PwC charges Nigerian energy firms, banks to boost investor’s confidence, credit ratings with early adoption of IFRS S1, S2 reporting framework
… releases latest flagship for ESG financial reporting
Oredola Adeola
PricewaterhouseCoopers Nigeria, PwC Nigeria has in its latest publication on the implications of the Environmental, Social, and Governance (ESG) framework in financial reporting charged Nigerian oil and gas companies, industries and financial institutions that are planning to access funds from the global stock market to boost their investors’ confidence, perception, and credit ratings through early adoption of General Requirements Exposure Draft(IFRS S1) and Climate Exposure Draft(IFRS S2).
This was exclusively obtained by EnergyDay on Thursday following the release of the publication by the leading professional services firm in Nigeria.
According to the PwC, Environmental, Social, and Governance (ESG) borders on maintaining sustainable business practices that are true, fair, and reliable across an entity’s business mode.
PwC said the ESG reporting framework is expected to have important and unique reporting effects on different industries in Nigeria, ranging from those with relatively higher carbon or environmental footprints directly or indirectly (like the Oil and Gas, Mining, Heavy Duty Manufacturing, Fast-Moving Consumer Goods (FMCGs), and the Financial Services Industry), to those with less carbon or environmental footprints as compared to the former (like the Agricultural, Pharmaceutical, Telecommunications and Entertainment Industry).
It also said that the financial services industry would be classified or ranked based on whether its product designs (i.e capital or funds) are allotted to carbon intensive or non-carbon intensive industries. Therefore, carbon footprint rankings for all financial services firms would majorly hinge on the fund allocations made to carbon and non-carbon intensive industries.
It said, “When companies engage in ESG practices, they are more accountable and responsible in how they conduct their businesses.
“Investors, lenders, rating agencies, and other interested stakeholders now hold organisations accountable for the impact created by business operations and activities and in essence, place more trust in organisations that demonstrate a sustained interest in communities, the environment, and good governance.
“Such organisations are expected to do more than simply ‘tick a box’. It says the organisations would have to build trust and deliver sustained outcomes by implementing effective ESG strategies.
“Investors, lenders, rating agencies and other interested stakeholders expect more transparency around financial and non-financial metrics to better understand a company’s performance, risks, and opportunities.
“Organisations also need to show how they create value – for shareholders and society alike – through insightful, balanced, and trusted performance and disclosure,” the report stated.
Explaining two financial reporting standard – IFRS S1 and IFRS S2-, PwC revealed that the General Requirements Exposure Draft (IFRS S1) sets out the core content for a complete set of sustainability-related financial disclosures, establishing a comprehensive baseline of sustainability-related financial information.
It said, “To comply with the proposed requirements, a company would disclose material information about all significant sustainability-related risks and opportunities to which it is exposed and how such materiality (depending on the unique judgements adopted) affects the enterprise value.
The consequence of non-disclosure of sustainability-related financial information, according to PwC, is that the sustainability-related financial disclosures would be required to be published at the same time as the financial statements.
PwC also said they must be presented fairly with emphasis on ensuring the information relates to the reporting entity’s value chain and is in line with industry practices.
On Climate Exposure Draft(IFRS S2) the report, PwC said companies must provide material information about its significant climate-related risks and opportunities.
It said, “IFRS S2 required a company to disclose information that would enable an investor to assess the effect of climate-related risks and opportunities on its enterprise value.
“The Climate Exposure Draft uses the same approach as the General Requirements Exposure Draft, so it would require a company to centre its disclosures on the consideration of the governance, strategy, and risk management of its business, and the metrics and targets it uses to measure, monitor, and manage its significant climate-related risks and opportunities,” the report noted.
PwC further noted that both IFRS S1 and IFRS S2 exposure drafts are expected to be adopted based on approvals at the jurisdictional level and full-time adoptions are expected to take place immediately after the drafts are finalized in 2023.
Speaking about the benefiting of IFRS S1 and S2 reporting into the conventional financial reporting frameworks, PwC said stakeholders and global attention have shifted beyond these traditional goals and the clamour for a more sustainable business practice that transcends the bottom-line is now in high demand
It said, “Stakeholders and regulators are beginning to hold corporations accountable for their operations with emphasis on the Enterprise Value- which speaks to how the company adds values beyond profit making to their host and remote society.
“Investors are typically averse to organizations that do not have a common pattern of conducting business in line with global regulations and frameworks.
“The IFRS S1 and S2 have come to stay and being an offshoot of the IFRS Foundation (a widely accepted regulatory body)”
PwC however noted that based on the advent of these standards, organizations that start building a track record of compliance would only further boost existing and potential investors’ confidence.
It also noted that companies that complied with IFRS S1 and S2 financial disclosure is likely to avoid regulatory sanction and exposures.
PwC said, “We anticipate that organizations with an early adoption record are more shielded against any possible regulatory sanctions for non-adoption. Your organization stands a great deal of favourable regulations for portraying your business as being a sustainable one through the adoption of the IFRS S1 and S2.
It also said that global rating agencies like S&P, Sustainalytics, and MSCI are at the fore front of rating multinational firms with international presence, and they are beginning to identify how unavoidably important your ESG Rating as a firm is to accessing funds on the global stock market.
PwC disclosed that the Nigerian Stock Exchange (NGX) and other African exchanges are likely to adopt S1 and S2 for all organization willing to further retain excellent ratings on their capital markets,
It noted that the regulators are placing key emphasis on ESG Rating for top tier financial institutions and other industries, all with the aim of ensuring a robust regulatory check and balance on their business practices.
PwC also noted that one essential passport that organisation involved in cross-border transactions, must have in order to enjoy a seamless entry into global markets is its consistency with global regulations and standards.
The report said that with more emphasis on climate change and sustainable business practice, compliance with the provisions of IFRS S1 and S2 is expected to become a key passport to accessing global markets.
PwC also noted that financial services firms would begin to look into the applications of Green and Climate Bonds, and how they form part of their traditional financial instrument portfolios in accordance with the relevant IFRSs (IFRS 9 and 7).
It however revealed that oil and gas firms would look more into provisions made for decommissioning environmental liabilities and additional disclosure requirements (Internationa Accounting Standard 37), and attention would be paid to recognition of Deferred Tax Assets as a result of Taxable profits possibly reducing due to climate risk exposures (IAS 12), amongst others.
PwC noted that the oil and gas industry has one of the highest carbon footprints as a result of its direct impact on the physical environment, adding that activities ranging from unearthing the earth’s surface for mineral resources, oil mining, gas flaring, and oil spillages makes its direct impact a major contributor to carbon emissions, hence more regulatory and reporting attention would be placed on this industry.
It however cautioned that companies operating in Nigerian require a multi-dimensional approach in order to ensure that they are data-ready and global reporting standard ready for ESG Reporting.
PwC charged clients in the Oil and Gas industry to develop unique data points for reporting purposes (data repository), adding that this would help the companies track how environmentally and socially responsible they are.
It said, “Oil and Gas industries’ data should communicate facts and fairness. We expect clients aiming at meeting global best practices for ESG Reporting to intentionally harness these data points and create a repository for them from which stakeholder-relevant information can be pooled for efficient reporting purposes.”
The publication charged oil and gas companies to gather these key and unique industry data so benchmark indices can be made and peer to peer performances can be tracked for ESG Reporting purposes.
