Collaboration is key when it comes to developing global sustainability reporting standards, says IAASB Chair Tom Seidenstein.
The global ecosystem for mandatory financial reporting has evolved over decades, and so will a global ecosystem for mandatory reporting and disclosure of sustainability-related information. Meanwhile, the potential for an internationally agreed baseline on which to build this ecosystem is within reach, if sustainability standard-setters can effectively manage diverse expectations across wide-ranging stakeholder groups and reach consensus on a balanced approach.
“You can’t let perfect be the enemy of good in this area,” says Tom Seidenstein, Chair of the International Auditing and Assurance Standards Board (IAASB) and co-CEO of the recently created International Foundation for Ethics and Audit (IFEA), which houses the IAASB and the International Ethics Standards Board for Accountants (IESBA).
“The standard-setting model that exists for accounting and auditing is relevant for sustainability standard setting,” says Seidenstein, echoing ICAEW’s recent report, Shaping sustainability standard setting, to which he contributed. Due process and governance are key to the development of independent standards with appropriate public accountability, he says, adding: “It’s not for the process itself – it’s for the end goal, the output, the trust and credibility.”
Over decades, independent standard-setters such the IAASB and the International Accounting Standards Board (IASB) have established a framework that can facilitate the widespread compromise and consensus that is needed to develop principles-based global standards for financial reporting and assurance that are endorsed and adopted by standard-setters across multiple jurisdictions. “You do this because you believe that by getting a broad range of input and expertise, you make your standard better,” says Seidenstein.
Finding clarity and consensus
In the world of accounting, there is clarity and consensus on what and who international standards for accounting, financial reporting, audit and their outputs are for. “Standard setting is about getting the best product that serves the efficient and sustainable functioning of capital markets and market economies,” says Seidenstein. It’s about protecting the clearly defined interests of investors and other primary users of financial statements.
Things are less straightforward in the world of sustainability standard setting. “As the ICAEW report states, it’s important to be clear on the purpose of standards and who you are writing them for,” says Seidenstein. Standard-setters of all types will need to connect their work to their mandates and also help users of sustainability information understand how the different frameworks interrelate.
Building on the existing financial reporting ecosystem, European Standards for Sustainability Reporting (ESRS) and International Financial Reporting Standards for disclosure of sustainability-related financial information (IFRS S1) and climate-related disclosures (IFRS S2) are, for example, carefully aligned on ‘financial materiality’. But ESRS feature ‘double materiality’, which combines this narrowly defined ‘financial materiality’ with ‘impact materiality’, which has a broader scope.
The broader and more diverse the stakeholders, the more challenging the standard setting. There is a difference, notes Seidenstein, between getting input from the broadest possible range of stakeholders when developing standards and trying to develop standards that offer something for everyone. Standard-setters have successfully navigated finding this balance in several contexts. To do so, they must remain true to their mandate, clearly identify the stakeholders they serve and take proactive steps to prevent the emergence of new expectation gaps.
Sustainability assurance matters
Assurance of information plays a valued role in enhancing stakeholder confidence in its credibility. “You can’t have a trusted system of reporting without assurance. You need independent, expert, third-party assurance to help address issues of trust and credibility,” says Seidenstein. This is why the IAASB developed its recently approved International Standard on Sustainability Assurance, ISSA 5000, after engaging with a broad range of stakeholders.
“We had one of our biggest consultations ever on ISSA 5000, which prompted involvement from around 2,000 participants,” he says. The result is a principles-based, standalone, overarching standard on general requirements for sustainability assurance. ISSA 5000 avoids detailed requirements that are specific to jurisdictions and subjects, and can be used to assess sustainability information prepared under any reporting framework including, for example, IFRS S1 and S2 and the ESRS, for engagements to provide limited and/or reasonable assurance.
Because the Corporate Sustainability Reporting Directive (CSRD) mandates limited assurance for ESRS reports, many engagements will be for limited assurance and, as people are more used to audit reports that offer reasonable assurance, education will be needed on what an assurance engagement provides. “This is a challenge, but I don’t think it is insurmountable. We are working on this now,” says Seidenstein, while urging all of those in the ecosystem to be clear on what assurance is and what it is not.
There seems to be a widespread expectation that, as the sustainability reporting and assurance ecosystem matures, there will be a transition to reasonable assurance (which provides a high level of confidence with a positive conclusion) and away from limited assurance (which provides a lower level of confidence and a negative conclusion). This could increase stakeholder confidence in the reliability of information in sustainability reports and disclosures, as with the reasonable assurance offered by financial statement audits.
Enforcement and evolution
Enforcement will play a key role and here, too, differences between sustainability standard-setters will matter. ESRS are already part of European Union law and various non-EU countries have committed to adopting IFRS S1 and S2 and/or using them as a basis for national standards. “We do not yet know how enforcement will be done in every jurisdiction. Most enforcement agencies are still figuring this out,” says Seidenstein. Standard-setters will need to work closely with multiple regulators, he adds, if their standards are to be audited and enforced appropriately.
Collaboration already involves assurance and ethics standard-setters. For example, the recently published IESBA ethics and independence standard is interoperable with ISSA 5000. “We’ve spent a lot of time with it,” says Seidenstein. “If you like a global baseline on the reporting side, you like a global baseline for assurance, you should like a global baseline for ethics.” But there is uncertainty around whether jurisdictions will adopt this, and how effectively those setting sustainability-related standards can coordinate what they do.
Seidenstein says: “It would be helpful to have some sort of forum – not a formal governance body, but a place that allows standard-setters and regulators to integrate timelines and coordinate strategy approaches, get feedback quickly and learn from implementation.” Perhaps the sort of structures that have enabled a global mandatory financial reporting ecosystem that is coherent and consistent across reporting, assurance and enforcement could do the same for the ecosystem around sustainability reporting and disclosures. Whatever happens, Seidenstein concludes, ICAEW and the wider profession have an important part to play in ensuring the success of that ecosystem.