities.

The ESRS draft standards are wider and call for the disclosure of material information about all the sustainability-related impacts, risks and opportunities of a company.

The word that pops out between the two is of course “impacts”. A single word that means oh so much. The enlightened approach of the EU wants companies to disclose their impacts (effects/ outcomes) on society and the environment over the short, medium and long term.

And who on earth would not want to know such information? Surely investors want this information too (except maybe the short-term traders, although they could go short on learning of a negative impact and the reputational harm it could impose on a company). Such information is surely relevant in assessing the longevity of their investment in a connected world.

From the ISSB we seem to just be getting more of the same financial accounting stuff…. But the world is moving on from the historical singular focus on financial capital to embracing, respecting and being responsible for the six capitals that a company relies on for its success and longevity. The saving grace for this rather old-fashioned view is their building blocks approach which allows individual countries (who adopt their standards) to add-on their own jurisdictional reporting requirements, including any multi-stakeholder information needs. Ummm….. is this a side-wards nod to the importance of reporting on impacts?

• This blog reflects Leigh’s personal views and should not be read as the IRC’s view.

Their significance is that they will form the basis of the first Exposure Drafts to be released from the ISSB. In terms of the ISSB’s due process, the Exposure Drafts will be issued for public comment and thereafter the updated versions issued as ISSB Sustainability Disclosure Standards. Each of the 140 jurisdictions that already follow the IFRS Accounting Standards will have the option of mandating use of the ISSB standards and instructing any ‘add-ons’ for local regulations and practices.

So, what’s in the General Requirements for Disclosure of Sustainability-related Financial Information Prototype, and what does it say about the hot issue of materiality, and does it offer clarity on enterprise value?

The Prototype should be seen as the overarching presentation guideline for all future standards addressing specific sustainability matters, e.g., climate, biodiversity, water. It sets out the overall requirements for disclosing sustainability-related financial information relevant to the entity’s sustainability-related risks and opportunities.

Some salient points and statements from the Prototype (headings added):

• The aim: The standards address sustainability matters that affect the assessment of enterprise value by investors, creditors, and other lenders.
• Enterprise value is defined in the Prototype as: The market cap of the entity plus the market value of the entity’s net debt. It is determined by capital market participants, based on their estimation of the amount, timing and certainty of future cash flows spanning the short, medium, and long term. Enterprise value reflects users’ assessments of future cash flows, including the value attributed to those cash flows by users.

Essential inputs in determining enterprise value include corporate reporting in financial statements, as well as reporting on sustainability matters that it is [reasonably likely] will affect the entity’s business model over time (that is to say, affect revenue, costs, assets, liabilities, cost of capital and/or risk profile). The term captures the notion of expected value creation, preservation or erosion over time for an entity’s equity and debt investors. This expected value creation, preservation or erosion is distinct from but fundamentally interdependent with an entity’s creation, preservation, or erosion of value for its stakeholders.

• The extent: An entity is required to report material information on sustainability risks and opportunities, which would assist users in predicting the value, timing and certainty of the entity’s future cash flows over the short, medium and long term and therefore their assessment of enterprise value.
• Materiality: Is defined as: To the extent it could influence the assessment of enterprise value, material information includes information about the entity’s impacts on society and the environment, and how those impacts affect its future cash flows. [This aligns with the IFRS Conceptual Framework for Financial Reporting.]
• On connectivity: Seeks to enhance connectivity within the entity’s general purpose financial reporting, including between the entity’s financial statements and sustainability-related financial information.
• Scope: Sustainability matters that do not affect the entity’s enterprise value are outside the scope, however, it states that reporting on such matters may inform a wider range of stakeholders (including users) who want to understand an entity’s positive and negative contributions to sustainable development
• General purpose financial reporting: An entity’s general purpose financial reporting shall include a complete, neutral and accurate depiction of an entity’s significant sustainability risks and opportunities A complete depiction shall include all material information about significant sustainability-related risks and opportunities. [So, this captures beyond the first standard on climate.]
• Disclosure: The Prototype follows the TCFD format …Information about significant sustainability-related risks and opportunities is built on a consideration of an entity’s governance, strategy, risk management, and metrics and targets.

Governance – the governance processes, controls and procedures a reporting entity uses to monitor sustainability-related risks and opportunities.

Strategy – the sustainability-related risks and opportunities that could enhance the entity’s business model and strategy over the short, medium and long term.

Risk management – how sustainability-related risks are identified, assessed, managed and mitigated.

Metrics and targets come into each of the above and is the information used to manage and monitor the entity’s performance in relation to sustainability-related risks and opportunities over time.

Where is this information disclosed?

