Global sustainability reporting is here. International and European standards are final – and effective – and a US climate standard may follow.
Many are hoping that the International Sustainability Standards Board (ISSB) and EU joint work on interoperability – i.e. complying with one set of requirements means you comply with the other – will reduce the burden of the new requirements.
Although progress has been made, concerns remain for companies with operations in multiple jurisdictions or dual listings that will have to cope with reporting under multiple sets of requirements within tight timelines.
What are standard setters doing currently to alleviate these concerns?
Early on, the need for interoperability of jurisdictional standards, such as European Sustainability Reporting Standards (ESRSs), with the ISSB’s global baseline was identified as critical to achieve global alignment of sustainability reporting in principles, in structure and in measurement.
Some progress has been made for climate-specific disclosures; however, more progress is needed on all standards to achieve this objective. Even small differences can multiply the cost-effort for companies and undermine comparability for users.
Such differences will also significantly impact global companies with operations in the EU. To help alleviate this burden, there are plans to develop a specific standard for non-EU companies. It is yet to be seen whether such a standard will provide the required relief.
Equivalence is the next opportunity
As efforts towards interoperability continue, ‘equivalence’ should be the goal for non-EU company reporting. Having led the way in driving global consistency of financial reporting by endorsing IFRS® Accounting Standards, the EU now has the opportunity to lead the way with equivalence for sustainability reporting. This would reduce the reporting burden for non-EU companies and remove barriers to trading and raising capital in Europe.
So the question is: what package of global sustainability reporting standards would be acceptable to the European Commission as equivalent to ESRSs?
GRI may be the key to equivalence
GRI (Global Reporting Initiative) Standards may be the key to bridging the gap and achieving equivalence with ESRSs. At a global level, a sustainability reporting package based on both ISSB Standards and GRI Standards would address both investor and broader stakeholder needs, and GRI Standards are already used by 78 percent of G250 companies1 globally.
But what would such a vision look like in practice? How would a preparer apply the two sets of standards? What changes would be required to the way in which GRI Standards are currently applied?
There are many questions to be answered, but one thing is clear to me: equivalence in the EU hinges on cooperation between the ISSB, GRI and EFRAG (the European Financial Reporting Advisory Group). For the EU, the fundamental question will be: What would it take to recognise national standards based on a combination of ISSB and GRI reporting as equivalent to ESRSs?
What needs to happen now?
Time is of the essence. While work is ongoing to put such a global reporting package that is equivalent to the ESRSs in place, conversations should happen in tandem between the EU and other jurisdictions to expedite the establishment of equivalence regimes.
We encourage all of the participants, including EFRAG, the ISSB and GRI, to work together more closely. And, looking forward, to work jointly on future projects, such as the development of sector-specific standards.
Achieving equivalence in the short term while remaining committed to interoperability would deliver an efficient and aligned global ecosystem for sustainability reporting – allowing multinationals to truly minimise the sustainability reporting burden while meeting investor and broader stakeholder needs.
A version of this article previously appeared in Accountancy Today.
1 World’s 250 largest companies by revenue based on the 2021 Fortune 500 ranking.
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