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Sustainability

What CPAs need to know about sustainability reporting

With sustainability reporting gaining global prominence, CPAs need to prepare organisations for mandatory disclosures by assessing potential impacts and enhancing reporting infrastructure

Sustainability has quickly risen to the top of business and government agendas, and various jurisdictions around the world, including Canada, have implemented or proposed new sustainability disclosure requirements. Incorporating sustainable business practices and providing greater transparency on environmental, social and governance issues (ESG) have become hot button issues for organizations. 

This momentum towards mandatory sustainability reporting is being driven in large part by investors who are seeking consistent and credible sustainability information to inform their capital allocation decisions. According to PwC’s 2023 global investor survey, three-quarters of investors and analysts say how sustainability is managed is important to their investment decisions, while—surprisingly—more than nine-in-ten (94 per cent) believe corporate reporting on sustainability performance contains unsupported claims.   

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Enter the International Sustainability Standards Board (ISSB). The ISSB was established with the mandate to develop a global baseline of sustainability disclosure standards for the capital markets and in 2023 delivered its inaugural standards covering general sustainability disclosure requirements (IFRS S1) and climate-related disclosures (IFRS S2).  

Now the focus is shifting to adoption. Jurisdictions representing nearly 55 per cent of global GDP are on a pathway to using the sustainability disclosure standards issued by the ISSB as a baseline for mandatory reporting. Earlier this year, the Canadian Sustainability Standards Board (CSSB) published two exposure drafts for comment which are identical to the ISSB standards apart from additional transitional reliefs to provide Canadian companies with additional time for compliance.   

We expect the CSSB will issue final standards before the end of the year, however, questions remain as to when and how these standards will make their way into Canadian regulation and which entities will have to apply them. The Canadian Securities Administrators have indicated they will be looking closely at responses to the CSSB consultation as they decide on how to move forward with their climate disclosure rule. During our outreach on the CSSB exposure drafts, we heard from many, not surprisingly, that reporting in compliance with these standards will be a significant challenge for most, especially smaller entities. 

While these standards are voluntary at the moment, CPAs should not sit on the sidelines until securities regulators make a final decision. Now is the time to identify matters for which disclosure is likely to be required, understand the potential effects on financial statements, and put the appropriate infrastructure in place to support enhanced internal and external reporting.   

Identify material disclosure matters 

Disclosure will be required if it is material. As most CPAs know, the most important aspect of any materiality assessment is a clear understanding of your user and what information will influence their decision. This is no different for sustainability reporting than it is for financial reporting.  And the good news is that the definition of material information in the ISSB standards is aligned with that used in IFRS Accounting Standards—that is, information is material if omitting, obscuring or misstating it could be reasonably expected to influence investor decisions. 

However, this does not mean that materiality assessments are without their challenges especially given the nature and complexity of sustainability issues. Materiality assessments rely heavily on management judgement and entities will often have to consider financial implications over longer time periods than the time periods considered in preparing financial statements. Entities will also need to look beyond their organisational boundaries and look at risks and opportunities within their value chain including an entity’s supply and distribution channels.  

Connectivity between sustainability and financial reporting  

It is important to connect the dots between sustainability and financial reporting. IFRS S1 requires qualitative and quantitative disclosures on the anticipated financial effects of sustainability-related risks and opportunities. Sustainability issues may also affect financial statements in a number of different ways. For example, climate-related matters may indicate that an asset is impaired or affect the fair value measurement of assets.  The International Accounting Standards Boardhas commenced a helpful project to provide further guidance and examples regarding how an entity applies IFRS Accounting Standards to report the effects of climate-related matters.  

Organisations also need to evaluate the accounting implications of net-zero commitments. The IFRS Interpretations Committee recently published an agenda decision regarding whether an entity’s net zero transition commitment results in a constructive obligation that should be recognized. Whether an obligation needs to be recognized requires careful evaluation of the specific facts and circumstances. The accounting treatment for carbon offsets is also coming under enhanced scrutiny and has been discussed on several occasions by Canada’s IFRS Accounting Standards Discussion Group.  

Looking beyond climate 

While the focus to date has predominantly been on climate, CPAs should not lose sight of other areas that are garnering increased attention and will likely make their way into disclosure standards. Notably, in April 2024, the ISSB signalled their next research projects will be on biodiversity and human capital. In addition, some organisations have already started preparing for disclosures on nature-related risks and opportunities, as over 300 organisations have signed on as early adopters of the recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD), a voluntary risk management and disclosure framework.  

Prepare for implementation  

A 2024 KPMG study found that only 29 per cent of companies feel ready to have their ESG data independently assured. A few steps to ensure readiness are resourcing the sustainability reporting team and clarifying reporting governance requirements. Also, documenting processes and controls, and assessing data integrity—a mapping exercise will help identify any gaps. 

Stay informed 

Sustainability reporting is a rapidly evolving area. CPA Canada is committed to keeping our members up-to-date and providing guidance to help entities report sustainability information.  To stay current on reporting and assurance matters, read our reporting resources developed as part of our capacity-building partnership with the IFRS Foundation. We also encourage members to join our TNFD Consultation Group to explore nature-related reporting or take our Sustainability Certificate for an in-depth educational experience.  

CPA Canada is committed to keeping our members up to date and building capacity for reporting and assurance of sustainability-related information. Bookmark sustainability is good business to stay current on  reporting and assurance updates, read our reporting resources developed as part of our capacity-building partnership with the IFRS Foundation  to help you with implementation, join our TNFD Consultation Group  to explore nature-related reporting or take our Sustainability Certificate  for an in-depth educational experience.