CHAPTER – 16

SUSTAINABILITY AND INTEGRATED

REPORTING

Evolving Information Needs of Stakeholders

Stakeholders want to deal with companies that evaluate and address their impact on
society and the environment while also evaluating and addressing society and the
environment’s impact on their business and long-term strategy. They want
companies to be sustainable, i.e. to meet the needs of the present world without
compromising the ability of future generations to meet their own needs.

Sustainability reporting – an organisation’s practice of reporting publicly on its

economic, environmental and/or social impacts, and hence its contributions –
positive or negative – towards the goal of sustainable development.
There are two aspects to sustainability reporting:
1. A discussion on how a company affects the society and environment in which
it operates, and
2. A discussion on how societal and environmental factors affect the company’s
enterprise value.

ESG Reporting and Sustainability Reporting

Environmental, social and governance (ESG) reporting refers to the disclosure of
data by a company covering its impacts in three areas:

Environmental Social Governance

How companies interact Companies conduct towards How companies behave in
with the environment: communities (both internal their business activities:
and external):
• Air & water population • Community relations • Audit committee
• Biodiversity & • Customer satisfaction structure
deforestation • Employee engagement • Board composition
 • Emission • Gender & diversity • Bribery & compensation
• Energy efficiency • Human rights • Lobbying activities
• Waste management • Labour standards • Political contributions
• Water scarcity

Financial Reporting and Sustainability Reporting

An environmental accounting system identifies measures and communicates costs
from a company's actual or potential impact on the environment. Costs can include
clean-up costs, environmental fines and taxes, purchase of pollution prevention
technologies and waste management costs.
The system not only measures effects on the environment in monetary terms but
would also consider ecological accounting measures and their impact on the
environment. These measures would include levels of waste products, and the amount
of energy consumed.

Corporate Social Responsibility (CSR) and Sustainability

Reporting
Corporate social responsibility is a business model in which companies attempt to
operate in ways that enhance rather than degrade society and the environment. It is a
broad concept that could take a number of forms depending on a particular company
and industry.
CSR forms a small part of sustainability, with CSR activities likely to be reflected in a
sustainability report. However, sustainability is generally much bigger concept
reflecting the ability of the company, as well as the environment within which it
operates, to continue in the long term.

IFRS S1
An Underpinning Standard
IFRS S1 sets out the more general reporting requirements, while other IFRS
Sustainability Disclosure Standards (e.g. IFRS S2) set out specific disclosures in
certain areas. IFRS S1 is effectively an underpinning standard: the sustainability
equivalent of IAS 1 Presentation of Financial Statements (see Chapter 4) and IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors (see Chapter 5).
IFRS S1 is effective for annual reporting periods beginning on or after 1 January 2024

Scope
IFRS S1 applies to the preparation and reporting of sustainability-related financial
disclosures in accordance with IFRS Sustainability Disclosure Standards.
• IFRS Sustainability Disclosure Standards may be applied irrespective of
whether the related financial statements are prepared in accordance with IFRS
Accounting Standards or other GAAP.
• Sustainability-related risks and opportunities that could not reasonably be
expected to affect an entity’s prospects are outside the scope of this Standard.
IFRS S1 uses terminology suitable for profit-oriented entities. Therefore, entities with
not-for-profit activities may need to amend the descriptions used for particular items
of information.

Objectives
IFRS S1 requires an entity to disclose information about its sustainability-related
risks and opportunities that is useful to primary users of general-purpose financial
reports in making decisions relating to providing resources to the entity.
Such information is useful to primary users because an entity’s ability to generate cash
flows depends on resources, its interactions between the entity and its stakeholders,
society, the economy and the natural environment throughout the entity’s value chain.

Climate-related Risks and Opportunities

IFRS S2 builds on the requirements of IFRS S1. It requires entities to identify and
disclose information about a subset of risks and opportunities specifically related to
climate.
Climate-related risks – the potential negative effects of climate change on an entity.
Climate-related opportunities – the potential positive effects arising from climate
change for an entity.
Climate-related risks include:
• Physical risks (e.g. Those resulting from increased severity and frequency of
extreme weather); and
• Transition risks (e.g. Those associated with changes in government policy and
evolving technology).
An example of a climate-related opportunity would be securing new business or
developing new products because of efforts to mitigate and adapt to climate change.
Like IFRS S1, IFRS S2 requires entities to disclose information about such risks and
opportunities using the four core content areas.
IFRS S2 has an effective date of 1 January 2024.

Governance and Strategy

An entity applies the governance-focused requirements by disclosing information
about the governance body that oversees the climate-related risks and opportunities,
including the controls, procedures and processes that support it.

IFRS S2 then requires a company to disclose how its strategy and decision-making
take climate-related risks and opportunities into account, for example:
• How its business model has changed and is expected to change.
• How its financial position, financial performance and cash flows are affected,
and.
• How it uses scenario analysis to assess the resilience of its strategy and
business model to climate change.

Risk Management and Metrics and Targets

Structurally reflecting IFRS S1, IFRS S2 requires an entity to disclose:
• How it assesses, prioritizes and monitors climate-related risks and
opportunities; and
• Whether its processes are integrated into the entity’s broader approach to risk
management.
An entity is also required to disclose information that enables investors to understand
its performance in relation to climate-related risks and opportunities, including:
• The amount of its greenhouse gas emissions.
• Cross-industry metric categories – the amounts and percentages that illustrate
how the entity’s assets, activities and finances are affected by climate change.

The Importance of Effective Sustainability Reporting

For Investors
In a general sense investors require comparable and more consistent reporting in
order to fully understand the resilience of their investment and so make valid,
considered decisions, whether those are rooted in financial performance
considerations, an ethical investment stance or sustainability considerations.

For the Reporting Entity

The continued development of narrative and sustainability reporting in response to
stakeholders’ information demands affects corporate behaviour by requiring the
management of a company to engage with sustainability and develop sustainable
business practices. In order to report on these effectively they must monitor and
evaluate their successes and failures, and the effect of this is to promote further
engagement in sustainable thinking and practice.

The Importance of Effective Sustainability Reporting

• Operational efficiency: streamlining processed through more sustainable
operations may also lead to lower costs.
• Reputational benefit: the increased transparency, credibility and
accountability of the company will create reputational benefit which may
translate into increased sales, increased market share or competitive
advantage. It can also attract talent and help to build employee loyalty.