The International Sustainability Standards Board (ISSB) has issued its first two IFRS Sustainability related Disclosure Standards, namely, IFRS S1, General Requirements for Disclosures of Sustainability Related financial information and IFRS S2, Climate Related Disclosures.

ISSB was established by the IFRS Foundation in November 2021 mandated to develop high quality sustainability disclosure Standards in response to demands from global capital markets for the development of standards to provide comprehensive global base line of sustainability disclosures.

IFRS S1 and IFRS S2 set out overall requirements for sustainability related financial disclosures requiring reporting entities to disclose material information about its sustainability related risks and opportunities that is expected to have material effect on its prospects and useful to the existing and prospective investors in making decisions related to providing resources to the entity.

According to IFRS S1, Information is material if omitting, misstating, or obscuring that information could reasonably be expected to influence decisions that the primary users of general-purpose financial reports make based on those reports, which include financial statements and sustainability-related financial disclosures and which provide information about a specific reporting entity.

"The entity’s interactions and interdependencies which include its operations, the supply chain, financing, geographical, the market and competitive environment, dynamism of information technology, geopolitical and regulatory environment in which the entity operates affect its prospects."

The need for issuing the Sustainability and Climate related standards arises because the annual reports which are predominantly in respect of historical financial information of an entity, do not provide users with entity’s ability to generate profit, cash and meet shareholders expectations over the short, medium, and long terms, which is linked to the environment in which the entity operates. The entity’s interactions and interdependencies which include its operations, the supply chain, financing, geographical, the market and competitive environment, dynamism of information technology, geopolitical and regulatory environment in which the entity operates affect its prospects. Hence, the standard requires the entity to disclose all relevant and material risks and opportunities and their financial impact as part of the annual report which gives comprehensive sustainability information about the entity. The sustainability standards have set out the core content of the disclosure that an entity has to make in respect its annual report, including:

Governance, Information about the governance process that the entity uses to monitor and manage the sustainability and climate related risks and opportunities.

Strategy, Information about an entity’s strategy for managing sustainability and climate related risks and opportunities.

Risk management, information on how sustainability and climate related risks and opportunities are identified, assessed, and managed and whether the processes are integrated with the overall risk management framework of the entity.

Metrics and targets, the entity’s performance in relation to sustainability related risks and opportunities, including progress towards set targets or targets to meet.

The entity’s board of directors is responsible for identifying, measuring, and reporting the risks and opportunities which have material impact on the sustainability of the entity. As per the ISSB, public interest entities (listed and not listed) and private companies are required to apply IFRS S1 and IFRS S2. However, the ISSB does not mandate applications. Companies can voluntarily apply these standards and jurisdictional authorities can decide whether to require entities to apply them.

"As per the ISSB, public interest entities (listed and not listed) and private companies are required to apply IFRS S1 and IFRS S2."

When seen in terms of the relevance of applying these standards to Ethiopian financial reporting landscape, at present Ethiopia is soon to launch capital market. Investors and other providers of finance would like to make informed decisions whether to buy stocks in the primary or secondary market and other providers of resources such as lenders and suppliers would like to make decisions not only based historical financial information contained in the annual report, but also comprehensive and relevant information about the financial impact of company’s short term, medium term and long term sustainability and climate related risks and opportunities. Companies that consistently disclose relevant sustainability and climate related risks and opportunities can enhance investor confidence. The flow of foreign direct investment can increase since international inverters can have comparable and reliable information prepared based on the global framework which will help them compare with other investment opportunities in other countries. Studies support the adoption of IFRS and applying sustainability reporting positively contribute to the increase of FDI.

Application of IFRS S1 and IFRS S2 is mandated to the jurisdiction of each countries’ regulators, which in the case of Ethiopia could be the Accounting and Auditing Board of Ethiopia as it is mandated by Proclamation 332/2014 to promote high quality reporting of financial and related information by reporting entities. Currently many African countries have applied the sustainability and climate related disclosure standards, Kenya being on the forefront. 

Effective date of application of the standards is on or after 1 January 2024. The ISSB, however, has provided transition reliefs when an entity applies IFRS S1 and IFRS S2. Successful implementation of new standards requires early planning and engagement of stakeholders to develop or upgrade entity capabilities and processes. Entities in Ethiopia should be alert and ready to embrace regulations requiring application of the standards. Implementing new standards and requirements may be challenging in the short term but deliver long term benefits.