NICOLENE WESSON: Sustainability reporting is far more than a scorecard

There is an urgency from global standard setters to raise the bar on sustainability reporting. One might rightfully ask: why more standards? Who will benefit? And what will the compliance cost be? In an African context especially, we need to seriously consider our role in the global debate and developments on sustainability reporting.   

As we celebrate the 60th anniversary of Africa Day we have the opportunity to reflect on the continent’s journey towards independence, unity and sustainable development. We are reminded of Africa’s commitment to Agenda 2063, the sustainable development goals (SDGs) and the Paris agreement on climate change, and to our aspiration to be a prosperous continent that is a global player and partner towards inclusive growth and sustainable development.

Globally, it is well-recognised that organisations (business) play a key role towards sustainable development, because their decisions affect the people and planet — and ultimately their prosperity and that of the economy. Organisations therefore need to understand the environment in which they operate, by identifying both risks and opportunities, to allow them to create and preserve long-term value for themselves and their stakeholders.

Accountability for and transparency of an organisation’s environmental, social and governance practices are displayed within sustainability reporting. In response to the demand for sustainable reporting from stakeholders (especially the investment community), sustainability reporting has evolved significantly over the past three decades through increased standardisation and global adoption. Global frameworks such as the Global Reporting Initiative (GRI) and the industry-specific standards of the Sustainability Accounting Standards Board have been widely accepted, but most frameworks and standards are applied voluntarily.

The results from the latest global benchmark study (covering the 2020 reporting year) by the International Federation of Accountants on sustainability reporting and assurance show the reality of organisations’ sustainability reporting practices: multiple sustainability reporting frameworks and standards are applied; sustainability disclosures are not necessarily confined to a separate sustainability report; and generally no assurance (audit) is obtained — and when assurance is obtained, it is limited assurance (as opposed to reasonable assurance applicable to an audit). The usefulness of sustainability reporting may therefore be affected by a lack of comparability, reliability and transparency. 

The renewed global debate on sustainability reporting has been sparked by the urgency of the climate crisis and the realisation that the fragmented approach to sustainability reporting has not resulted in large-scale improvements. Tightening corporate governance measures and following a globally co-ordinated process are therefore proposed, with planned implementation as early as 2024.

Three aspects of corporate governance on sustainability reporting agenda currently addressed are the development of a global set of sustainability reporting standards (which first addresses climate change); mandating assurance of sustainability reporting; and providing guidance on ethical behaviour to compilers of sustainability reports. These global standard-setting efforts on sustainability reporting, respectively led by the International Sustainability Standards Board (ISSB), International Auditing and Assurance Standards Board and International Ethics Standards Board for Accountants, are grounded in extensive consultations and partnerships to ensure scalability for large and small organisations and countries.

Specifically, the ISSB — established towards the end of 2021 — is tasked with developing sustainability standards that represent a global baseline, are cost-efficient and useful in guiding decisions. The ISSB will build off existing and widely used standards and frameworks. It is envisaged that a benchmark set of sustainability standards will reduce the complexity of sustainability reporting and the compliance cost, enhance the comparability and transparency of sustainability reporting, and ultimately lead to high-quality sustainability disclosures and practices. 

But will a set of globally accepted sustainability standards, underpinned by assurance and ethical requirements, ensure that all organisations recognise the urgency for sustainable business practices? Sustainability business practices should not be a mere compliance exercise. For sustainability reporting to properly address the urgency for sustainable business practices, increased governance is required to hold boards of organisations accountable for their oversight on the strategic direction of the organisation. The design of executive remuneration incentives to include sustainability metrics is a well-recognised governance mechanism.

The general lack of sustainability expertise and reliable data on sustainability metrics, however, hampers effective sustainability management and should be proactively addressed. Furthermore, the total value chain of sustainability reporting (including shareholders, sustainability reporting service providers, assurers, sustainability reporting ratings agencies, policymakers, lenders and customers) should recognise their accountability towards redirecting the focus of an organisation towards long-term value creation.

The recent global developments on sustainable reporting require a concerted effort from all stakeholders to ensure that the urgency of delivering on long-term value creation is achieved. The exposure drafts on the first two ISSB standards are already open for review (IFRS S1 on general requirements and IFRS S2 on climate change), with the drafts on the assurance and ethics standards expected to be issued towards the end of July 2023.

Africa is in an ideal position to contribute towards the global debate — not only because of the continent’s unique sustainability challenges, but also based on our history of promoting sustainability reporting through our world-class King Reports on Corporate Governance, and our leading role on integrated reporting.

In the spirit of Africa Day we have the opportunity to be a global player within the sustainability reporting landscape — for the ultimate benefit and prosperity of our continent and the planet. 

Prof Wesson is the head of the Centre for Corporate Governance in Africa at Stellenbosch Business School.