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Europe could set the standard for non-financial reporting

15 June 2020: in a new paper, ICAEW has called for a ‘bridged’ European and international approach to standard-setting. Nigel Sleigh-Johnson, Director, Technical Strategy Accountability Group and Susanna Di Feliciantonio, Head of European Affairs, explain why.

The COVID-19 pandemic has battered human, social and economic capital across the globe. To rebuild more sustainable and resilient economies, improved reporting of environmental and social issues must be central to recovery efforts.

The European Commission is keen to extend legislation to do this. That could provide a crucial point of reference – and help generate global momentum towards finding a universal solution to address shared challenges.

Broadened non-financial disclosures can help businesses better understand and be accountable for the relationship between their activities and nature, people and the economy. The demand for enhanced non-financial information – increasingly required by shareholders, regulators and other stakeholders – has led to a confusing proliferation of non-financial standards, guidelines and frameworks. It is time for a change.

Consolidation needed

Moves to consolidate existing standards, guidelines and frameworks need to be accelerated and made more open and transparent. A single principles-based, internationally recognised global framework, for example, would help provide comparability and consistency for non-financial reporting. The IFRS Foundation could restructure to create an International Non-Financial Reporting Standards Board, parallel to the IASB.

The longer-term goal, however, should be the establishment of a global corporate reporting structure, encompassing both financial and non-financial reporting. Accountancy Europe has set out some useful proposals in this regard.

High quality standards need to be based on a shared understanding of the goals and purposes of reporting. A robust conceptual framework for non-financial reporting is currently lacking and urgently needed.

Europe’s role

The EU is prioritising action in this area. If framed in an innovative, outward-looking and collaborative way, such activity can help catalyse international alignment with specific EU policy objectives and regulatory needs. In the mid-term, this could lead to a 'bridged' approach to the setting of non-financial reporting standards. We could then see a more direct role for the European Financial Reporting Advisory Group (EFRAG) in assuming some standard-setting functions to address pressing needs for action at European level.

An enhanced way of working between the EU/EFRAG and a new International Non-Financial Standards Board could lead to the collaborative development of standards. This could enable the EU (and other individual jurisdictions) to request work on specific standards – and potentially provide for the EU to take a 'lead' in certain circumstances. At the same time, it could create a new way of working at an international level, building on standards developed by the EU or others to form part of a global suite of standards.

Read the full paper here.