Shixiang You
Member
Macau Institute for Corporate Social Responsibility in Greater China (MICSRGC)
Macau adopts the International Financial Reporting Standards (IFRS) Standards (the 2015 version) as its financial reporting standards. IFRS is the most widely adopted accounting standard worldwide. In June 2023, the IFRS Foundation issued IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2: Climate-related Disclosures. IFRS S1 requires a company to disclose sustainability-related risks and opportunities that may affect the company’s cash flows, financial access, and cost of capital in the short, medium, or long term. At the same time, IFRS S2 particularly reinforces the disclosure of climate-related risks and opportunities.
Adopting the latest version of IFRS Standards can help Macau align with the international financial reporting trends and allow Macau’s businesses to engage in globalization more proactively. However, some companies, particularly small and medium enterprises (SMEs), may find it challenging to evaluate what kind of sustainability-related risks and opportunities exist in their business operations or what type of climate risks and opportunities will significantly impact financial performance. For example, some managers may think climate-related risks, such as global warming, are too far away for an average SME among many companies. Some companies only prioritize risks and opportunities related to product responsibilities, as customers are their major stakeholder group.
Generally, sustainability reporting requires companies to disclose their environmental, social and governance (ESG) performance. Sometimes companies disclose ESG information as much as possible to show their determination to promote sustainable development and maintain a socially responsible image. However, excessive ESG information will dilute the effectiveness of sustainability reports by mixing many unnecessary disclosures. Stakeholders will likely miss the point. Besides, misjudging or overlooking significant ESG risks damages the balanced relationships with various stakeholder groups. Some investors may make biased investment decisions when they do not find the expected sustainability information in sustainability reports or annual reports.
The decision on the necessary ESG performance to be disclosed remains a question. Using the materiality principle in sustainability reports is one way to help companies accurately evaluate ESG risks and opportunities. Materiality has been applied in both financial and non-financial reporting. It sets a threshold for the omission or misstatement of information that can impact stakeholders. In short, companies should disclose sustainability information that is truly important to stakeholders based on thorough communication with all stakeholder groups. Materiality is not just ticking boxes on a report; it shows the relationship between sustainability, responsibility, and resilience.
Since materiality in sustainability reporting does not have a standard definition, companies can define the benchmark of materiality by themselves. Senior managers can consider ESG risks and opportunities from financial and non-financial perspectives. For example, cutting energy consumption may significantly impact a company’s revenue or expenses (financial performance) and long-term sustainability. Thus, the company chooses to disclose energy consumption performance in the sustainability report due to its financial materiality.
Following international reporting standards and applying materiality principles can benefit companies in many ways. First, companies can enhance their responsible reputation and credibility among various stakeholders, such as investors, customers, and the community. Since material ESG information is what the stakeholders expect, companies can maintain a stable relationship among stakeholders. Second, proper ESG disclosure can help gain more accessible access to capital. Companies may attract a broader range of institutional investors as sustainable investing is gaining popularity. Third, business organizations can improve risk management and mitigate potential threats by considering sustainability risks and opportunities, such as climate change, procurement corruption, and modern slavery. Fourth, companies presenting sustainability efforts will likely gain competitive advantages in the market since consumers have increasingly focused on sustainable development. Finally, disclosing material ESG information helps create long-term value. Integrating sustainability considerations in reporting practice and business operations can foster business innovation and adapt to changing market trends.
Both mainland China and Hong Kong promote or implement materiality in sustainability reporting. In Hong Kong, the Hong Kong Exchanges and Clearing Limited (HKEX) has already mandated listed companies to disclose ESG information based on the materiality principle. In mainland China, the proposed sustainability reporting regulation of the Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE), and Beijing Stock Exchange (BSE) also adopt the double materiality principle under the supervision of the China Securities Regulatory Commission (CSRC). Since Macau follows the IFRS accounting standards and has substantial economic connections to mainland China and Hong Kong, it is almost inevitable that sustainability reports will be issued based on the materiality principle. Thus, we encourage companies in Macau to disclose material ESG information based on the latest IFRS Standards to enhance transparency and accountability of sustainability performance.
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