Sustainability reporting: What’s new and why it matters
In June 2023, the International Sustainability Standards Board (ISSB) released its first two IFRS Sustainability Disclosure Standards, which are designed to be used alongside financial statements in the same reporting package. These standards were developed to ensure consistency and comparability in sustainability reporting across different companies.
To date, telcos have been using a range of sustainability reporting standards
Until now, there hasn’t been a single globally accepted sustainability reporting standard that applies to all telcos. However, this doesn’t mean that telcos have not been putting in the effort to report their sustainability efforts using various standards developed by entities such as:
- Global Reporting Initiative (GRI): GRI offers a comprehensive framework for reporting on a wide range of sustainability issues, focusing on their economic, environmental, social, and governance (ESG) performance
- Task Force on Climate-related Financial Disclosures (TCFD): TCFD provides recommendations for voluntary climate-related financial disclosures. While TCFD specifically focuses on climate-related information, its recommendations have gained widespread recognition and adoption
- Climate Disclosure Standards Board (CDSB): CDSB focuses specifically on climate-related disclosures and aims to provide a framework that helps companies communicate their environmental performance and the potential impact of climate-related risks and opportunities.
The new IFRS Sustainability Disclosure standards will bring financial reporting practices to sustainability reporting
The International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB). IFRS provides a common language for business affairs so that company accounts are understandable and comparable across international boundaries. The goal of IFRS is to bring consistency, transparency, and efficiency to financial reporting globally.
In June 2023, the International Sustainability Standards Board (ISSB) released its inaugural two IFRS Sustainability Disclosure Standards, which are designed to be provided alongside financial statements as part of the same reporting package: IFRS S1, outlining General Requirements for the Disclosure of Sustainability-related Financial Information, and IFRS S2, specifically addressing Climate-related Disclosures. The development of the standards was prompted by the growing demand from users of general-purpose financial reports, such as investors, lenders, and other creditors, for more uniform, comprehensive, comparable, and verifiable information concerning companies’ sustainability-related risks and opportunities. Organisations can use IFRS Sustainability Disclosure Standards regardless of whether they prepare their financial statements following IFRS Accounting Standards or other generally accepted accounting principles or practices (GAAP).
There are two distinct sets of standards that telcos must adopt: S1 and S2
IFRS S1 requires entities to disclose information encompassing all sustainability-related risks and opportunities that could reasonably impact the entity’s cash flows, access to finance, or cost of capital over the short, medium, and long term. These factors are collectively referred to as “sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects”. The standard establishes fundamental requirements for the content and presentation of these disclosures, ensuring that the disclosed information is valuable to users in their decision-making processes related to providing resources to the entity.
IFRS S1 outlines the specifics of disclosing information related to an entity’s sustainability-related risks and opportunities. Notably, entities are required to provide disclosures regarding:
- The governance processes, controls, and procedures employed by the entity to monitor, manage, and oversee sustainability-related risks and opportunities.
- The entity’s strategy for handling sustainability-related risks and opportunities.
- The processes used by the entity to identify, assess, prioritise, and monitor sustainability-related risks and opportunities.
- The entity’s performance concerning sustainability-related risks and opportunities, including progress toward any targets set by the entity or mandated by law or regulation.
Figure 1: Requirements of IFRS S1
IFRS S2 was created in response to the demands for more uniform, comprehensive, comparable, and verifiable information concerning a company’s climate-related risks and opportunities. This standard outlines the obligations for companies to disclose details regarding their climate-related risks and opportunities. It extends and builds upon the requirements outlined in IFRS S1 and goes a step further by incorporating the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). It mandates the disclosure of information pertaining to both cross-industry and industry-specific climate-related risks and opportunities.
Figure 2: Requirements of IFRS S2
IFRS S1 and S2 will introduce greater governance and accountability to telcos’ sustainability reporting
Once the IFRS Sustainability disclosure standards become effective, sustainability reporting will become as rigorous as financial reporting. This means several changes for telcos:
1. Common sustainability reporting standards will ensure that telcos use standardised metrics and methodologies when reporting their sustainability performance. This will ensure consistency and comparability across the industry, making it easier for stakeholders, including investors, customers, and regulators, to assess and compare the sustainability performance of different telcos. Since investors are increasingly considering ESG factors in their investment decisions, common reporting standards will facilitate more informed investment choices, potentially attracting investors who prioritise sustainable and responsible investment practices.
2. For effective sustainability reporting, collaboration between financial and sustainability departments within a telco will be essential. CFOs have traditionally focused on financial KPIs, however, as telcos start adopting IFRS Sustainability disclosure standards, the range of attention and assistance offered by the finance function will broaden. The financial department is in an optimal position to facilitate this crucial transformation due to its significant influence on critical business decisions and processes.
3. When telcos move to full-fledged reporting, the audit community will need to sign off climate-related financial disclosures in the same way as they do financial metrics. This involves an independent examination of the company’s processes for collecting, calculating, and reporting climate-related data to ensure accuracy and adherence to reporting standards. Verifying the accuracy of the data helps ensure that the reported information is reliable and can be trusted by stakeholders.
Figure 3: Changes in the telecoms industry once IFRS Sustainability Disclosure standards become effective
In summary, common sustainability reporting standards for telcos will promote transparency, consistency, and accountability in their ESG practices, influencing various aspects of their operations, reputation, and relationships with stakeholders. IFRS S1 and S2 may seem like a technicality, a reporting standard of interest to a few folks in Finance. However, it has wide ramifications for all telco teams pursuing sustainability goals. These telcos should learn from the experiences of early adopters, such as Singtel, whose experience STL Partners will be sharing in our forthcoming report published next month.
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