New European sustainable reporting regime aims to phase-in third-party verification and avoid concentration of business among top audit firms.
Europe’s plans to extend and increase sustainability reporting by corporates marks a big step forward in third-party assurance of ESG data, according to Ugo Bassi, Director of Financial Markets at the European Commission’s directorate general for financial services (DG FISMA).
“This proposal will introduce, for the first time, an EU-wide requirement for the audit of sustainability information. Investors must be able to trust the information that they get. The objective is to have a similar level of assurance for financial and non-financial reporting,” he said, speaking at a City & Financial event on ‘Standardisation of ESG Reporting’ yesterday.
Published in April, proposals for the Corporate Sustainability Reporting Directive (CSRD) would require 50,000 firms to provide a non-financial statement on a series of ESG-related factors, in alignment with the Taxonomy Regulation.
The directive effectively replaces the Non-Financial Reporting Directive and is expected to apply from 2024. The European Financial Reporting Advisory Group aims to finalise European Sustainability Reporting Standards by October next year.
Bassi said the sustainability reporting process would be highly digitised, adding that a proposal for a Single European Access Point would be made by the Commission “very soon”.
In the absence of regulatory oversight and third-party verification, voluntary sustainability reporting frameworks have been susceptible to questions of consistency and accuracy.
Bassi emphasised the need for a gradual approach to the introduction of third-party assurance requirements for sustainability reports. Under the CSRD proposals, assurance would cover the period of the report, the sustainability reporting framework and standards used, the scope of assurance and the sustainability assurance standards applied.
“We need to allow for the development of an assurance market for sustainability information,” he said, noting the need for market practices to develop and for costs to be phased in, reflected in CSRD’s proposals for only ‘limited assurance engagement’ to be required at the first stage, evolving to reasonable assurance once capacity has been built.
Although accounting and auditing firms are expected to provide the bulk of sustainability reporting assurance services, the proposed directive allows for alternative providers to enter the market, which Bassi said would avoid over-concentration.
“The assurance of sustainability reporting by auditors will ensure the connectivity and the consistency of financial and non-financial reporting. But to avoid or mitigate the risk of further concentration of the audit market, the proposal allows member states the option to accredit independent assurance service providers to provide an opinion on the sustainability report, as a kind of double check,” he said.
Bassi emphasised the importance of double materiality to European sustainability reporting requirements, but he said Europe would take full account of other reporting frameworks and initiatives.
“We are not going to develop these standards in a vacuum. We mean to contribute to the global standardisation process. We see the other initiatives as a very important piece of the puzzle,” he said.
The IFRS Foundation is in the process of establishing an International Sustainability Standards Board (ISSB) to develop a set of global standards, starting with a climate-focused prototype. The ISSB’s approach is expected to be focused on the impact of ESG risks on enterprise value.
“We see the global standard as a baseline which we need to build on and certainly not as a roof that will prevent us from going further or adjusting the standards to our specific needs,” Bassi said.
Whilst noting the Commission’s commitment to international cooperation, he contrasted the “building block” approach highlighted recently by IOSCO, the securities regulators’ representative body, with one of “co-construction”.
“We do not see the role of Europe as gold plating or putting something on top as an additional layer to the global standards. Rather, we see a process which will run in parallel, in coordination, where there will be cross-fertilization between the two bodies,” he said.