Sustainability reports must drive decisions

Businesses are operating in a world where issues once regarded as “non-financial” are increasingly inseparable from financial results.

Climate events disrupt production, water shortages constrain operations, regulation changes markets, technology alters asset values and supply chains fail in unforeseen places.

A corporate report can tell you how much money a company made and where it invested. What it does not always tell you is whether the business is prepared for the future. That is beginning to change.

The International Sustainability Standards Board (ISSB), established by the IFRS Foundation, is developing a global baseline for sustainability-related financial disclosures through the IFRS Sustainability Disclosure Standards. Its inaugural standards are IFRS S1 and IFRS S2.

IFRS S1 requires disclosure of sustainability-related risks and opportunities that could affect an entity’s prospects, including cash flows, access to finance and cost of capital. IFRS S2 focuses specifically on climate-related risks and opportunities.

These standards are often discussed as a reporting transition. But the more important shift happens before the report is written, when companies examine issues they may previously have mentioned only broadly or failed to connect to their financial position. Kenya has joined this transition through a phased roadmap.

Public Interest Entities are expected to apply the standards for annual reporting periods beginning on or after January 1, 2027, followed by large non-Public Interest Entities in 2028 and SMEs in 2029. The transition has therefore reached Kenyan boardrooms. But its underlying challenges are global: climate exposure, supply-chain disruption, changing regulation, resource constraints, data quality and capital-market expectations.

There is a danger, however, that the standards become another annual compliance exercise. We could end up with better-looking reports without necessarily getting better businesses. The real value lies in the questions companies must confront before publishing: What could disrupt our supply chain? What assumptions are we making about water, energy or weather that may no longer hold? Which assets may lose value? How resilient is our strategy? How reliable is the information behind our investment decisions? These are not abstract sustainability questions. They are business questions. Drought can reduce agricultural production and household incomes. Flooding can damage assets and interrupt logistics. Water scarcity can constrain manufacturing, while regulation can increase the cost of carbon-intensive operations. Eventually, the costs may appear as higher insurance claims, defaults, disrupted production, expensive inputs or weaker revenues.

The same analysis can reveal opportunities: more efficient technologies, resilient suppliers, new products, financing channels and markets positioned to benefit from a changing economy. Sustainability-related financial disclosure should therefore connect risks and opportunities to governance, strategy, risk management and financial decision-making. Sustainability information should not sit in one section of an annual report while the assumptions underlying strategy and financial reporting tell a different story.

Capital pays attention to what it can see. Investors need to understand risks behind expected returns, while lenders and insurers need to assess exposure to disruption. Better disclosure will not automatically attract investment or guarantee cheaper capital, but poor information creates uncertainty — and uncertainty can carry a price.

Greenwashing presents another challenge. Sustainability reporting has sometimes rewarded appearance over evidence, with organisations making broad environmental or social claims while leaving harder questions unanswered: What has changed? How is progress measured? What risks remain? Standards can make vague claims harder to sustain, but they cannot eliminate greenwashing. A technically compliant report can still contain selective information or claims unsupported by evidence.

This is why scrutiny matters. Boards must challenge the information presented to them, management must understand its assumptions, and investors, lenders, assurance providers and regulators all have a role. Communications professionals, too, must resist turning incomplete progress into refined certainty.

Trust is built when stakeholders believe what a company says, especially when the information is not flattering. A business that acknowledges a weakness, explains its exposure and shows how it is responding may protect its credibility better than one presenting an image of perfection.

The real test of the IFRS Sustainability Disclosure Standards will not be how many companies publish disclosures.

It will be whether the information changes decisions. The most useful report should not simply make a company look better. It should make the company look harder at itself.

Follow ourWhatsApp channel for breaking news updates and more stories like this.