As proposals for setting sustainability standards emerge, Susanna Di Feliciantonio reflects on the growing call for simplification and integration in non-financial reporting.
If 2020 set in motion multiple efforts to address the proliferation of sustainability standards, guidelines and frameworks, 2021 may be the year significant decisions are made on the future of global sustainability reporting.
Responding to growing demands for enhanced sustainability reporting – that is, non-financial reporting – from investors, civil society and regulators, the past 12 months has seen a notable acceleration of initiatives to tackle issues with the comparability, reliability and relevance of sustainability disclosures. Central to the debate have been questions relating to the setting of sustainability standards.
Europe catalyses the debate
Ursula von der Leyen, President of the European Commission, is unequivocal: the EU must “go faster on climate action”. To achieve this, over a third of EU COVID-19 recovery funds are being directed to green objectives, while the Commission continues to re-examine a vast swathe of the EU’s rulebook to ensure it remains fit for purpose. One key review concerns the Non-Financial Reporting Directive (NFRD), which has been in place for larger entities since 2018.
Launching a broad public consultation on the NFRD in spring 2020, the then-responsible Commissioner Valdis Dombrovskis called for an ‘open, transparent and inclusive’ approach to developing non-financial reporting, which avoids ‘fragmentation of global capital markets’. A review of stakeholder responses, issued in the summer of 2020, highlighted strong support for some changes, including bringing more companies into the scope of the NFRD and streamlining existing sustainability reporting provisions spread across several different EU laws. A large majority of respondents also backed moves to amend the NFRD to mandate the use of a common non-financial reporting standard or framework.
European activity was kicked into even higher gear last summer following formal requests from the Commission to the European Financial Reporting Advisory Group (EFRAG) to start work on the elaboration of possible EU non-financial reporting standards. A rapidly convened project taskforce, bringing together more than 70 participants from different backgrounds, launched in September 2020. Following an initial mapping and assessment exercise, attention has subsequently focused on defining more detailed recommendations and the setting of a tentative work programme that could see the delivery of a first European standard by late June 2022. Concurrently, Jean-Paul Gauzès, EFRAG Chair, has also been developing proposals for potential changes to EFRAG’s governance and financing, should it be entrusted with the standard-setting role. Both workstreams are due to issue their final reports in early 2021.
The legislative changes to the NFRD, also due to be published early this year, will provide concrete indications of the EU’s direction of travel when it comes to the setting of sustainability standards. Other provisions will be of interest too – including approaches to materiality, treatment of SMEs, potential assurance requirements, the location of reported information and issues around digitalisation.
Standards bodies collaborate
Recognising existing confusion among producers and users of sustainability information – not to mention a ‘groundswell of demand’ for change, including from regulators, policymakers and the accounting profession – the five leading sustainability and integrated reporting standards bodies announced steps towards greater alignment in summer 2020.
The joint statement by CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) sets out how transparent measurement and disclosure of sustainability performance has become a fundamental part of effective business management. The statement also outlines some of the complexities associated with sustainability disclosures, due to different user needs. Deepening collaboration between the five is presented as an important step in driving progress towards a more comprehensive solution for corporate reporting, building on existing financial reporting standards and sustainability standards, with integrated reporting providing a connection between the two.
In setting out a path towards a more comprehensive corporate reporting system, the five bodies also explain how existing frameworks and standards could be applied in a complementary and additive manner, thereby enabling companies to report sustainability information that is focused on enterprise value creation as well as the broader United Nation’s Sustainable Development Goals (SDGs).
Support and activities accelerate
Noting the different activities underway, the International Federation of Accountants also issued a position paper in September, clearly supporting the establishment of a new standards-setting board alongside the International Accounting Standards Board (IASB) to develop and coordinate a global system of interconnected financial and non-financial reporting. In a similar move, Eumedion, the Dutch investor body, called for the International Financial Reporting Standards (IFRS) Foundation to expand its mission and establish a separate non-financial information standard-setter.
Acknowledging the driving role that regulation can play in this area, the International Organisation of Securities Commissions (IOSCO) also picked up the pace, setting up a board-level task force to identify commonalities in sustainability disclosure standards, with a view to enhancing transparency and comparability. IOSCO aims to finalise work, with industry input, in October 2021.
Towards an International Sustainability Standards Board?
The calls for change continued into Q4 of 2020 with the IASB and the IFRS Foundation addressing the issue of sustainability reporting head-on. Speaking in September, IASB Chair Hans Hoogervorst noted the intensified interest in sustainability reporting, while pushing back against a perceived disconnect between IFRS standards and sustainability issues. Hoogervorst underlined that “the principle-based approach of IFRS standards means that issues that relate to, for example, climate change could be captured by our requirements, both in terms of recognition and measurement and disclosure”. The point had already been taken up in an open letter from major global investor groups calling on companies to apply existing IASB guidance to fully reflect the effects of climate change in their financial reports.
The launch of a consultation paper by the Trustees of the IFRS Foundation a few days after Hoogervorst’s speech took matters further. Intimated in several speeches during the year, the Trustees opened the door to a broad reflection on how the IFRS Foundation could help meet the demand for global sustainability standards by potentially extending its remit beyond the development of financial reporting standards. Warning of the risk of increasing global fragmentation as a result of diverse frameworks and regulatory approaches, the Trustees outlined the potential establishment of a new sustainability standards board operating alongside the IASB under the same three-tier governance structure.
When it comes to sustainability reporting, 2020 saw many questions raised, initiatives announced, and workstreams launched. Concrete decisions on the way ahead will need to follow soon. Looking ahead, 2021 could well be the year that ushers in a new era of sustainability reporting. The challenge will be to do this in a way that responds to the needs of diverse audiences, addresses specific jurisdictional needs and enables global consistency and comparability. Watch this space.