Sustainability Reporting Standards Drive Boosted by EC, IFRS

As SFDR comes into force, EC plans integration of sustainability reporting regimes, while IFRS Foundation outlines SSB plans.

The European Commission has published oversight plans for sustainability reporting aimed at ensuring future standards are aligned with its broader sustainable finance agenda. The European Financial Reporting Advisory Group (EFRAG) and EFRAG’s Project Task Force published two reports, prepared at the request of the Commission.

The publication of the reports adds further momentum to global efforts to harmonise and standardise sustainability reporting, following an IFRS Foundation statement on Monday about next steps for its planned Sustainability Standards Board.

The first report proposes a roadmap for the development of EU sustainability reporting standards beyond the implementation of the Sustainable Finance Disclosure Regulation (SFDR), Non-Financial Reporting Directive (NFRD) and EU Taxonomy.

The taskforce said that SFDR, NFRD and the Taxonomy provide the EU with a strong sustainability reporting landscape from which to develop standards that will “contribute to the achievement of the EU’s policy objectives”. The NFRD is currently under revision.

“Standard-setting should be built on robust EU conceptual guidelines, addressing public good alignment, expected qualitative characteristics of information, relevant time-horizons, clear boundaries, double materiality and connectivity between financial and sustainability reporting,” the report said.

The taskforce has not set out specific disclosure requirements, indicators or metrics, noting that this is a task “for the EU’s future standards-setter”.

According to current European Commission timelines, Level 1 of SFDR will come into force from Wednesday March 10, the updated NFRD from April 2021 and the EU Taxonomy from January 2022.

Previously, market participants have complained that the interconnected areas of reporting between these three regulations remain confusing, which will make implementing harmonised sustainability standards more challenging.

The second report proposes internal reforms to EFRAG’s governance structure to ensure more active support by the group when future EU sustainability reporting standards are developed.

This includes the introduction of a non-financial reporting pillar that will operate alongside EFRAG’s existing financial reporting pillar.

A newly formed Non-Financial Reporting Board (NFRB) will govern the non-financial reporting pillar and support the EC with implementing and harmonising EU sustainability reporting standards.

It will work in tandem with a Financial Reporting Board (FRB), which will oversee the existing obligations of the EFRAG Board.

IFRS outlines plans for global standards

These European developments follow an update on implementing globally standardised sustainability standards by the International Financial Reporting Standards (IFRS) Foundation. The IFRS Trustees met on March 2-4 and discussed feedback on the Consultation Paper on Sustainability Reporting.

The Trustees welcomed the public statement made by the International Organisation of Securities Commissions (IOSCO) Board last month, announcing IOSCO’s intention to work with the IFRS Foundation to develop a Sustainability Standards Board (SSB). The SSB will oversee the implementation of any global sustainability standards introduced.

IFRS Trustees’ further announced they will “consider the prototype proposed by the alliance”, referring to a climate-based standards initiative by the ‘group of five’ standards-setting bodies: CDP, Climate Disclosure Standards Board (CDSB), Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB).

The group of five has previously encouraged companies to begin producing climate-related financial disclosures in line with their sustainability standards prototype, ahead of any global standard the Foundation may introduce.

“GRI welcomes the direction of travel IFRS is taking, which has the potential to strengthen financial reporting by taking into account the financial opportunities and risks of a company’s sustainability impacts. GRI believes that such strengthened financial reporting complements sustainability reporting, which focuses on disclosing a company’s impact on the world,” GRI Chairman Eric Hespenheide said.

Sustainability reporting is also moving up the US agenda since President Joe Biden came into office. The Securities and Exchange Commission (SEC) is working on updating its 2010 guidance of climate-related risk disclosures and recently launched the ESG-focused taskforce.

Also in the US, the Centre for Audit Quality (CAQ) and American Institute of Certified Public Accountants (AICPA) have also published a roadmap which aims to help independent auditors support companies in achieving their ESG reporting goals.

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