The Accountant – Issue 3 of 2021 (MIA Publication)
The Intergovernmental Panel on Climate Change (IPCC) report published in August confirmed that temperatures will reach 1.5C above pre-industrial levels under all emissions scenarios and that human influence mainly caused climate change. Whilst the report is a ‘code red for humanity’, hope is not lost if the world acts quickly in the next few years to address climate change and many other sustainability issues, including environmental degradation, human rights and social issues.
The European Union (EU) has been leading sustainable development for years, pioneering the European Green Deal in 2019. Sustainability reporting standards are particularly important in the EU as they contribute to achieving public policy objectives, including the ambitions of the European Green Deal.
Therefore, the European Commission (EC) proposed a Corporate Sustainability Reporting Directive (CSRD), to supersede the current Non-Financial Reporting Directive (NFRD) . Accountancy Europe welcomed the proposals of CSRD as they progress sustainability reporting.
Amongst other upgrades, the CSRD mandates the use of European sustainability reporting standards (ESRS) in the EU. These standards will be developed by the European Financial Reporting Advisory Group (EFRAG) and will be adopted by the EC via delegated acts by 31 October 2022. Accountancy Europe welcomed the EU leadership and progress on developing sustainability reporting standards: robust and verifiable sustainability reporting standards, which enable reliable reporting, improve market transparency, and minimise greenwashing.
The Commissioner for Financial Stability, Financial Services and the Capital Markets Union, Mairead McGuinness, asked EFRAG to start undertaking the necessary changes to its governance and funding and drafting these standards. A new sustainability reporting pillar will be created at EFRAG whereby:
- the EFRAG Sustainability Reporting (SR) Technical Expert Group (TEG) will be responsible to draft sustainability reporting standards; and
- the EFRAG SR Board will be responsible to approve the sustainability reporting standards proposed by the SR TEG.
ESRS will be based on the proposals of the EFRAG Lab Project Task Force on preparatory work for the elaboration of possible EU non-financial reporting standards.
At an international level the IFRS Foundation will set up an International Sustainability Standards Board (ISSB) in parallel to the current International Accounting Standards Board (IASB). The ISSB’s first standard on climate will build on the prototype standard on climate-related financial disclosures. The goal is to provide a globally consistent and comparable sustainability reporting baseline, while also providing flexibility for coordination on reporting requirements that capture wider sustainability impacts.
The below table summarises the key elements of these two initiatives:
Towards global sustainability reporting standards
Sustainability issues are global issues and require an internationally harmonised solution.
With many intercepting areas to their standards and common input, the ISSB and EFRAG should collaborate to produce aligned standards.
Accountancy Europe’s paper A constructive two-way cooperation to sustainability reporting standard-setting lays down principles for cooperation and explores how this collaboration could work in practice (see figure).
In summary, there would be collaboration at a:
- technical level to ensure producing aligned standards: the ISSB, its advisory groups and the EFRAG SR TEG, SR Board its working groups work closely together; and
- political level to promote consistency and progress towards global sustainability reporting standards: the ISSB would be part of the EFRAG’s Consultative Forum and the EFRAG SRG would be part of the IFRS’s Multi Stakeholder Expert Consultative Committee.
Accountancy Europe will continue participating to this critical and strategic debate in the European public interest.
Hilde Blomme is Accountancy Europe Deputy CEO. Hilde leads the professional expertise team on the areas of reporting, assurance, (sustainable) finance, tax and practice development.
Jona Basha is a Senior Manager at Accountancy Europe. She engages in various financial reporting matters and specialises in non-financial information reporting and standard setting.