Understanding IFRS S1 & S2 for Sustainability Reporting in Nigeria

Many companies in Nigeria are struggling with how to decide what is important when it comes to sustainability reporting. They are unsure what Sustainability Related Risks and Opportunities (SRRO) should be prioritized. This confusion comes from the past focus on corporate social responsibility (CSR), where companies reported mainly to show they are giving back to society.

As Nigeria rolls out IFRS S1 and S2, the Financial Reporting Council (FRC) requires companies to identify and assess SRRO during the second phase of implementation. The Revised Roadmap for Implementation explains this further. S2 only covers climate-related risks and opportunities. This means the International Sustainability Standards Board (ISSB) does not have standards for other sustainability issues outside of climate risks.

Companies need clear guidance to identify and assess these SRRO. In my previous article, I shared tips for identifying SRRO for those adopting IFRS S1 and S2. I highlighted the confusion that can happen when a sustainability topic is not included in the IFRS Sustainability Standards. IFRS S1 tells companies to follow a hierarchy that limits references to sustainability standards focusing on what investors need to know. Today, I will talk about another part of identifying SRRO, which is the assessment of what is material.

When assessing materiality, one important thing to remember is that ISSB Sustainability Standards look at SRRO that could impact a company’s future. This is why IFRS S1 (para 3) says that companies must disclose all sustainability-related risks and opportunities that might reasonably affect their cash flows, access to finance, or cost of capital.

The concept of double materiality is becoming more common in discussions about sustainability. This includes financial materiality and impact materiality. Financial materiality is about SRRO that influences a company's financial performance, position, cash flows, access to finance, or cost of capital. This view is important for investors who use sustainability reports to make investment choices. Impact materiality looks at the social and environmental effects of a company's operations and is important for stakeholders like NGOs, environmental groups, and human rights advocates.

To assess materiality under IFRS S1 and S2, companies should focus on SRRO that can affect their future, this includes financial performance, position, cash flows, access to capital, and cost of capital. IFRS S1 (para 18) explains that information is material if missing or misrepresenting it could influence the decisions of primary users of general purpose financial reports.

According to IFRS S1 (B14), primary users are those making decisions about providing resources to the company. These decisions may involve buying, selling, or holding equity and debt instruments, providing loans, or voting on management actions that impact the company’s resources. IFRS S1 (B19) also states that judgments about materiality are specific to each company. Therefore, just because stakeholders ask about certain SRRO does not make them automatically material. It is not enough to want to show the effects of sustainability efforts.

Companies must clearly differentiate between financial materiality, which looks at the financial impact of SRRO, and impact materiality, which considers social and environmental effects. Investors mainly care about financial materiality, while society and stakeholders like NGOs and environmental groups focus on impact materiality. The assessment of materiality under IFRS S1 and S2 is based on financial materiality, not impact materiality.

Many companies in Nigeria still struggle with understanding what material SRRO is and what they should focus on. The confusion continues because companies that previously did sustainability reporting did so mainly to show they are giving back to society. They see this as making a positive impact. However, this is not the same as understanding the social and environmental effects of their operations.

This lack of clarity shows in the ongoing efforts of companies implementing IFRS S1 and S2. They still want to report on giving back to society, which they think demonstrates their impact. Some companies now plan to create two sustainability reports: one that meets the requirements of IFRS S1 and S2 and another called an impact report or corporate responsibility report for specific stakeholders and rating agencies.

There is still a need to clarify what should be included in the IFRS S1 and S2 sustainability report. In my previous article, I suggested that an entity’s ability to generate cash flows is closely linked to how it interacts with stakeholders, society, the economy, and the environment across its value chain.

When IFRS S1 (3) speaks of SRRO that could reasonably affect access to capital or cost of capital, IFRS S1 (2) helps us see that capital includes six types: financial, manufactured, natural, human, intellectual, and social and relationship capital. Therefore, assessing materiality involves looking at sustainability issues around these six types of capital and considering how the company interacts with its stakeholders, society, and the environment throughout its value chain. This is where financial and impact materiality meet.