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Why Europe wants sustainability and financial reporting to connect

Author: ICAEW Insights

Published: 10 Dec 2021

EFRAG’s Board President explains why sustainability is as much a financial reporting issue as a non-financial one.

EFRAG – the European Financial Reporting Advisory Group - gives voice to the EU in influencing IFRS developments while providing advice to the European Commission on whether to endorse IFRS standards for use in the EU. As the International Accounting Standards Board (IASB) looks to finalise significant projects in 2022, EFRAG is impacting the direction of travel through its discussion papers and consultation responses. 

“For EFRAG, it is essential that in our research work, we are working on activities that are relevant to our stakeholders and important for Europe in influencing the IASB,” says EFRAG Board President Jean-Paul Gauzès. 

EFRAG expects to complete open proactive research projects on crypto assets, intangibles and variable and contingent consideration this year. It will select its new proactive research topics for the coming years based on European priorities and the IASB’s new projects. 

“We need to update our strategy for the four year’s period 2021-2024 to address the likely developments in financial reporting and plans for the corporate reporting developments and the role of EFRAG as the technical advisor to the Commission on draft sustainability reporting standards. The insights on the future financial reporting developments are expected to support our views and activities notably on digitisation and interconnectivity.” notes Gauzès

When asked about the biggest financial reporting issues faced by the industry and standard setters in the coming years, Gauzès says that sustainability in financial reporting, starting with climate-related reporting, will become very important. 

“With all that is happening now, also so close to our homes, we cannot deny the urgency of sustainability anymore and reporting is important to support the actions taken identified in the EU Green Deal. Obviously, connectivity between financial reporting and sustainability reporting needs to be considered at all stages of our work.” 

EFRAG has been running its European Corporate Reporting Lab for three years. It published its first digitally navigable report at the beginning of 2020, on climate-related reporting; an important first step, says Gauzès. “The report illustrated from different perspectives which practices were good and perhaps more importantly how they could be further improved. It also addressed climate-reporting based on the TCFD recommendations including the challenging reporting area of scenario analysis. The idea is that other companies, perhaps less advanced in this area, could draw inspiration for their own reporting.”

At the beginning of October, the Lab’s second project task force published its report:Towards Sustainable Businesses: Good Practices in Business Model, Risks and Opportunities Reporting in the EU’ and the supporting 'Supplementary Document: Good Reporting Practices'. Similarly, this aims to help companies benchmark and improve their current reporting practices. The report has been very well received, says Gauzès, since business model reporting has to ameliorate. The proposal for a CSRD requires disclosures on the resilience of the business model and strategy to risks related to sustainability matters.

“In the recommendations in my final report on the changes to the governance and finance of EFRAG, if EFRAG were to become the European sustainability reporting standard setter,” says Gauzès. “I have suggested we maintain the European Lab function. 

“In the public consultation on my proposed recommendations there was positive feedback on maintaining this function within the new governance structure, even though stakeholders recognised that function may be dormant in the first years, as the priority will be the development of future draft sustainability reporting standards. In future, the project task forces will, depending on the topic, directly operate under the EFRAG Financial Reporting Board (FRB), the EFRAG Sustainability Reporting Board (SRB)or under both.”

Gauzès stresses the importance of connectivity between financial and sustainability reporting which will have to be considered throughout both the process of the financial reporting and the sustainability reporting activity. If a sustainability matter is material for the financial statements it has to find its place in financial reporting. Financial reports will have to consider how to accommodate connectivity. Cooperation between financial reporting and sustainability reporting standard-setters will be key, he says, to ensure the continuity and coherence of corporate reporting. 

“How to operationalise connectivity is a topic that will keep us busy in the coming months and years. The report of the EFRAG Project Task Force on non-financial reporting standards earlier this year developed initial ideas on how this could be done.”

For EFRAG, this means clear cooperation between the EFRAG Reporting Boards, FRB and SRB, and at EFRAG Reporting Technical Expert Groups (TEGs) level – Financial Reporting TEG and Sustainability Reporting TEG. “This will ensure that there is full transparency and consideration of the implications of the sustainability reporting on financial reporting but also the other way round. Connecting financial reporting and sustainability reporting will require greater attention in providing a full picture of companies’ reporting.”

Non-financial reporting: where are we headed?

What are the challenges that companies face when it comes to non-financial reports, where can improvements be made, and what does the future hold?

Insights special: Non-financial reporting

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