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The Association of Certified Chartered Accountants (ACCA) has co-produced a report with the Adam Smith Business School at the University of Glasgow assessing the readiness of chemical and construction material companies to comply with the draft IFRS S2 Climate-related Disclosures.
"These two sectors give us a window into the challenges that other companies and other sectors are likely to experience," Yen-Pei Chen, subject matter expert in corporate reporting at ACCA, told Corporate Disclosures.
The report used a sample of the 50 biggest emitters from each industry and compared companies' current reporting practices with those proposed by the IFRS S2 exposure draft. It found that disclosures from both sectors were moderately successful at fulfilling the IFRS S2 requirements.
On average, 43 % of chemical companies' reporting adhered to IFRS S2's requirements whereas construction materials companies scored 39%.
While this seems promising, Chen said that this number is boosted by the fact that 77% of the sample companies use the Task Force on Climate-Related Financial Disclosures (TCFD) framework for climate reporting, which has effectively served as the foundation for IFRS S2.
Very few companies already disclose the type of requirements that the ISSB has added on top of the TCFD provisions, specifically those in paragraphs 13 to 15 and 21 of the draft IFRS S2, she explained.
It was perhaps to be expected that companies do not yet disclose what they haven't been asked to disclose, but how much of a burden, cost and administrative, will it be on them to close that gap? Or is it just a matter of including in the report information they already have, but chose not to disclose yet?
It depends on the company, Chen said. "If you look what IFRS S1 and S2 are saying around value chain and Scope 3 emissions, that is an area where companies are going to struggle, because even the largest companies have very little visibility over what their suppliers are doing at the moment."
Companies that have not yet embraced the TCFD framework will also struggle as they'll lack the maturity of others to address the ISSB standard's requirements, she continued. Finally, SMEs face a real risk of additional burden through a trickle-down effect from larger companies asking for information from their value chain, Chen said. While the European standards have made it clearer for SMEs, the ISSB standards are blurrier and could trigger "a massive burden coming down the line" for SMEs. Beyond SMEs, emerging markets may also face challenges with the new requirements, she said.
To help emerging markets, Chen suggested either a "soft launch" with the standards voluntary for two years or a phased approach to implementation, although she did note that this could mean that investors are less willing to invest in companies in these economies if they do not have the same standard of disclosure.
Other key findings of the report
Chemical companies scored better than construction companies. For Chen, this discrepancy was mostly due to a geographical difference between the two sectors. Construction materials companies are more spread around the world and therefore operate in developing economies, particularly in Asia, where there is little narrative or forward-looking disclosure requirements.
She added: "Disclosure scores in Asia tend to lag behind other regions, it seems it's probably the influence of not having mandatory ESG reporting regimes."
Governance was the area where the sample companies' reporting adhered the most to the ISSB standard. Strategy was the area which current disclosures were weakest on. Chen said that "not all of the sections receive the same level of standard setting attention" and the governance section is the shortest one with the fewest disclosure requirements making it the easiest section for companies to complete. Governance is also the logical and natural starting point in the sustainability reporting journey, she added.
Conversely, strategy is the bigger section with a lot of new requirements, which explains why it is more challenging for companies to comply with.
Companies exhibit a very low score for the financial statements disclosures. This is mostly due to confusions around the disclosures themselves, Chen explained, as many companies may choose not to disclose on this as the decision on whether climate affects assets and liabilities is a "judgemental one". It is also due to confusion on where the disclosures should go as she said it is unclear what and how much goes into the financial statement compared to what goes into the management report.
Disclosures tended to be scattered and duplicated with no cross-referencing. Chen said that, as they stand, the ISSB standards would not help streamline reporting as the international standards setter has deliberately left the question of disclosure location open for interpretation.
55% of the sample companies have some form of assurance for their disclosures. "There has been a big push for more assurance of non-financial disclosures for a number of years now," Chen said. "So, the finding is line with this trend, but having said that it is easier to assure quantitative disclosures and the challenge as far as assurance goes going forward will be on how to give assurance on the narrative disclosures."