An intriguing question on which to speculate is whether it will be the International Sustainability Standards Board’s (ISSB) series of IFRS Sustainability Disclosure Standards or the European Sustainability Reporting Standards (ESRSs), developed by the European Financial Reporting Advisory Group (EFRAG) and endorsed by the European Commission, that will be adopted as required standards in jurisdictions around the world. There is an interesting parallel between the likely future influence around the world of the ISSB and the likely future influence of the International Accounting Standards Board (IASB), when it came into existence in 2001.

When the IASB was created in 1999-2000 to succeed the International Accounting Standards Committee, no one knew whether, and to what extent, countries’ regulators and standard setters around the world would adopt its standards as financial reporting requirements for their listed companies. In short, would the new IASB have a clientele? If not, how long would it remain in existence with adequate funding and talented members and staff?

In June 2000, to the surprise of most, the EU’s European Commission announced that it would take steps towards requiring all of the some 6,700 companies listed on EU stock exchanges to implement the IASB’s standards in their consolidated financial statements by 2005. This was the Commission’s way of bringing accounting standards of the highest international standing into EU capital markets.

In June 2002, the European Parliament approved Regulation (EC) No. 1606/2002 on the application of international accounting standards, known as the IAS Regulation. This regulation converted the European Commission’s announced expectation into law. Karel Van Hulle (2002, 360), a senior member of the legal staff at the Commission, wrote: “A decision by the EU to adopt all existing IAS would be an important signal to the standard setters in other parts of the world to move in the same direction.” 

In Australia, Jeffrey Lucy, the chairman of the Financial Reporting Council (FRC), said, upon learning of the EU’s adoption of the IAS Regulation: “Australia certainly cannot afford to lag Europe in this regard.” Australia’s FRC promptly announced that, effective in 2005, companies would be required to convert from Australian GAAP to full adoption of IFRSs, and New Zealand’s Accounting Standards Review Board followed suit two years later. Thereafter, many other countries followed the EU’s lead (Camfferman and Zeff 2015, 66-67, 607). The IAS Regulation thus assured a worldwide clientele for the IASB.

By contrast, consider the current position with respect to the issue of environmental, social and governance (ESG) standards. This time, Europe has decided to issue its own standards. But a charge has also been given to the ISSB, which the IFRS Foundation formed in late 2021 as a sister-board to the IASB, to issue ESG standards. 

The EU’s programme has proceeded at a swift pace. In November 2022, the EU Parliament adopted the Corporate Sustainability Reporting Directive (CSRD), mandating EFRAG to develop draft European Sustainability Reporting Standards (ESRSs) for submission to the European Commission as technical advice. Having completed consultations with EU authorities and expert groups, the European Commission adopted the delegated act including the first set of 12 finalised ESRSs at the end of July. A two-month scrutiny period by the European Parliament and the EU’s Council is now underway. So long as no objections are raised by either of the co-legislators, the ESRSs will go into effect. The overarching CSRD is expected to come into force for the reporting year 2024 and will apply to all large and listed companies, which constitutes about 50,000 EU businesses.

The ISSB, for its part, has just issued its first two IFRS Sustainability Disclosure Standards designated as IFRS S1 and IFRS S2. The International Organization of Securities Commissions (IOSCO) has, in an unprecedented decision, announced its endorsement of the two standards. However, so far, no country’s regulatory body or standard setter has said whether it will adopt the ISSB’s standards for required, or even voluntary, use by companies. 

The open question is whether jurisdictions around the world will opt for the ISSB’s standards, the EU’s standards, or neither. Efforts are being made to minimise the differences between the two, but only time will tell whether such efforts have been successful. 

The big difference between the situation in 2001 as regards the IASB’s clientele and the current situation as regards the ISSB’s clientele is that, this time, the EU is developing its own standards. How will this affect the success of the ISSB’s venture?

Stephen Zeff FCA (honorary), Keith Anderson Professor of Accounting, Rice University, Houston, Texas