• The Prototype says it’s a part of the entity’s “general purpose financial reporting” explained as providing the financial information that is useful to existing and potential investors, lenders and other creditors. Subject to any local regulations or requirements it says there are various places within general purpose financial reporting for the disclosures.
• It can be included in management commentary. It states: Management commentary can be known by or incorporated in reports with various names, including management’s discussion and analysis, operating and financial review, integrated report and strategic report.
• The information which is not material can be included provided it does not obscure ISSB information.
• ISSB information can be included by cross-reference from another report if that report to users comes out at the same time and on the same terms as the financial statements. Also, material information that is included by cross-reference means that the information forms part of “general purpose financial reporting” and hence has to comply with the ISSB standards.
• Acknowledgment of overlap and interdependency: The Prototype states that there can be significant overlap in the scope of sustainability matters that they address. This overlap stems from the interdependency of impacts on people, the environment, and the economy, and the effects those impacts have on enterprise value because entities depend on people, the environment and the economy to generate value over the short, medium and long term.

So, what’s in the Climate-related Disclosures Prototype?

•  As expected, the Prototype states that it incorporates the recommendations by the TCFD, and uses as its starting point the relevant components of the frameworks and standards of international sustainability bodies, as published in a prototype climate-related financial disclosure standard in December 2020.
• The industry disclosure requirements (Appendix B) form part of the requirements, and have been derived from SASB Standards.

The Value Reporting Foundation (VRF) was formed in July 2021 through the merger of the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB). On 3 November 2021 it announced that it will be consolidated into the new International Sustainability Standards Board (ISSB) together with the Climate Disclosure Standards Board (CDSB). It’s a life too short to mourn.

Importantly let’s talk to are the developments in international corporate reporting. Who said reporting was boring!

The new ‘kingpin’ player is undoubtedly the ISSB. It’s IFRS Sustainability Disclosure Standards could potentially be enforced in 130 jurisdictions around the world (each country will have to mandate their use). This is definitely taking sustainability reporting mainstream and putting it right alongside financial reporting.

Well, actually, to be technically correct, let’s call rather it sustainability-related financial reporting. Because while the first exposure draft on climate is likely to be released in Q1 next year, it’s still unclear as to the extent of the new standards – that is, will they cover the inward impacts of sustainability matters on the organisation, to the extent they affect investors decision-making, plus the impact of the organisation on society and the environment? It’s the great materiality debate and the inward/outlook focus.

The IFRS Foundation does make some encouraging statements in its media release announcing the changes today, 3 November 2021. It says: “It is expected that there will be a great deal of overlap between information needs of investors and broader stakeholder groups on sustainability matters. However, there focus of the ISSB will be on meeting investors’ needs, as the Foundation’s remit and expertise is to set standards that provide information for the capital markets.”

So what do preparers do in the midst of the changes? My suggestion is to carry on using the existing frameworks and guidelines. And we’ll keep you updated on how the international corporate reporting developments align with integrated reporting in South Africa.

There’s a lot going on in the international corporate reporting arena; leaving many bewildered, bemused, and, for some, a tad irritated to see the main players jostle to get their agendas met. So, here’s my personal view on what’s going on in this unfolding (and still uncertain) story.

The ISSB (International Sustainability Standards Board) looks like a done deal and will be announced by the Trustees of the IFRS Foundation in November this year. The ISSB is likely to focus on developing international standards to uniform the disclosure by companies of the impacts on them arising from certain sustainability matters (the ‘inward impacts’). This stems from the recognition that: Non-financial factors can hugely affect a company’s longevity; the financial performance/ factors covered by accounting standards only amount to a small and ever-diminishing percentage of a company’s market value; and, investors want better information from companies to enable them to make informed risk-reward investment decisions.

On the ISSB standards that could come out… They will be aimed at meeting the needs of investors. The targeted sustainability matters are climate change, biodiversity, with others to follow. The standards could be tailored to be industry-specific (dedicated KPIs, material issues, etc.). Each standard could be structured around the TCFD recommendations (its four disclosure areas are governance, strategy, risk management, and metrics). The standards could have a limited focus – that is, they address the ‘inward impacts’ on the company (hits to cash flow projections, risks, strategy changes, etc.) with limited disclosure of the company’s impacts on society, economy, and environment (the ‘outward impacts’).

(Those up in arms over this last point – and the obvious contradiction to the generally accepted understanding of the term ‘sustainability’ – should be aware that this positioning neatly secures continued relevance for the GRI, and hey, if companies were to account for all their external impacts would any still be in business and would any investors still invest?)

There is another tangent at play. The IFRS Foundation’s existing IASB (International Accounting Standards Board), which will be the ‘brother’ to the new ISSB, recently issued an Exposure Draft to seek public comment on its revised Management Commentary (MC) Practice Note. The MC is traditionally a voluntary letter of explanation accompanying the Annual Financial Statements which aims to put the financial figures in context. The IASB started a project a few years ago to pick up integrated information and other reporting innovations to include in the MC. A lot of this has been taken from the International <IR> Framework.

