What’s going on with Europe’s sustainability reporting standards?
Lawmakers are reportedly eyeing ISSB adoption and might ditch double materiality. What’s actually on the table, and will it help?
A consultation on new European Sustainability Reporting Standards (ESRS) is due any day now.
And it wouldn’t be EU sustainability regulation if it didn’t come with some last-minute plot twists.
This time around, what’s taken the industry by surprise is a potential plan to make the ESRS – and therefore the Corporate Sustainability Reporting Directive (CSRD) – even more accommodating to the International Sustainability Standards Board (ISSB).
According to insiders, a proposal has been put on the table in the last three weeks which the Commission is taking seriously.
It mirrors comments made to European Parliament last month by ISSB Chair, Emmanuel Faber.
“After thorough discussions with EFRAG and with the European Commission, the assurance profession and the preparers, we believe we have found a way to potentially give the European standards a direct, full ‘ISSB adopter’ status,” he told the economic affairs committee.
Faber is referring to the official list of jurisdictions with sustainability disclosures regimes aligned to ISSB – and therefore with potential regulatory equivalence.
The IFRS Foundation has suspended the EU’s alignment profile while the ESRS is revised, but Faber’s comments offer the possibility of ‘upgrading’ it from partial to full adopter when it’s restored.
“To do that, we need two small items [in the ESRS] to be amended,” he said.
The first is the structure requirements: the IFRS Foundation wants them changed to allow companies to use their ISSB disclosures as part of their CSRD reports.
“The second is to ensure the non-obscuring of financial materiality information, that is critical for ISSB, is introduced more clearly than it is today.”
In other words, the ESRS should stop firms from disclosing details about their impacts on people and the planet together with financially-material information, because it muddies the waters for investors.
ESRS already contains a line prohibiting disclosures that “obscure” relevant information, but that applies to everything – it doesn’t prioritise financial information.
There is speculation that the Commission plans to update ESRS in a way that splits disclosures into ‘financial’ and ‘non-financial’ sections.
Donato Calace, senior vice president at Datamaran, thinks this could be a futile exercise.
“If you look at the structure of sustainability reports now, there is already a clear distinction between financial information and impact, because everything is defined as either an Impact, Risk or Opportunity,” he tells Real Economy Progress.
“I have a hard time imagining how those distinctions could be made any clearer in practice.”
Law firm and NGO Frank Bold says the proposal reveals “a fundamental tension with [ISSB’s] own standards”.
IFRS S1 acknowledges that financial risks originate from sustainability-related impacts and dependencies, notes Susanna Arus, Frank Bold’s EU public affairs manager, adding that users need both sets of information to get a full picture of the risks crystalising for a business, and how they’re being managed.
“Mandating an additional labelling exercise, or outright requiring strict separation of impact and financial material information doesn’t simplify anything: it forces companies to overhaul a reporting system they have only just built, adding burden and audit complexity, while risking that critical impact information gets buried in an appendix,” she argues.
“The EU should question if the ISSB proposals are really working towards simplification or if they are simply put forward to erode the EU standard-setting power.”
But others are supportive of the plans.
Dr. Uta-Bettina von Altenbockum, sustainability lead for German capital markets trade body Deutsche Aktieninstitut, describes them as enabling “two frameworks – one report”.
“We welcome the fact that the Commission is considering ways to spare European companies the burden of dual reporting under ESRS and ISSB standards,” she told Real Economy Progress.
“The aim should be to ensure that European companies’ ESRS reporting is ISSB-compliant without incurring extra reporting costs and efforts. This could be achieved if the ISSB granted the EU IFRS adoption status.”
Meanwhile, a spokesperson for the IFRS Foundation said ISSB was working with the Commission and EFRAG to “reduce the burden for companies so that they can efficiently comply with both ESRS and ISSB Standards”.
“Clearly identifying information that is intended for investors as well as information that is intended for other stakeholders enables better use of the information provided,” he stated.
“Emphasising this, along with allowing flexibility in how companies present their sustainability-related information, would allow a company wishing to do so to provide a single report that meets both sets of requirements.”