Financial Minds’ Faatima Kholvadia unpacks the different standards, measurement methods and her top tips for reporting your organisation’s sustainability at the 2024 Finance Indaba.
Sustainability has become the most important section of any organisation’s annual report as stakeholders realise that people and the planet outweigh profitability. “Investors and lenders are looking for long-term returns. This means it’s not just about the profits the business has made in the past and how it’s doing currently, but also about how well it's going to perform in the future,” said Faatima.
She used an example of a thriving little fish and chips shop by the seaside. “An investor comes along that owns a chain of fish and chips shops, and wants to add your shop to his portfolio. In order to understand whether the business will bring him returns in the future, he will look at various factors that could impact those returns; like overfishing.”
She explained that this is because they are considering the economic impact, environmental protection and social wellbeing of the company and its products. “If we are overfishing in a certain area, that means our access to resources will be limited in the future.” The same applies to all industries and resources.
To balance these three interests, finance teams have had to integrate ESG reporting into their annual statements. This comes with a lot of regulation in terms of what should be disclosed, how it should be disclosed, and how we should measure what we disclose.
Simplifying sustainability standards
“At the moment, there are quite a lot of standards, frameworks, rankings and rating agencies trying to formalise this space,” Faatima explained.
There are internationally-recognised standard-setters like FRAG, FASB, ISSB, IASB, OECD and IEC. There are international framework setters like the UN Sustainable Development Goals.
The first real standards were set in 1997 and were developed until 2010, when companies started using the integrated reporting framework (most JSE-listed companies still use this method).
The International Accounting Standards Board (IASB) is in charge of developing, revising and issuing IFRS standards, the global standard for reporting financial results. They have created a new board called the International Sustainability Standards Board (ISSB), which has been tasked with creating standards similar to IFRS. These sustainability standards are then used by people globally and give guidelines on how to report on environmental, social and governance matters. The ISSB has, to date, issued two standards: Sustainability Standards 1 and Sustainability Standards 2.
“The Companies Act requires us to implement and apply all of the standards issued by the IASB,” Faatima noted. “Soon, we will also need to comply with Altrez Foundation standards, which will include the ISSB’s new standards.”
Calculating company sustainability
Even though there’s no mandatory application of the sustainability standards yet, they already do affect us in a number of different ways. “IFRS S1, the presentation and disclosure statement for financial statements currently, says you need to disclose any information that is relevant to achieve their presentation. This could include some climate, social or governance disclosures.”
IFRS S2 relates specifically to climate-related disclosures and how they impact your strategy. “In South Africa, the most common example of managing climate-related emissions is the move away from electricity towards solar or other sustainable electricity generation sources,” she said.
It can be split up even further into physical risks and transitional risks.
- Physical risks – this includes flooding (like we’re seeing in the US after the hurricane), or droughts (like we’re seeing across Africa).
- Transitional risks – for example, moving from Eskom-generated power to solar energy, the transitional risk is what we do in the period between switching.
“The JSE also has some guidance metrics around biodiversity, water security, climate change (environmental), human rights and labour (social), as well as board composition, ethical behaviour and remuneration (governance), to name a few,” Faatima said.
Under the IFRS S1 and S2 standards, there has been a lot of narrative disclosure. “When you look at the gap analysis between the current disclosures that most companies are doing in South Africa versus what's required, the biggest change from this integrated reporting method to ISSB is the requirement of quantitative analysis and ways of measuring these disclosures,” Faatima explained. “This includes the metrics, measurements and targets to back up what we are saying so that we don’t subscribe to greenwashing.”
When it comes to measuring and reporting your emissions, there are three categories they fit into: scope one, two and three.
- Scope one is the greenhouse gases being emitted, like when using a vehicle.
- Scope two is the greenhouse gases emitted by the services used – like electricity: Eskom emits the greenhouse gas by making the power, but consumers use the electricity that comes from it.
- Scope three is the greenhouse gases emitted by suppliers – even though it is not direct, the gases emitted to supply the service/product must be considered.
Share the organisation’s story
“Ultimately, though, because there’s no real standard yet saying you must, what and how you report your organisation’s sustainability is still discretionary,” Faarima said. “You have to think about what the company’s story is and find information that fits into that story. Where the information doesn’t fit, you need to change your story to reflect the right data.”
She suggested that finance teams develop a task force comprising legal governance, HR, marketing and sales input, as well as operations to get a holistic view of your organisation’s sustainability metrics.
“This is actually something that needs to be embedded in the business,” Faatima encouraged. “It needs to be spoken about in every management discussion and implemented in every area of the business – right down to the lowest transactional level.”
Join the first-ever CFO South Africa CPD Day – an opportunity for finance professionals to learn, engage and grow, while completing 8 verifiable CPD hours before the reporting deadline. Taking place on 18 November in Melrose Arch, this event will cover mission-critical topics for finance professionals, including IFRS, Sustainability and Ethics. Book your seat today!
