How sustainability reporting unlocks capital for banks and others, By Innocent Okwuosa

Today, social and environmental sustainability issues are risks facing businesses and only managers know their extents and magnitude. The crystallisation of these risks are bound to affect cash flows, profit and future continuity. Investors also now want to know about this information, presently known only to managers. This is what sustainability standards and information are addressing. They are therefore financial information and not non-financial information. In this lies the unlocking of capital.

It is no longer news that Nigeria was the first country in Africa to announce the adoption of the sustainability standards issued by the International Sustainability Standard Board (ISSB), a sister body of International Accounting Standard Board (IASB), which issues the International Financial Reporting Standards (IFRS). Nigeria has adopted and implemented the IFRS from way back in 2012. So far, the ISSB has issued two Sustainability Standards’ IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 – Climate-related Disclosures.

The Financial Reporting Council (FRC) of Nigeria, the ISSB and Nigeria Exchange Group Regulation Limited (NGX Reg Co) launched the two ISSB Sustainability Standards on Monday 26 June, 2023. This coincided with the day both standards were launched in six major global financial centres, which included New York, London, Frankfurt, Singapore, Santiago and Montreal.

An Adoption Readiness Working Group set up by FRC has finalised an implementation roadmap, which the ISSB Chair, Emmanuel Faber, launched in March after a visit to both the Vice President, His Excellency, Senator Kashim Shettima and the President, His Excellency, Senator Bola Ahmed Tinubu, who pledged commitment to the standards for their benefits.

Under the roadmap, all listed companies and public interest entities are mandatorily required to prepare their sustainability reports in line with IFRS S1 and S2 for the financial year beginning on or after 1 January, 2027, with early adoption for accounting periods beginning on or after 1 January. Already in Nigeria, we have four early adopters, namely Fidelity Bank, Access Bank, Seplat and MTN. The FRC and Nigerian Integrated Reporting (NIRC) signed an MOU in which the NIRC acts as technical partner in the advocacy and implementation of sustainability reporting in Nigeria.

Sustainability information, sometimes called sustainability-related financial information is the information about companies’ environmental, social and governance matters that affect financial performance but are not traditionally captured in financial reports. Some refer to it as Environmental, Social and Governance (ESG) information. There is a heightened demand for this information both locally and globally, because investors see it as useful in evaluating the ability of companies to survive in the future.

International institutional investors engage in the ESG rating of companies and inability of a listed company to provide sustainability information means low rating, the consequence of which may be divestment. There are capital market implications that make many institutional investors shy away from a company’s stock. That in itself is the locking of capital flows to that market, which sustainability can unlock.

One of the major problems in the capital market is information asymmetry, a situation in which the managers of businesses have more information about its prospects than the investors. The existence of information asymmetry increases the risk perception of firms by investors, and as such more disclosure reduces risk perception.

Today, social and environmental sustainability issues are risks facing businesses and only managers know their extents and magnitude. The crystallisation of these risks are bound to affect cash flows, profit and future continuity. Investors also now want to know about this information, presently known only to managers. This is what sustainability standards and information are addressing. They are therefore financial information and not non-financial information. In this lies the unlocking of capital.

During the visit to the Vice President and President, the ISSB Chairman, Emmanuel Faber disclosed how the $510 million (2020 value) Nigerian cocoa export market is under threat if the supply chain does not adhere to the EU deforestation policy, a sustainability issue and hence sustainability information. It is a known fact that sustainable banking principles were championed by one bank to enable banks in Nigeria access certain international funds that imposed sustainability practices as a pre-condition to be satisfied.

International institutional investors engage in the ESG rating of companies and inability of a listed company to provide sustainability information means low rating, the consequence of which may be divestment. There are capital market implications that make many institutional investors shy away from a company’s stock. That in itself is the locking of capital flows to that market, which sustainability can unlock.

Social and environmental sustainability issues have traditionally been seen as risks, but strategically integrating their information into financial reporting and company strategy brings out their opportunity potentials. For example, reporting scope 1 – 3 carbon emission opens banks eyes to investment opportunities in renewable energy, green finance, green bonds and possible mitigations. Accountants will come on board to see how sustainability can translate into revenue and cost reduction opportunities.

Assets managers, pension fund managers, investment advisers, stockbrokers and analysts in the Nigeria capital market must scale up to that point where they begin to utilise sustainability reporting information as it has now become common place globally.

Consequently, by providing information on how companies deal with sustainability issues, investors get to know that they are conscious of its risks and are addressing them. Investors get to know how a company is doing that. Herein lies the reduction in information asymmetry and risk perception. It is this that leads to reduction in the cost of capital, as shown by research in adopting ISSB sustainability reporting.

Sustainability information can support the evaluation of market value. For example, researchers at Harvard Business School developed a model which predicted that an investment of $1 made in a value-weighted portfolio of a company performing well in sustainability in 1993, would have grown to $22.6 by the end of 2010, while a control portfolio of non-sustainability performers would have grown to only US$15.4 in the same time period.

Research has shown that companies focused on sustainability have improved worker morale, hence productivity, reduced costs, and they created new revenue-generating opportunities and highly mitigated risks. Based on historical data, Bank of America Global Research found that companies in the top quintile of ESG performance experienced the lowest volatility in earnings per share in a subsequent five-year period. By contrast, ‘companies with the worst environmental, social and governance records averaged a 92 per cent volatility.

Assets managers, pension fund managers, investment advisers, stockbrokers and analysts in the Nigeria capital market must scale up to that point where they begin to utilise sustainability reporting information as it has now become common place globally.

Innocent Okwuosa is the chairman, Nigerian Integrated Reporting Committee and immediate past president, Institute of Chartered Accountants of Nigeria.

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