But, there are some major problems within the revised MC…. As it’s a letter from management it could muddle board accountability; it’s narrow as it focuses largely on ‘inward impacts’ rather than ‘outward impacts’; it’s only a partial inclusion of the International <IR> Framework; it excludes information on Governance; its role is unclear (is it a part of the Annual Financial Statements under the IASB, or a part of the new ISSB’s framework, or does it overlord as the ‘head of the octopus’/ top of the pyramid?); and there is the oddity of the Annual Financial Statements and Sustainability Report being approved by the Board and connecting the two will be a comment by management).

If I were a company, my personal view at this stage of the game, is that I would:

• Carry on with the status quo. There is still much uncertainty in international developments and who knows how long it will take.
• Keep a beady eye on international developments (the IRC of SA keeps its members updated with webinars and there is an update page on this website). Know that whatever happens internationally will have to dovetail in with national laws, governance codes and practices.
• Companies adept at integrated reporting will have the advantage of sustainability systems and controls already being in place and making the connections between the financial and non-financial (6 capitals).
• Ensure the internal controls and systems on sustainability matters are ‘assureable’ as external assurance is likely to come next.
• Become au fait with the TCFD recommendations (they’re pretty entrenched in global thinking and likely to be the basis of the ISSB standards and maybe whatever comes out in the final MC).
• Take a look at the SASB indicators – talk is there’s a big push to get the indicators into the new ISSB standards.
• Take the time to get your voice heard with comment submissions.

Let’s all aim to get what matters most measured and accounted for by companies. Respect for all 6 capitals used and affected by a company and its products. For short-term thinking to switch to the longer term. Awareness that what a company does today sets it up for tomorrow. Transparent reporting. Board accountability.

It is, for sure, the mindful adherence to the 19 requirements of the International <IR> Framework. It also stems from the organization’s intention of producing a meaningful and concise integrated report.

So, what is meaningful and concise? The Integrated Reporting Committee (IRC) of South Africa set about honing this broader term into targeted focus areas for preparers in its Delivering a Meaningful and Concise Integrated Report: An Information Paper (Paper) released in January 2021 and available at https://integratedreportingsa.org/a-meaningful-and-concise-integrated-report/ We ended up with six focus areas.

1. Alignment: Optimize and align the reporting suite

In South Africa, our preparers like to apply “The octopus model” to their corporate reporting suite (for the IRC FAQ on this see https://integratedreportingsa.org/faq-the-octopus-model/).

It’s a sensible way of ordering and aligning all the legislative, regulatory, and stakeholder reports released by an organization. The integrated report is the “head”, and the other reports are the “arms”. The integrated report informs on the holistic story with the other reports focusing on subject-specific and more detailed information.

2. Connectivity: Connect the information in the Content Elements

The integrated report should be a good read, rather than a weighty tome for insomniacs. It should have a logical structure and flow: this supports connected information, helps to avoid inconsistencies, and can limit duplication. A logical flow to the unfolding story in the integrated report could be. . . information on the organization and what it does; the external environment in which it operates; the business model; stakeholders’ needs and the responses (this shows the all-important feedback loop); the strategic objectives that direct the path ahead; the risks and opportunities; performance; and governance. (Outlook information is often given throughout the report and a summary thereof is a useful readability tool.)

3. Conciseness: Balance conciseness and comprehensiveness

Achieving a concise report is an oft-cited bugbear of preparers. Our tips in the key considerations section in the Paper include: have a robust materiality process; be firm in only including relevant information; use the website and other reports to house detailed information; use considered infographics that give meaningful information; write in plain language and get straight to the point.

4. KPIs: Explain KPIs and the link to value

Continually assess whether the disclosed KPIs actually reflect the value that is being created, preserved or eroded over time: are they relevant and used internally by the organization? Give the context to each KPI: what it measures, why it was selected, trends and industry benchmarks.

5. Outcomes: Report clearly on outcomes and trade-offs

Good and complete disclosure of outcomes is essential to an integrated report. They are, after all, the “lasting effects” of the value process. Be brave about showing both the positive and negative outcomes on each of the six capitals. For a report that is biased to the positive can lead to questions over its completeness and credibility, and is there any organization today that can faithfully say it does not rely or affect each of the six capitals?

6. Technical: Apply the International <IR> Framework’s requirements.

And with the governing body opining on whether or not the 19 requirements have been met in the integrated report. (Preparers new to adopting the <IR> Framework can use the “extent to which” leeway clause offered in the <IR> Framework (2021).)

Like most things in life, if something is not done meaningfully and with intention, it may not be worth much. www.integratedreportingsa.org

Leigh Roberts is the CEO of the Integrated Reporting Committee of South Africa and the Chair of its Technical Working Group. She is a member of the IIRC’s Framework Panel.

 This blog first appeared on the IIRC website in March 2021