Canada’s CPP questions need for ‘standalone’ EU sustainability reporting standard

Government-backed fund asks EFRAG to consider 'adopting in full' proposed standards from the ISSB.

Canada’s CPP Investments has questioned the need for a separate European corporate sustainability reporting standard, given the work being done by the International Sustainability Standards Board (ISSB).

In its response to drafts put out by Europe’s corporate reporting body EFRAG, the government-backed fund stated that, in light of international efforts to develop a global standard, “we are now uncertain as to the merits of a standalone European standard as proposed by EFRAG”.

CPP Investments, whose mandate is enshrined in a 1997 Act of Parliament, manages C$539 billion (€410 billion; $417 billion) on behalf of the Canada Pension Plan, of which 16 percent is invested in Europe.

In May, EFRAG launched a consultation on its proposed European sustainability reporting standards (ESRS), which will underpin the bloc’s Corporate Sustainability Reporting Directive (CSRD). The consultation, which closed last Monday, ran in parallel with one on standards being developed by the ISSB, the body tasked by the IFRS Foundation with developing a global baseline for corporate sustainability reporting.

A key difference between the approach being pursued by EFRAG and ISSB is the former’s focus on “double materiality”, which seeks to capture a company’s impact on the environment and society in addition to the sustainability impacts on the company. ISSB, by contrast, has adopted an enterprise value approach, which measures how sustainability impacts a company’s valuation.

CPP Investments, however, suggested that ISSB’s collaboration with standard setting body Global Reporting Initiative (GRI), which was announced in March, allows it to “meet the needs of both single and double materiality reporting”.

The fund wrote: “With the ISSB and GRI seeking to develop their standards to be both interoperable and meet the needs of both single and double materiality reporting, we are now uncertain as to the merits of a standalone European standard as proposed by EFRA.”

EFRAG’s work, it added, “now appears duplicative of efforts seeking to deliver a common global standard and risks imposing expensive reporting obligations on European issuers that, unless aligned with the ISSB, risk falling short of the expectations of international investors and could place those issuers at a competitive disadvantage in the capital markets”.

The fund asked EFRAG to consider “adopting in full” ISSB’s proposed standards and “any elements of the GRI required to meet the needs of European investors and regulators”.

‘Detail and granularity’

The GRI, which also formally agreed in July to share its technical expertise with EFRAG, raised concerns about the “level of detail and granularity” in EFRAG’s standards in its response to the consultation. The standards body highlighted that the draft ESRS uses many of GRI’s optional reporting concepts, but makes them mandatory. “[E]ven the most experienced reporters with sophisticated reporting and data collection systems will struggle to comply with all the requirements,” the GRI wrote.

CPP Investments urged EFRAG to adopt a “comply or explain” approach if it continues with the standards as formulated in the drafts. “[W]e believe it is imperative that issuers are afforded the opportunity to only report data they believe is material and explain which metrics are not and why.”

The fund’s response was penned by Richard Manley, head of sustainable investing and chair of the Investor Advisory Group of the Sustainability Accounting Standards Board (SASB). As of August, San Francisco-based Value Reporting Foundation, which houses the Integrated Reporting Framework and the SASB Standards, was absorbed into the IFRS Foundation.

Norway’s trillion-dollar sovereign wealth fund, Norges Bank Investment Management, also floated the need for a “comply or explain” approach in its response to EFRAG’s consultation.

Given the “complexity of obtaining appropriate input data from non-EU entities within a company’s value chain…[s]ome aspects of the standards may be better suited as ‘comply or explain’ rather than requirements”, it wrote.

The giant fund also suggested that the draft standards might need to be simplified to be operationally practical for reporting companies, and “to ensure that the costs to preparers are proportionate to the benefits for users”.

“We believe EFRAG could prioritise further, reduce the number of disclosure metrics across its standards and focus on the important information that is likely to be valuable for users,” it added.

Assessment and disclosure

On this, NBIM highlighted a distinction proposed by the Taskforce on Nature-related Financial Disclosures (TNFD) between “assessment metrics and disclosure metrics”, which recognises that “what gets disclosed is only a subset of what gets analysed by the company”.

NBIM’s submission was put together by Carine Smith Ihenacho, chief governance and compliance officer, and Séverine Neervoort, lead ESG policy adviser.

Last week, Responsible Investor reported that the UN-convened Net Zero Asset Owner Alliance and EU securities markets regulator ESMA had stressed the importance of the interoperability of corporate sustainability disclosure standards being developed globally, in their response to drafts put out by Europe’s corporate reporting body, EFRAG.