Comment: Sustainability standards ‘building blocks’ remain separate Lego sets

Emily Pierce and Johanna Fager Wettergren propose 'equivalence with conditions' to bring the ‘building blocks’ vision to life while also advancing EU policy goals.

Companies that operate across borders are facing the challenge of building separate reports to meet different requirements of the two main sustainability reporting standards: the European Sustainability Reporting Standards (ESRS) and those of the International Sustainability Standards  Board (ISSB).

Global investors will be digesting multiple reports. Comparability and cost considerations loom large.

On 2 May, EU standards body EFRAG and the ISSB published their Interoperability Guidance, declaring that their two sets of standards “have a high degree of alignment” and identifying similar disclosures. The importance of this achievement cannot be understated.

With this mapping document, issuers and investors now have basic instructions for putting the pieces together as they navigate the different sustainability disclosure requirements emerging in many jurisdictions.

This milestone reflects what can be accomplished when regulators and standard-setters collaborate to identify commonalities, accept differences, and find solutions. But is there more that policymakers could do?


Since the CSRD and ISSB were in their early stages of development, policy makers and regulators recognised that there were significant differences in policy goals and approaches.

The ISSB was created to support users of financial statements, eliciting decision-useful information about financially-material sustainability risks and opportunities. The CSRD shared that objective, but, as part of the EU Green Deal, has additional objectives: to serve stakeholders beyond the financial markets and to elicit information about impacts.

To help build on the commonalities and bridge the differences, the International Organization of Securities Commissions (IOSCO), an organisation with over 130 members, including the securities regulators from all EU Member States and the European Securities and Markets Authority, offered an early vision: “Building Blocks”.

How would this work? The ISSB would develop standards for users of financial statements that could “provide a consistent and comparable baseline of sustainability-related information that is material to enterprise value creation, while also providing flexibility for coordination on reporting requirements that capture wider sustainability impacts”.

Europe, via EFRAG, would move forward with “co-constructing” standards that met its additional policy objectives.

Fast forward to 2024. We have the building blocks, but in the form of two separate Lego sets.

Lego sets do offer flexibility for companies to build different reports for different needs. The Interoperability Guidance offers instructions that show companies how to build two structures by re-using similar pieces.

But anyone who has built with Lego knows that it is a lot easier to build one base and then add on, rather than to extract pieces with the brick separator and re-build anew.

Equivalence with Conditions

Imagine instead that a company could build ISSB-based disclosures first, and then build on that base to provide the additional information required under the CSRD, subject to conditions.

“Imagine instead that a company could build ISSB-based disclosures first, and then build on that base to provide the additional information required under the CSRD, subject to conditions”

The ISSB Standards and the ESRSs offer all the bricks. The European Commission (EC) can offer “equivalence with conditions” to non-EU companies to bring the “building blocks” vision to life.

This proposal for “equivalence with conditions” would not only preserve Europe’s policy objectives, it would accelerate them.

An EC equivalence determination could recognise the ISSB Standards as equivalent for purposes of financially material information only, based on the aligned definitions of “information that is considered material for users of financial statements” – as highlighted in the Interoperability Guidance.

To preserve the EU’s policy objectives, the EC could include conditions, such as requiring companies opting to rely on equivalence to:

  • Assert  that (1) they have followed the ISSB Standards comprehensively, even if domiciled in a jurisdiction that has not formally adopted ISSB-aligned requirements, and (2) its financially-material, ISSB-based disclosures are subject to supervision or enforcement by its home regulator;
  • Separately provide information on material impacts, following the ESRSs (or other impact-focused framework the EC might accept, such as the Global Reporting Initiative);
  • Provide the impact information in a widely accessible format and location;
  • Obtain assurance over both sets of reports (pursuant to the CSRD requirements); and
  • Apply digital tagging.

Offering this option to non-EU companies would enhance the enforceability of the CSRD, support global market efficiencies, and bolster sustainability reporting beyond its borders.

Global boost

The CSRD is expected to impact more than 10,000 non-EU companies in dozens of countries around the world. Many of those companies have a subsidiary or subsidiaries that fall in scope because they meet the definition of “large”, but they do not issue securities in Europe.

Similarly, under the CSRD, many non-EU parent companies will need to report at the global level for FY2028 if they meet the net turnover thresholds.

The enforcement structures over financial reporting have historically been within the remit of European securities regulators, where resources are most robust. Those enforcement resources will be strained. For many non-listed companies and their parents abroad, the remit of securities regulators is limited or rests with other authorities.

By requiring non-EU companies to attest that their home regulator has supervisory or enforcement authority over their ISSB-based disclosures, Europe will be able to bolster its supervisory and enforcement resources with the help of its regulatory counterparts.

Europe could also accelerate parent-level reporting by offering this option to non-EU companies that are subject to CSRD reporting for subsidiaries today. Many of these companies are also facing the prospect of parent-level reporting for FY2028, might opt for parent-level reporting sooner if they had this option.

“The building blocks approach would help companies avoid running afoul of a key principle of securities regulation: not obscuring financially-material information in investor-focused filings”

For European consumers, civil society, and other stakeholders, that means receiving information about companies’ global impacts sooner.

“Equivalence with Conditions” in no way lowers the substantive expectations for reporting. Instead, it provides a way for non-EU companies to support efficiencies in compliance processes.

Together, the two sets of disclosures would contain the same information, subject to the same level of assurance, as the CSRD would elicit with direct compliance. The European playing field will still be level.

It would also help level other playing fields around the world. Embracing the ISSB Standards for this purpose would incentivise other jurisdictions to adopt those standards – and, importantly, to do so without carve-outs.

This will drive more consistent, comparable, reliable and regulated reporting around the globe, reducing regulatory fragmentation at the same time. That helps European multinationals too.

Allowing non-EU companies to approach ISSB and CSRD requirements with a two-step process will also make reporting more efficient and effective for many market participants, including Europeans.

Multinationals’ disclosures based on the ISSB Standards for sustainability-related financial information could serve as a passport for meeting ISSB-based requirements across multiple jurisdictions.

If companies are able to build their systems, processes and controls to collect data consistently across its global subsidiaries, they are more likely to provide high-quality, consistent information.

This would also bring efficiencies for assurance providers as they rise to the challenges of providing assurance over different disclosures in multiple jurisdictions. More efficient assurance leads to more effective assurance.

The building blocks approach would help companies avoid running afoul of a key principle of securities regulation: not obscuring financially-material information in investor-focused filings.

This delineation of a company’s ISSB-based disclosures would help investors compare information more efficiently across borders.

While many investors welcome all the impact information the ESRSs are designed to elicit, they also need to understand management’s view of which of those risks, opportunities, and impacts are reasonably likely to impact the company’s prospects.

The ESRS-ISSB Interoperability Guidance is a milestone step towards the vision for meeting different policy needs efficiently. It shows what is possible. Policymakers and regulators must continue that progress, and Europe has an opportunity to lead the way.

Johanna Fager Wettergren, Head of Group Sustainability at Swedbank, and Emily Pierce, Chief Global Policy Officer at Persefoni AI, are both former securities regulators who served together in leadership roles on the IOSCO Sustainable Finance Task Force.

Fager Wettergren was the Head of Sustainable Finance at Finansinspektionen, and Pierce was an Assistant Director in the Office of International Affairs at the US SEC.

The opinions above represent their personal views.