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Effect of IFRS Sustainability Disclosure Standards on the Financial Reporting Quality of Listed Companies in Nigeria

Abstract

The introduction of the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards by the International Sustainability Standards Board (ISSB), particularly IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures, represents a significant milestone in the evolution of global corporate reporting. These standards aim to establish a comprehensive and globally consistent framework for sustainability-related financial disclosures by requiring organizations to provide transparent, reliable, comparable, and decision-useful information regarding sustainability risks and opportunities that may affect enterprise value. Unlike traditional financial reporting, which primarily focuses on historical financial performance, the IFRS Sustainability Disclosure Standards integrate sustainability-related risks into financial reporting, thereby enabling investors and other stakeholders to make more informed economic decisions. In Nigeria, increasing emphasis on sustainable development, climate resilience, environmental responsibility, and corporate governance has heightened the relevance of sustainability reporting among listed companies. Regulatory institutions such as the Financial Reporting Council of Nigeria (FRCN), the Securities and Exchange Commission (SEC), and the Nigerian Exchange Group (NGX) have continued to encourage greater transparency in sustainability reporting in line with international best practices. The adoption of IFRS Sustainability Disclosure Standards is expected to improve financial reporting quality by enhancing transparency, consistency, comparability, completeness, and credibility of sustainability-related disclosures. However, implementation challenges—including inadequate technical expertise, limited sustainability reporting experience, high compliance costs, evolving regulatory requirements, inconsistent reporting practices, and data availability constraints—may affect the realization of these expected benefits. Despite the growing global attention on sustainability reporting, empirical evidence regarding the effect of IFRS Sustainability Disclosure Standards on the financial reporting quality of listed companies in Nigeria remains limited. Against this background, this study investigates the effect of IFRS Sustainability Disclosure Standards on the financial reporting quality of listed companies in Nigeria. The study is anchored on Stakeholder Theory, Legitimacy Theory, and Signaling Theory. Stakeholder Theory posits that organizations enhance long-term value by providing transparent and relevant information that satisfies the information needs of investors, regulators, employees, customers, creditors, host communities, and other stakeholders. Legitimacy Theory explains that organizations adopt sustainability disclosure standards to demonstrate conformity with societal expectations, strengthen corporate legitimacy, and maintain their social licence to operate. Signaling Theory argues that companies adopting high-quality sustainability disclosure standards communicate positive signals regarding transparency, sound corporate governance, effective risk management, and long-term sustainability, thereby strengthening investor confidence and improving the quality of financial reporting. Collectively, these theoretical perspectives provide a comprehensive framework for explaining the relationship between IFRS Sustainability Disclosure Standards and the financial reporting quality of listed companies in Nigeria. The study adopts a quantitative research design using a structured questionnaire administered to accountants, chief financial officers, sustainability reporting officers, financial controllers, internal auditors, external auditors, compliance officers, finance managers, and other personnel responsible for financial reporting within selected companies listed on the Nigerian Exchange Group (NGX). A stratified random sampling technique will be employed to ensure adequate representation of respondents from manufacturing, financial services, telecommunications, oil and gas, consumer goods, industrial goods, healthcare, agriculture, and other sectors of the Nigerian economy. Primary data collected from respondents will be analyzed using descriptive statistics to summarize respondents' demographic characteristics and perceptions regarding the implementation of IFRS Sustainability Disclosure Standards and financial reporting quality. Structural Equation Modeling (SEM) will be employed to examine the effect of IFRS Sustainability Disclosure Standards on financial reporting quality. The measurement model will be evaluated using Cronbach's Alpha, Composite Reliability (CR), Average Variance Extracted (AVE), and Confirmatory Factor Analysis (CFA) to establish the reliability and validity of the research instrument. Additional diagnostic tests, including multicollinearity assessment, common method bias analysis, and model fit indices such as the Comparative Fit Index (CFI), Tucker-Lewis Index (TLI), Root Mean Square Error of Approximation (RMSEA), and Standardized Root Mean Square Residual (SRMR), will be conducted to ensure the adequacy, consistency, reliability, and robustness of the structural model. The study anticipates that the adoption of IFRS Sustainability Disclosure Standards will have a significant positive effect on the financial reporting quality of listed companies in Nigeria. Compliance with IFRS S1 and IFRS S2 is expected to improve the transparency, completeness, comparability, reliability, relevance, and consistency of financial reporting by integrating sustainability-related risks and opportunities into corporate disclosures. The implementation of these standards is also anticipated to strengthen corporate governance, enhance internal reporting systems, improve risk management practices, and facilitate greater alignment between financial and sustainability information. Furthermore, high-quality sustainability disclosures are expected to reduce information asymmetry, improve investor confidence, attract responsible investment, strengthen corporate reputation, and enhance stakeholder trust. Listed companies effectively implementing IFRS Sustainability Disclosure Standards are therefore expected to produce financial reports with greater decision usefulness, improved disclosure quality, enhanced credibility, and stronger compliance with international reporting requirements. Conversely, inadequate implementation capacity, weak governance structures, insufficient sustainability reporting expertise, and inconsistent disclosure practices may reduce reporting quality and limit the benefits of sustainability reporting. Consequently, effective adoption of IFRS Sustainability Disclosure Standards is expected to contribute significantly to improving financial reporting quality, promoting corporate transparency, and strengthening the efficiency of Nigeria's capital market. This study is expected to make significant theoretical and empirical contributions to the literature on financial accounting, sustainability reporting, corporate governance, and capital market studies by providing robust evidence on the relationship between IFRS Sustainability Disclosure Standards and the financial reporting quality of listed companies in Nigeria. Unlike previous studies that focused primarily on Environmental, Social, and Governance (ESG) reporting or voluntary sustainability disclosures, this research specifically evaluates the influence of the recently introduced IFRS Sustainability Disclosure Standards on financial reporting quality using primary data and Structural Equation Modeling (SEM). The findings will provide valuable insights for the Financial Reporting Council of Nigeria (FRCN), the Securities and Exchange Commission (SEC), the Nigerian Exchange Group (NGX), listed companies, investors, auditors, sustainability professionals, professional accounting bodies, policymakers, and academic researchers regarding the strategic importance of IFRS Sustainability Disclosure Standards in promoting transparent, reliable, and globally comparable corporate reporting. The study will also provide evidence-based recommendations for strengthening sustainability reporting frameworks, enhancing professional capacity building, improving regulatory implementation, reinforcing corporate governance practices, promoting compliance with international sustainability reporting standards, and fostering sustainable corporate reporting and capital market development in Nigeria.

Keywords: IFRS Sustainability Disclosure Standards, IFRS S1, IFRS S2, financial reporting quality, sustainability reporting, listed companies, Structural Equation Modeling (SEM), corporate governance, International Sustainability Standards Board (ISSB), Nigeria.