1. The nature of approval responsibilities at March board meetings is changing
March is a critical time when many companies finalize their annual financial statements and submit them to the board of directors.In the past, board approval was seen as a “confirmation of the company’s annual operating performance.” However, with the introduction of the IFRS S1 and IFRS S2 sustainability disclosure standards, the significance of financial statement approval extends beyond just numerical accuracy.
IFRS S1 requires companies to disclose how they reflect sustainability-related risks and opportunities in their financial information. IFRS S2 is a disclosure standard that clearly defines risks and opportunities related to climate change. Companies must disclose information such as greenhouse gas emissions, the status of their decarbonization efforts, and the resulting cost increases. They must also report potential risks arising in their supply chains. This information is relevant to future management decisions.
The board of directors no longer approves only financial statements. It now approves the “substance” behind risk management and the basis for financial estimates.
Any discrepancy between disclosures and financial assumptions not only undermines external trust but also increases governance risk. March is a critical time for reviewing these interconnections.
Image source: FREEPIK
2. Three Disclosure Risks Companies Often Overlook
2.1 Inadequate Quantification of Climate and Transition Risks
Carbon taxes, CBAM, and fluctuations in energy prices are increasingly integral to the business operating environment. In practice, while companies often describe these risks in their disclosures, many fail to adequately assess their financial impact.Examples:
- Are carbon costs reflected in cost estimates?
- Do export restrictions affect gross profit?
- Are fluctuations in energy prices reflected in cash flow assumptions?
2.2 Lack of Alignment Between Human Resources/Operational Risks and Finance
ESG is not limited to environmental issues. Factors such as employee turnover, supply chain stability, and business continuity can impact revenue and costs.Examples:
- Does high employee turnover lead to increased recruitment and training costs?
- Do supply chain delays affect revenue recognition?
- Could labor disputes result in potential liabilities?
2.3 Untraceable Governance Processes
IFRS S1 places significant emphasis on governance structures and risk monitoring mechanisms. However, in practice, even if a company has considered these matters, it cannot prove that an appropriate deliberation process took place unless these are recorded in formal minutes or decision-making documents.- Does the board of directors review significant risks?
- Are records maintained of significant judgments?
- Is the rationale for decisions preserved?
Image source: FREEPIK
3. Risk Checklist to Complete by March
Before Board approval, companies should thoroughly review the following three points:(1) Preparation of an ESG risk inventory
Document the sources of risk, the extent of their impact, and the criteria for determining materiality in writing rather than verbally.
(2) Assessment of potential impacts on financial items
Even if no adjustments to the figures are required, conduct reasonable estimates and sensitivity analyses to provide input for the Board’s deliberations.
(3) Establishment of cross-departmental integration and approval processes
Establish integration and approval processes across departments. Ensure there are no discrepancies between disclosure content and financial assumptions across Finance, Human Resources, Operations, and Sustainability.
The focus in March is not on expanding the scope of disclosure. Instead, it is on verifying the consistency of the logic behind estimates and the basis for internal decision-making regarding risks that are already disclosed.
Image source: FREEPIK
4. The Role of Certified Public Accountants in the Current Period
As sustainability disclosures become increasingly integrated with financial information, the role of accountants is evolving accordingly. Accountants not only audit financial figures but also help clarify the connection between risk disclosures and financial estimates.Certified public accountants can provide professional support in the following areas:
- Verify that there is a reasonable basis for judgment regarding material risks.
- Ensure there are no discrepancies between disclosures and financial assumptions.
- Strengthen systems for preserving records of board deliberations.
5. Conclusion
As sustainability disclosures become increasingly integrated with financial information, the board of directors approves not just a set of numbers, but the validation of the company’s risk management capabilities.March should not be viewed merely as the period for fiscal year-end closing, but as a critical juncture to re-examine consistency between disclosures and financial statements. Delaying action tends to increase year-end costs and concentrate risks.
Financial statements are not the end goal; they mark the beginning of governance responsibilities.
To help companies systematically complete their reviews before board approval, we developed the “ESG Risk Disclosure Consistency Verification Tool.” Companies can use this tool for a preliminary review and to determine whether further specialized support is needed.
Download the Tool
➡️ ESG Risk Disclosure Consistency Verification Tool
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