FARRUKH REHMAN, FCA | FEBRUARY 2, 2024
Behind the Scenes: The Journey to Embrace IFRS Sustainability Disclosure Standards in Pakistan
At COP 26, the UN Global Summit to address climate change held in November 2021, the formation of the International Sustainability Standards Board (ISSB) as a sister standard-setter to the International Accounting Standards Board (IASB) under the International Financial Reporting Standards Foundation (IFRS Foundation) was announced. This was a momentous step towards addressing the call of various stakeholders to bring about a global system for sustainability-related financial disclosures for investors, to be used around the world as a baseline for sustainability reporting for the capital markets.
Within 18 months of its formation, the ISSB provided the market with its first two IFRS Sustainability Disclosure Standards, which built upon existing and respected frameworks and standards. The International Organization of Securities Commission (IOSCO) endorsed these standards, calling on its 130 member jurisdictions (which regulate more than 95% of the world’s financial markets) to consider ways in which they might adopt, apply or otherwise be informed by the ISSB Standards.
IFAC has actively advocated for the IFRS Foundation to develop a comprehensive global baseline for private sector sustainability-related financial disclosure for the capital markets. As with IFRS financial reporting standards, and as may be appropriate to meet jurisdiction-specific objectives, IFAC expects most jurisdictions to adopt these standards and build on them. IFAC member organizations must engage now with local policy makers on what mechanisms can be used to transition forthcoming global ISSB standards into local standards. This article outlines the work done by one such IFAC member organization, ICAP (Institute of Chartered Accountants of Pakistan), to adopt the IFRS Sustainability Disclosure Standards and build capacity for their implementation.
The Role of the Accountancy Profession in Adopting Reporting Standards in Pakistan
The Accounting Standards Board (ASB) in Pakistan was established by ICAP’s Council as an independent board. Its multi-stakeholder composition include corporate and banking regulators, the profession, industry, academia, the stock exchange, and Auditor General Office. It reviews standards issued under the IFRS Foundation; it also creates awareness for and makes recommendations about the standards’ adoption.
The ASB has formed a Sustainability Working Group (SWG) to focus on the adoption and implementation of the IFRS Sustainability Disclosure Standards. Important factors motivating ICAP and the ASB’s recommendations include the sustainability opportunities and risks facing Pakistan, the increased demand by external stakeholders from export sectors of Pakistan regarding ESG (i.e., environment, social and governance) matters, as well as net zero commitments made by local industry. The SWG included multi-stakeholder representatives from the Securities and Exchange Commission of Pakistan (SECP), the profession and industry, the Pakistan Business Council, Overseas Investors Chamber of Commerce & Industry, the Pakistan Stock Exchange, and the Pakistan Institute of Corporate Governance, all of which are also working on furthering ESG-related activities and objectives.
In 2023, the SWG reviewed the draft ISSB standards, disseminated them to stakeholders and conducted awareness sessions. Based on its outreach, the SWG provided feedback on the draft standards to ISSB.
Following the final standards being issued by the ISSB in June 2023, ICAP increased its interaction with the SECP on the strategy of adoption and implementing the IFRS Sustainability Disclosure Standards in Pakistan. The SECP has taken a proactive approach on ESG matters, including issuing an ESG Regulatory Roadmap for Capital Markets and an ESG Action Plan that establishes the responsibilities of various stakeholders. The SWG reviewed the final standards and disseminated these to stakeholders seeking feedback on their adoption and implementation.
Stakeholder Consultation Sessions were then held involving SECP and ICAP representation with more than 100 companies and professional firms, held in large cities to discuss their preparedness and obtain proposals about the adoption and implementation of IFRS Sustainability Disclosure Standards. Based on engagement through these sessions, the SWG developed proposals for the phased implementation of the Standards. It was felt that adoption of the Standards from January 1, 2024 would be challenging for many companies, particularly those not involved in exports and global value chains, given that the concept of sustainability reporting is relatively new and many companies need time to advance their governance, systems, controls and processes.
A special consultation session was also held with the State Bank of Pakistan with a focus on the banking sector.
Engagement and feedback on the IFRS Sustainability Disclosure Standards have now been summarized in a publication, IFRS Sustainability Disclosure Standards Study, consultation and recommendations for implementation in Pakistan, which includes recommendations for the adoption and implementation of these Standards. The publication has been disseminated publicly and shared with all relevant stakeholders. It also includes a summary of the adoption status of these standards in other jurisdictions.
Adopting a Phased Approach to Reporting and Assurance
We have recommended a phased approach for the adoption of IFRS Sustainability Disclosure Standards, which effectively begins the mandatory application to very large entities in Pakistan in the first year (beginning on or after January 1, 2025) covering both listed and unlisted companies, followed by large companies—again both listed and unlisted—in the second year (on or after January 1, 2026), and subsequently the remaining listed companies, not covered in phase 1 and 2, in the third year (on or after January 1, 2027). Specific criteria for companies have been recommended to provide a distinction between the phase 1, 2 and 3 adoption stages.
Further, the requirement for mandatory external assurance on the sustainability reports is recommended from the second year of reporting by companies respectively falling in all phases.
Building Capacity for High-Quality Implementation
ICAP is now moving to the next stage to build capacity of its members and engage its membership and accounting firms on their preparedness for the adoption of the Standards. Given that in the first year of the application of Standards, entities are required to disclose climate-related risks and opportunities in accordance with IFRS S2, the SWG has a strategy to deliver seminars and master classes on the specific technical topics emanating from disclosure requirements of IFRS S2. The first topic in this regard is the calculation of GHG Emissions under the standards mandated by IFRS S2 (using the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard; and Corporate Value Chain (Scope 3) Accounting and Reporting Standard).
ICAP has also issued publications to update its members on the developments around IFRS Sustainability Disclosure Standards and has dedicated a specific part of its website to include all sustainability-related documents and links to resources and education opportunities.
This includes a frequently asked questions series that has also been planned to provide guidance and clarity on the key concepts and requirements.
Further, there has been continued communication to members about the developments at ISSB which includes informing them about the launch of the ISSB Knowledge Hub. This hub features education materials on the IFRS Sustainability Disclosure Standards and other related material from various credible organizations around the world.
Our extensive engagement and consultation are a significant step towards the formal adoption of the Standards. The IFRS Sustainability Disclosure Standards involve accountants learning a new language, which is essential for keeping themselves relevant and responding to the demands of the market. ICAP has a critical role in advocating for the adoption and implementation of ISSB standards, developing capacity within the profession, and building on the role and strengths of our profession in driving sustainable and resilient organizations.
This article was first published by IFAC.org at the following URL: https://www.ifac.org/knowledge-gateway/supporting-international-standards/discussion/behind-scenes-journey-embrace-ifrs-sustainability-disclosure-standards-pakistan