Following COP28’s historic agreement with 198 countries to welcome a new era of climate action, the UAE has intensified efforts to align with international standards, boost corporate transparency and ensure long-term economic resilience in a dynamic global landscape. Development plans such as the UAE Green Agenda have paved the way for the UAE’s commitment to sustainable development, spurring businesses to increasingly adopt sustainability reporting to measure and disclose their environmental, social, and governance (ESG) performance.
However, as a relatively new but rapidly growing requirement, sustainability reporting still challenges preparers and users. The many standards and frameworks make it hard to compare results between companies in the same industry and across different sectors and industries.
Last year, the IFRS Foundation formally announced the creation of the International Sustainability Standards Board ‘ISSB,’ which will parallel the International Accounting Standards Board under the IFRS Foundation. The ISSB standards originated from the demand for a global reporting baseline by the participants at COP26 in Glasgow, as the world collectively acknowledged the urgency of addressing pressing global climate challenges and the need for robust and comprehensive sustainability reporting frameworks.
The creation of the ISSB and the implementation of European Sustainability Reporting Standards (ESRS) in Europe have been the most significant developments in ESG Reporting for some time. They are major steps towards bridging the currently disjointed reporting landscape. These frameworks will help address the lack of consistency, making sustainability disclosures less useful for users and more difficult for assurance providers to verify. In the UAE, for instance, listed companies are legally required to either issue separate sustainability reports alongside their annual and/or periodic report or integrate financial and non-financial data in their annual reports.
Since the final standards were released last month, the ISSB standards have become a key talking point for organisations, investors, regulators and other stakeholders within the UAE. So, what sets ISSB apart from the other frameworks and standards in the market?
Traditional IFRS has been the default set of standards for companies for financial reporting in the UAE, with its application entrenched in UAE laws. However, the lack of a definitive set of standards for reporting sustainability-related issues created a need for the IFRS Foundation to venture into sustainability reporting.
Two new sustainability standards, IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures), were introduced on June 26, 2023. These standards aim to cater specifically to investor information needs, integrating effortlessly into the financial reporting ecosystem. This includes their incorporation into financial statements, preparation processes, submission procedures, audits, investor communications and more.
The ISSB is based on existing frameworks and standards, including the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). It is also working closely with the Global Reporting Initiative (GRI) to ensure its new investor-focused standards are complementary to and compatible with the existing impact-based GRI standards commonly used with the UAE but which have a different objective of meeting wider stakeholders’ information needs.
The ISSB has also been working closely with jurisdictional standard setters to maximise interoperability between its standards and incoming mandatory reporting frameworks—for example, with the European Commission and EFRAG (European Financial Reporting Advisory Group) in the EU and with the SEC (Securities and Exchange Commission) in the US.
In the future, connected financial and sustainability reporting will be a requirement rather than a gesture of good practice. Finance and sustainability teams must work closely together to ensure the information disclosed is complementary and based on the same underlying assumptions, facts and circumstances.
Although sustainability-related information differs from information presented in financial statements, there will increasingly be a need to ensure connectivity to financial reporting. This requirement applies whether financial statements are prepared under IFRS Accounting Standards or other generally accepted accounting principles. Companies will need to have processes and controls in place to provide sustainability-related information of the same quality and timeliness as their financial statements.
In the UAE, as with other jurisdictions, the final endorsement of the ISSB standards rests with the relevant regulators. When to adopt and what further regulations the UAE may need requires careful consideration of local circumstances. The ISSB recognises there can be different routes to adopting their standards and broader factors to consider. Still, the global community is moving towards increased disclosure of consistent, high-quality and reliable sustainability information, meeting a range of user needs.
The effectiveness of adaptation efforts will depend on each organisation’s maturity in sustainability reporting. To navigate the evolving landscape, businesses must develop customised reporting strategies that address their specific systems, teams, data needs and processes. Immediate action is crucial; organizations should begin to establish a solid foundation and meet the demands of emerging standards, ensuring they are well-positioned to thrive in a future driven by transparency and sustainability.
