The global reporting landscape has undergone a tectonic shift over the last decade, fueled by the recognition that environmental, social and governance (ESG) or sustainability issues have the potential to impact financial value.
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. South Africa was one of the first countries to adopt the Integrated Reporting Framework as part of its corporate governance framework.
Globally, reporting on ESG or sustainability matters has become common and multiple sustainability-related disclosure standards have emerged containing diverging guidelines. Significant progress has been made towards the standardisation, convergence and consolidation of sustainability-related disclosure standards.
The International Financial Reporting Standards (IFRS) Foundation, an organisation that was once only concerned with the global convergence of accounting standards (being responsible for the International Accounting Standards Board [IASB] who developed the 'IFRS Accounting Standards'), has now expanded its focus to sustainability-related disclosure standards by forming the International Sustainability Standards Board (ISSB) in November 2021. The ISSB is responsible for developing the ISSB Standards.
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 and in sustainability disclosures that is useful to investors and other participants in the world’s capital markets in making economic decisions.
Last year, the ISSB published inaugural standards (IFRS S1 and IFRS S2) (ISSB Standards) that 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).
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. China issued the Exposure Draft of Chinese Sustainability Disclosure Standards for Business Enterprises—Basic Standard and Explanation of the Drafting, which formulates the unified China Sustainability Disclosure Standards based on ISSB Standards but aligns with China's context.
The USA Securities and Exchange Commission's (SEC) climate disclosure rule also has similarities with the ISSB Standards (although there are also some important differences, for example relating to Scope 3 emissions).
In May 2024, the United Kingdom (UK) published an update setting out the next steps of implementing the UK Sustainability Disclosure Requirements, which states that the UK government aims to make UK-endorsed ISSB Standards.
Australia is in the process of finalising legislation that would introduce mandatory climate-related financial disclosures. The proposed legislation has important consequences for potential director liability in relation to climate-related disclosures in Australia.
The EU's CSRD (as well as the recently adopted Corporate Sustainability Due Diligence Directive) will also have consequences for directors in relation to sustainability disclosures and reporting.
How the ISSB Standards are adopted in a particular jurisdiction ultimately depends on the regulatory framework operational 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, which identifies the policy rationale, 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.
The Companies Act, 2008 and the Companies Regulations, 2011 (Companies Regulations) require certain companies (including state-owned companies, public companies listed on an exchange and non-profit companies incorporated by the state or performing a statutory or regulatory function) to comply with the IFRS when preparing their financial statements. 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 (King IV) (as part of the integrated reporting framework approach adopted in King IV), 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 are aligned with, influential global initiatives on sustainability/ESG and climate change disclosure, including the ISSB's prototype disclosure requirements (which ultimately informed the final ISSB Standards).
Garyn Rapson, Nonhlanhla Mnengi, Sabeeha Loonat & Sinalo Matubatuba 13 May 2024
On 10 May 2024, SA'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.
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 set on the Integrated Reporting Framework or the recommendations of the TCFD, as 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. First, it would require a shift in the mindsets of many South African companies who do not currently perceive sustainability-related or climate-related disclosures to be financial in nature.
Second, 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 (for example, the definition of 'IFRS' in the Companies Regulations could be updated to include the 'ISSB', as the definition currently only refers to the 'IASB').
Third, 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 (although materiality would still matter), 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. Although the path towards adopting the ISSB Standards and/or mandatory ESG disclosures in SA 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.
