Turning complex climate issues into financial data

Columnists

Turning complex climate issues into financial data


Summary

  • Investors have also recognized that these NFIs have a significant impact on an organization’s ability to create sustainable value.
  • Organizations should start providing relevant information about these BSS to enable investors to translate these complexities into relevant financial information for decision-making.

Traditional financial reporting faces a myriad of challenges regarding its relevance. A major drawback noted in recent times has been the inability of stakeholders to extract relevant financial information.

This specific challenge was born out of the realization that complex non-financial issues (NFIs) in an organization’s environment impact its fortunes.

Today, these environmental complexities include increasing geopolitical conflict, macroeconomic volatility, high unemployment, massive social inequality, climate change, diversity, technology and innovation, to name a few. only a few.

Investors have also recognized that these NFIs have a significant impact on an organization’s ability to create sustainable value. The establishment of the International Sustainability Standards Board (ISSB) by the IFRS Foundation last year is a direct consequence of the impact of NFIs on the long-term sustainability of organizations.

The ISSB is responsible, among other things, for providing a comprehensive global baseline of sustainability-related disclosure standards, following investor demand for high-quality, transparent, reliable and comparable reporting by companies on sustainability issues. ESG.

This implies that investors are keen to understand the impact of NFIs on an organization’s financial condition and performance.

Therefore, organizations should start providing relevant information about these NFIs to enable investors to translate these complexities into relevant financial information for decision-making.

Determining what information to provide on non-food items can be a daunting task for many organizations. However, organizations can approach this task by considering four main aspects of their environment coined using the acronym HERM

This approach captures the information that organizations should consider disclosing to translate the complexities of their environment into relevant financial information. By considering these four aspects, organizations can provide investors with relevant information on NFIs, thereby helping investors manage their investment risks.

By applying a systems theory approach to problem solving, organizations can think holistically in a way that recognizes the significant impact of these complexities in determining their long-term viability. The four main aspects to consider in the environment are;

1. HUMAN CAPITAL AND VALUES – It is considered a fundamental aspect of an organization. Therefore, it is essential to provide information on human capital capabilities, experiences, skills, incentives to innovate and reinvent within an organization.

Organizations should also consider providing information about the core beliefs that shape the attitude of human capital within an organization, how ethical behaviors are defined, decisions made, and the organization is governed.

2. ENVIRONMENTAL AND SOCIAL RESPONSIBILITY – Organizations should consider providing information on their legal and constructive obligations as required and expected by stakeholders on environmental and social issues.

It includes information on risks and opportunities arising from climate change, social frameworks, protocols and relationships formed within society, among others.

3. RESEARCH AND DEVELOPMENT – Organizations should consider providing information on the value of intellectual property (IP), technology, know-how, infrastructure and levels of invention needed to be competitive in the short and long term.

It includes information on the ability of organizations to adopt both a defensive and offensive strategy in the face of disturbances in their environment.

4. MERGERS AND ACQUISITIONS – Organizations should consider providing information on M&A activities in the environment directly and indirectly related to the organization.

It also includes information on market-specific information, encompassing matters ranging from deal initiation to post-acquisition activities.

By considering these four aspects and applying the appropriate reporting framework, organizations can begin to provide investors with the information they need to translate the complexities faced by organizations in their environment into relevant financial information.

This will result in benefits such as increased transparency of organizations as a result of improved disclosures, reduced transaction costs associated with M&A deals and transactions by making more relevant information available stakeholders and encouraging organizations to take a long-term mindset when it comes to setting strategic goals.

Mr. Awodumila is an Associate Director at PwC Kenya. An author who writes and speaks widely on topics related to corporate reporting

Teresa H. Sadler