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green globe | accountingweb | Sustainability reporting implementation faces potential delays

Sustainability reporting faces potential delays


Will there be a delay in implementation of reporting information on sustainability? International Financial Reporting Standards expert Santosh Sahani explores the complex challenges ahead.

1st Nov 2023
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Establishing a framework for reporting sustainability information is a mammoth task. Entities face a significant challenge in figuring out what information needs to be reported, while aiming to minimise disruption. 

Additionally, it is important to acknowledge that different stakeholders will have different requirements and information for at least five years. 

While many in the profession are keen to offer a service on sustainability, most are not aware of the finer details, which may be a result of ignorance or lack of potential and resources. 

The comprehension and resources required to provide the service are possessed primarily by the Big Four. This is because of their extensive engagement and collaborative efforts in the field from its inception. Notably, EY and KPMG are emerging as significant players in this domain.

So let’s try to simplify the understanding of reporting on sustainability. 

Critical elements         

By and large, the critical elements at macro level are central to reporting information about economic facts of sustainability’s risks and opportunities in the financial reporting system.

  1. Need for sustainable infrastructure: The economy flourishes with advanced infrastructure that makes it easier to do business. The need for sustainable infrastructure is influenced by countries’ commitment to carbon emissions and therefore divided into three categories.
    a) Developed countries: The need for sustainable infrastructure is triggered by the aim of maintaining economic growth while leading the vision of a sustainable world. Therefore, their commitment is to earlier carbon emissions. 
    b) Developing countries: The need for sustainable infrastructure is only for a new infrastructure that will replace the old infrastructure. This is because revisiting the recently developed non-sustainable infrastructure could affect their economic growth. Hence, their commitment to slower carbon emission. 
    c) Under-developed countries: There is an urgent demand for any infrastructure, whether sustainable or unsustainable, because of a sense of responsibility to uplift its population. Their commitment is mixed, with their private sectors committed to earlier carbon emission, while their public sectors are committed to slower carbon emission.  
  2. Economic resources: The infrastructure requires stable and consistent supply of economic resources over the years. The financial community generally creates a pool of capital to fund the new infrastructure projects. This is in order to manage the cash volatility and to minimise the risks in the monetary markets (especially in debt markets).
  3. Policy: The policy on sustainability is an essential step in the implementation of the process to keep records of carbon emission, while creating and supporting sustainable infrastructure. Basically, it is about roles and responsibilities of the stakeholders involved in implementation of sustainable projects. 
  4. Principles: The state of information on sustainability’s risks and opportunities cannot be observed directly. This information should be reflected in a set of reports, like financial statements. The principle is a language that enables communication of information on sustainability’s risks and opportunities in a set of reports that is relevant, verifiable and reliable.  
  5. Regulation: The policies and principles get integrated into laws by synthesising local business environment needs. There could be different ways both policies and principles are implemented into laws. Generally, in the Europe Union-there is a common platform, whereas in Asia there is a companies act for implementation.  
  6. Enforceability: Effective communication of information on sustainability’s risks and opportunities is a precondition of enforceability. The enforceability starts with the attest function. Also, there could be a certification function. Enforceability depends on regulation about reporting of information on sustainability. 

The mechanism involves the above core elements to come together to report the information about sustainability’s risk and opportunities in the financial reporting system. Presently, only the first three of the above elements are completed, the fourth is halfway and the remaining are not initiated. 

Reporting of risks and opportunities

The information about sustainability’s risks and opportunities is driven by two factors. The first is materiality, a scale to measure the information over short, medium and long term for reporting. The second is core metrics which are organised into three or four pillars. These two factors interact with each other in a report and explain approach, explained in the following table.

Core metric organised in three or four pillars 

Materiality: a scale to measure the information for reporting purposes

Short term 

Medium term

Long term

Information in financial statements for its users. 

Information for enterprise value creation.

Information reflects an entity's commitment to the economy, environment and people for society.

US elections 

Policy makers are making tremendous progress in addressing the issue of climate change. Probably it is the first time in the history of policy making that such coordinated efforts and commitments have been put in place.

Despite all this, the challenge might come from the approvers of policy – politicians. Until now they have deflected from issues of climate change and managed to delay the policy. For example, the USA is a leader in policy making and its implementation to address global issues. However, for Republicans the issue of climate change is not a priority. If they form a government in the next elections, there could be a delay on policies on climate change, including reporting on sustainability. Thus, the next US elections will be the next major stepping stone for implementation of reporting on information on sustainability. 

Because of this uncertainty, there are no new major developments on issues of climate change, including sustainability reporting.

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