A guide to IFRS S1 and S2 sustainability reporting (1), By Innocent Okwuosa

It is in metrics and targets that actual performance can be assessed by users of GPFR. Baseline metrics are established in the first year of adoption and subsequent years’ comparative metrics and targets enable users of GPFR to measure performance and progress made by the entities adopting IFRS S1 and S2. These should not be masked by pictures. An IFRS sustainability disclosure should have a beginning and an end and should not be scattered over the annual report.

The Financial Reporting Council (FRC) of Nigeria is the first reporting regulator to announce the adoption of IFRS S1 and S2 in Africa. This explains why the International Sustainability Standard Board (ISSB) that issued IFRS S1 and S2 always wants to hear from Nigeria on the presentation of the sustainability reports.  Four early adopters emerged at the end of the early adoption phase, namely: Access Bank Plc, Fidelity Bank Plc, MTN Nigeria Plc and Seplat Energy Plc. These four companies claimed to have published a sustainability report that complies with IFRS S1 and S2.

A cursory look at their sustainability reports will leave one wondering what should be the content and presentation format of IFRS S1 and S2 sustainability reports. This is important now that voluntary adopters are emerging, and coupled with the fact that the early adopters are publishing their second sustainability reports, some of which differ from what was published in the first year (see for example Fidelity Bank’s 2024 sustainability report). This article briefly provides a guide into the content and presentation of a sustainability report that complies with the provisions of IFRS S1 & S2.

Before going into the above, let me first commend the four early adopters for being the trail blazers in an uncharted territory. This was at a time when others were afraid and uncertainty pervaded the landscape of this emergent new sustainability reporting guidelines. It takes courage and purposefulness to enter this ring. I recommend that the FRC and the Nigeria Exchange Group should present these companies with awards for being the first among peers.

Prior to this time, sustainability reporting in Nigeria rested on a foundation of Corporate Social Responsibility (CSR), supported by mantras like “shared value”, “giving back to the society”, “community investment,” among others. This explains why such sustainability reports comprise mostly pictures of community projects and philanthropy, and these define the content and format of presentation. While I support this foundational underpinning in Nigeria, upon which the FRC now advocates for corporate behavioural change, it is important to understand that sustainability reporting under IFRS S1 and S2 has a completely different underpinning foundation.

This foundation aligns more with the accountant’s “going concern concept,” which is an assumption that the business will continue in operational existence for the foreseeable future, and it has neither the intention nor the necessity to significantly curtail the scale of its operation. In this, sustainability disclosures aim to communicate to stakeholders, particularly providers of financial capital, how sustainability is part of the strategy to achieve this. This is why the objective of IFRS S1 and S2 is to require an entity to disclose information about its sustainability-related risks and opportunities, which is useful to primary users of the General Purpose Financial Reports (GPFR) in making decisions about providing resources to the entity.

IFRS S1 and S2 aim to satisfy the information needs of primary users of the GPFR, who are the providers of financial capital. That is why its core content elements are governance, strategy, risk management, metrics and targets. These should be the core content and presentation of a sustainability report that complies with IFRS S1 and S2, not pictures of community projects and philanthropy. A cursory look at the sustainability reports of early adopters reveals an immense struggle, dealing with the pictures and providing the information required by the core content elements in an IFRS sustainability report.

The content and presentation of an ideal IFRS S1 and S2 sustainability report should therefore address the following:

Governance: The entity provides sustainability-related financial disclosures that enable users of GPFR to understand the governance processes, controls, and procedures that an entity uses to monitor, manage and oversee sustainability-related risks and opportunities. Also, which committee of the board is in charge of this and what is the role of management.

Strategy: The entity provides sustainability-related financial disclosures that enable users of GPFR to understand an entity’s strategy for managing sustainability-related risks and opportunities, and the effects of those risks and opportunities on the entity’s strategy and decision-making. Also, the entity provides information that enables users of GPFR to understand the current and anticipated effects of the risks and opportunities on the entity’s business model and value chain. Similarly, the entity provides information on the effects of sustainability-related risks and opportunities on its financial position, performance and cash flows for the reporting period (current financial effects) and its capacity to adjust to the uncertainties arising from sustainability-related risks.

Risk Management: The entity provides sustainability-related financial disclosures that enable users of GPFR: (a) to understand its processes in order to identify, assess, prioritise and monitor sustainability-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process; and (b) to assess the entity’s overall risk profile and risk management process.

Metrics and Targets: The entity provides sustainability-related financial disclosures that enable users of GPFR to understand an entity’s performance in relation to its sustainability-related risks and opportunities, including progress towards any targets it has set, and any targets it is required to meet by law or regulation. In this, there are specified cross-industry metrics, industry metrics and targets, which the entity is expected to disclose. An example is the scope 1 to 3 carbon emission.

It is in metrics and targets that actual performance can be assessed by users of GPFR. Baseline metrics are established in the first year of adoption and subsequent years’ comparative metrics and targets enable users of GPFR to measure performance and progress made by the entities adopting IFRS S1 and S2. These should not be masked by pictures. An IFRS sustainability disclosure should have a beginning and an end and should not be scattered over the annual report. That may be construed as masking or obstructing information, hence greenwashing. This is different from cross-referencing. It should avoid the repetition of already disclosed information. TO BE CONTINUED.

Innocent Okwuosa, PhD, SAP FICO, CPFA, FCIB, FCA, is the chairman, NIRC; the 59^th president, Institute of Chartered Accountants of Nigeria; and a visiting associate professor of Accounting at Pan Atlantic University, Lekki, Lagos. He can be reached on 08128131345.