As global awareness of environmental, social, and governance (ESG) impacts grows, companies are increasingly expected to disclose their sustainability practices and environmental impact reports.
To address this need, the International Sustainability Standards Board (ISSB) has issued two critical standards effective for annual reporting periods starting on or after January 1, 2024:
- IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information
- IFRS S2: Climate-related Disclosures
KPMG Caucasus and Central Asia has released a comprehensive overview on the implementation of these sustainability disclosure standards. This overview aims to assist companies in assessing the risks and opportunities that affect their ability to create long-term value.
Key Aspects of IFRS S1 and S2
Governance: Companies must describe the governance processes, controls, and procedures used to monitor sustainability risks and opportunities.
Strategy: Companies need to explain the strategies they deploy to manage sustainability risks and opportunities.
Risk Management: Clear descriptions of the processes used for the identification, assessment, and management of sustainability risks and opportunities are required.
Metrics and Targets: Companies should report their performance related to sustainability risks and opportunities, including progress towards their stated goals.
Importance for Central Asia
Gulnaz Shakhmukhanbetova, Associate Director of Advisory Services at KPMG and the author of the overview, emphasizes the importance of adopting IFRS S1 and S2 as mandatory requirements in Central Asian countries. As G7 countries and other European Union nations consider implementing mandatory sustainability disclosure requirements, companies operating in or collaborating with these markets must comply with these standards.
Shakhmukhanbetova outlines the main aspects of disclosure under the new standards and provides guidance for companies on their application. She also identifies the challenges Central Asian countries may face in adopting these standards, including:
- Lack of awareness among companies about the requirements of these standards
- The need for significant investments in time, money, and resources to develop processes and systems for data collection and analysis
- The necessity of engaging with stakeholders, including investors, employees, customers, and suppliers
Enhancing Investor Confidence and Competitiveness
The overview stresses the importance of understanding investor composition and resources to streamline sustainability disclosures. Companies should engage with their top investors to address their concerns and align reporting with best practices. This approach not only satisfies investor information needs but also enhances a company’s competitiveness by showcasing sustainability efforts effectively.
Implementation Challenges and Recommendations
Implementing IFRS S1 and S2 in Central Asia poses several challenges, such as the need for greater awareness and understanding of sustainability reporting. Additionally, companies must invest in creating and developing processes for data collection and analysis. Engaging with stakeholders is crucial to ensure comprehensive and transparent sustainability reporting.
To address these challenges, collaboration between companies, governments, civil society organizations, and other stakeholders is essential. Investment in capacity-building and awareness-raising initiatives will also play a significant role in facilitating the adoption of these standards.
Aligning with International Standards
IFRS S1 and S2 are designed to provide investors with comprehensive information on sustainability-related risks and opportunities that could affect a company’s cash flows, access to finance, or cost of capital. These standards are developed in close cooperation with the International Accounting Standards Board (IASB), ensuring compatibility and comprehensive information for investors and capital market participants.
Steps for Implementation
KPMG’s overview recommends a phased approach for implementing IFRS S1 and S2, starting with large and listed companies and gradually including smaller companies. Key actions include:
- Impact Assessment: Determine applicable standards for your company.
- Materiality Assessment: Identify relevant sustainability topics and material information.
- Maturity Assessment: Evaluate and enhance sustainability reporting processes and controls.
- Transform Reporting: Design future-state reports and assess resource needs.
- Assurance Readiness: Ensure data quality and documentation support assurance.
KPMG, one of the world’s largest global networks of professional firms, provides Audit, Tax, Legal, and Advisory services. Operating in 143 countries with more than 270,000 employees worldwide, KPMG is dedicated to social responsibility and continuously enhancing its knowledge and expertise to foster new perspectives for cooperation.
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