Introduction
Climate change and broader issues related to sustainability have attracted increasing interest in the recent years. This major development is a result of greater awareness of climate risks, social inequality, and the impact of COVID-19. For example, the COVID-19 pandemic has taught us a lesson on the importance of considering climate risks and social factors in making key business decisions.
Businesses across the world are increasingly seeing the importance of integrating wider factors such as sustainability performance metrics, climate risks and social factors into their business model, strategy, and reporting. It is increasingly seen that the long-term value and resilience of an organization depends on how it can meet the expectations of its investors and broader group of stakeholders including the society at large.
In the banking sector, key stakeholders such as institutional investors and regulators demand high quality and relevant non-financial data (such as those relating to climate risks and sustainability performance) in making key decisions. These stakeholders have called for global sustainability disclosure standards that meet their information needs.
To respond to the urgent need for a sustainability reporting framework based on global standards, the International Financial Reporting Standards Foundation formed a new sustainability disclosures board, known as the International Sustainability Standards Board (the ISSB). The ISSB was formed ahead of the COP26 U.N climate change conference in Glasgow in November 2021.
Adoption of sustainability disclosure standards
The basic idea behind the ISSB is to set high quality standards for reporting on an entity’s performance on material sustainability issues. Because of the strong relationship between financial performance and sustainability performance, investors need relevant, reliable, and comparable information for both. Similar to IFRS standards, the new ISSB standards will be voluntary minimum standards but will only become a reporting requirement in a given jurisdiction if adopted in local legislation.
Importantly there has been widespread international support of the ISSB project, including from international organizations such as the International Monetary Fund and UN as well as global financial regulatory bodies like the Financial Stability Board and International Organization of Securities Commission. This creates great expectation that the ISSB disclosure standards may become as widely adopted as IFRS, including in our East African region. The ISSB sits alongside and works in close cooperation with the International Accounting Standard Board (the IASB), ensure connectivity and compatibility between IFRS Accounting Standards and the ISSB’s standards. The ISSB and the IASB will be independent, and their standards will complement each other to provide comprehensive information to investors and other relevant stakeholders.
“Banks should ensure that an appropriate governance structure is in place to provide oversight during the implementation of the sustainability disclosures and subsequent reporting.”
Implementation of sustainability disclosure standards
Prototype standards on climate-related disclosures and general requirements for sustainability disclosures have also been published to give indication of the expected requirements for sustainability disclosures. ISSB is currently considering feedback received on the two proposed standards on disclosure requirements and aims to issue the new standards by the end of the year 2022.
Implementing the sustainability disclosures standard will require significant time and effort, particularly for entities that do not currently produce similar sustainability-related information. It is therefore critical for banks to take necessary measures to get ready for the expected sustainability disclosures requirements, even before the final standard is issued.
Banks that expect to apply the new standard will need to carry out a comprehensive assessment to obtain a full insight of the sustainability related risks and opportunities they are facing. The existing reporting processes, controls and data capabilities will also need to be reviewed and revised as necessary since the new requirements are likely to result in additional disclosure efforts. In some cases, banks may be required to implement new systems and processes to create an alignment between internal processes and sustainability reporting.
Conclusion
It is likely that sustainability disclosures will be subject to high scrutiny by regulators and auditors. Therefore, banks should ensure that an appropriate governance structure is in place to provide oversight during the implementation of the standard and subsequent reporting. This calls for a need to have in place an effective internal control and risk management processes, as well as assurance on sustainability information. The urgent need for global sustainability reporting standards means that the development process is likely to be fast tracked. Therefore, banks should start planning for these coming changes by identifying key priorities and milestones, and assessing the required resources needed to implement these changes.
