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The Middle East economy is still attracting inward investment in 2023, despite a slowing global economy. The IMF and World Bank are predicting GDP growth in the Middle East and North Africa (MENA) in 2023 to land somewhere between 2.4% and 3.1%.

A critical one-time choice in the first CT return is whether to elect the “realisation basis” for unrealised gains and losses. Under normal accrual accounting, certain assets or liabilities can have unrealised gains or losses (for example, a rise in value of an investment property or securities portfolio) that are recorded in profit before any actual sale or settlement. By default, such unrealised gains would be included in accounting income and thus taxable.

The degree to which environmental, social, and governance (ESG) reporting is being talked about depends very much on where you are in the world. The United Arab Emirates (UAE) has been somewhat of a trailblazer within the Middle East region when it comes to ESG:

• The UAE’s Securities and Commodities Authority issued guidance back in 2020 which mandated listed companies on the Abu Dhabi Securities Exchange (ADX) or Dubai Financial Market (DFM) to disclose ESG information in their annual report.
• In January, President His Highness Sheikh Mohamed bin Zayed Al Nahyan declared 2023 to be the “Year of Sustainability”.
• COP28 will be held in Dubai towards the end of this year, only the second time that the conference has been held in the Middle East.
• The UAE is the first Middle East and North Africa (MENA) nation to declare a strategic initiative to reach Net Zero by 2050.

ESG reporting is a challenge both for companies and firms of accountants. The increase in the volume of information that must be captured and reported on and, in due course, assured, is vast, and differs significantly from company to company depending on their industry sector and how they operate.

This can be even more difficult for smaller companies, many of which will get caught by ESG disclosure requirements despite them not being directly applicable to such companies yet in most jurisdictions. This is due to the concept of supply chain disclosures e.g. Scope 3 emissions for greenhouse gases, where a company has to disclose the CO2 emissions that it is indirectly responsible for up and down its value chain. Smaller companies will soon find themselves being asked for ESG data by their listed company customers, and most are simply not yet geared up to measure, capture, and analyze all the data that will be requested.

A further challenge is the lack of global standards for ESG reporting, resulting in a fragmented approach across the world (often known as the “alphabet soup”) which makes the situation even more difficult for companies within global operations and supply chains. However, this is now starting to change.

The formation of the International Sustainability Standards Board (ISSB) was announced at COP26 in Glasgow just two years ago. In that short time, a new international standard setting body has been set up to develop global sustainability disclosure standards that are backed by the G7, the G20, the International Organization of Securities Commissions (IOSCO), the Financial Stability Board, and numerous countries’ finance ministers and central banks.

Its work culminated in the release of the ISSB’s inaugural two sustainability standards on 26 June 2023:

IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information

The objective of S1 is to require an entity to disclose information about its sustainability-related risks and opportunities that is useful to users of general purpose financial reports.

IFRS S2 Climate-related Disclosures

S2 is focused on climate-related risks and opportunities.

We now have the first standards that will provide a global baseline for sustainability-related disclosures. These have been designed to work alongside financial reporting standards to enable seamless financial and sustainability reporting in the same reporting package. The two standards have been built on and consolidate the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, the Sustainability Accounting Standards Board (SASB – now part of the ISSB) standards, the Climate Disclosure Standards Board (CDSB) Framework, Integrated Reporting Framework and World Economic Forum metrics to streamline sustainability disclosures.

It’s early days, but the hope is that a consensus will form, and a majority of countries will choose to adopt the new ISSB standards over the coming years. The speed at which this will happen will vary considerably though in different jurisdictions. For example:

• Progress in the USA is strongly linked to the results of the next presidential election, due to be held in 2024.
• The EU forged ahead with its own ESG reporting framework, the European Sustainability Reporting Standards (ESRS). In its recent response to the EU consultation on the ESRS, IFAC noted: “significant concerns regarding the need for interoperability that supports a global system for reporting”. The European Commission and ISSB are continuing to work together to close the gap, but in the meantime, some substantial differences between the two will cause issues for many international companies that have operations in the EU.

One of the biggest challenges of ESG and sustainability reporting is the move to what is known as an “integrated mindset”. To deliver useful information for both internal decision-making as well as for external investors and wider stakeholders, many organizations are looking to break down functional and information silos, with a view to taking a holistic approach to both financial and sustainability information from within an organization and from outside.

This is something that is high on the corporate agenda at the moment, with IFAC president Kevin Dancey raising this in his presentation to the Forum of Firms in New York in June. This was also the topic of a recent conference I attended in Frankfurt, where academics, standard-setters, regulators, the accounting profession, and the business community got together to explore some of the practical challenges of taking such an approach.

The other aspect of ESG and sustainability reporting that affects the profession is the provision of assurance, and as with reporting, the situation is fragmented. The closest international standard we currently have is the ISAE 3XXX series:

• ISAE 3000 covers the provision of assurance other than audits or reviews of historical financial information, but is not specific to ESG and sustainability, and so is somewhat generic for this purpose and lacking in guidance on critical matters.
• ISAE 3410 only covers greenhouse gas emissions, and so is too narrow in scope on its own.

In the absence of anything better, most auditors have been muddling through using the above two standards. However, ESG assurance is an area where other third-party specialists outside of the accounting profession have also been providing services, using a variety of other assurance standards such as AA1000 and ISO14064. These vary considerably in terms of the amount of work to be performed and the level of assurance provided.

Fortunately, the International Auditing and Assurance Standards Board (IAASB) is coming to the rescue. It is currently working on a new sustainability assurance standard which will be known as ISSA 5000. Work has been progressing at a great pace compared to the usual time taken to draft a brand new standard, and the IAASB approved the first draft for public consultation at its recent meeting in June, with the aim of releasing the final version in September 2024.

Whilst this has been going on, the International Ethics Standards Board for Accountants (IESBA) has been running its own project, looking at ethical and independence issues affecting the provision of sustainability assurance engagements. The current plan is for a new Part 5 to the IESBA Code of Ethics which will apply to both limited and reasonable assurance engagements of sustainability information. The drafting will be such that it will be applicable to all sustainability assurance practitioners, both professional accountants and others.

ESG and sustainability reporting and assurance represent the biggest changes to the accounting and auditing professions for a generation. Within Kreston Global, our ESG Advisory Committee supports Kreston member firms in helping clients on their ESG journey. We can all play our part in moving towards a more sustainable world. His Highness couldn’t have put it better: “Today for Tomorrow”.