Europe’s Green Deal and ESG reporting standards: From (alphabet) soup to nuts

Revision of EU law might alter standard setting landscape

The revision of the EU’s Non-Financial Reporting Directive (NFRD) might bring important changes to the fragmented landscape of standard-setting in the sustainability reporting arena, often referred to as an ‘alphabet soup’ of initiatives – all voluntary. 

But EU Commissioner, Vladis Dombrovskis, has tipped that both the NFRD revision and corresponding standards might need to go hand in hand. (Pending the publication of the NFRD consultation, see RI coverage)

Dombrovskis recently suggested that the European Commission is up for formalising ESG reporting to develop “European non-financial reporting standards.”

“The many overlapping international reporting standards and set-ups confuse companies and investors,” he said.

Dombrovskis argued that the EU is well placed to show leadership in building consensus for a set of standards that can be widely accepted.

That’s in line with some of the ideas presented by an oft-cited study by Patrick de Cambourg, President of French standard-setter, the Autorité des Normes Comptables, which describes Europe as the potential "land of choice" for extra-financial information.”

Such leadership has definitely been relinquished – if it was ever ambitioned – by the US and the UK. 

We hope that the IFRS Foundation will speed up its process to define its position in the current discussion on non-financial reporting standard setting, before being confronted with a European fait accompli

Just a couple of days after Dombrovskis’ speech, the US Securities and Exchange Commission (SEC) signalled the opposite direction of travel.

The SEC announced that ESG considerations will not be considered in the modernisation of its disclosure rules.

And in a post-Brexit world where the EU could eye such leadership in sustainability reporting standards, the UK might need to conform to being a self-imposed rule-taker. 

The otherwise convenient London headquarters of what could have been a global beacon for non-financial reporting, the International Accounting Standards Board (IASB), will be no more than a trivial geographical location.  

Nonetheless, it is not clear how Dombrovskis’ high level remarks will play out in the somewhat arcane and territorial world of standard-setting.

So far, Dombrovskis has just said that the European Financial Reporting Advisory Group (EFRAG) will be invited to start preparatory work. 

Informed commentators approached by Responsible Investor say that it’s still early days to know what that really means, including EFRAG itself.

Mark Vaessen, Partner and Head of KPMG’s Department of Professional Practice, told RI:

“EFRAG is currently not set up to be a standard setter. It would need a change of mandate if it were to be turned into one.  I would expect to see a consultation from the European Commission before concluding that EFRAG is best placed to take on this role.”

What Dombrovskis did say is that the existing frameworks and standards (aka the alphabet soup) will be taken into account, and that the EC “cannot do this [standard-setting] alone”.

Standard-setting matters in the context of the ongoing NFRD revision. The NFRD introduced certain ESG-related reporting obligations but mentioned no standards to comply with them.  

The EC is of the view, RI understands, that there are no standards in the market that satisfactorily capture the concept of “double materiality” envisaged by the NFRD (i.e. how ESG factors impact companies and vice versa, how companies impact society and the environment). 

Dombrovskis’ words might resonate with the many participants in this space, particularly those perceived as rivals, or those in search of market hegemony.

Among the Corporate Reporting Dialogue, organisations such as the Sustainability Accounting Standards Board and the Global Reporting Initiative would likely be very keen to show the EC their credentials.

Everyone prefers an international solution, but it appears the EC has no time to wait for this.

The civil servants at the EU’s executive branch seem ready to roll up their sleeves and explore this work because other landmark legislative initiatives (the Disclosures and Taxonomy Regulations) depend on getting right the flow of non-financial information.

In that respect, the IASB, responsible for the globally adopted (ex US) International Financial Reporting Standards (IFRS), has not fully showed its cards.

For a long time, a range of stakeholders, particularly investors, have called on the IASB to be the curator of ESG reporting globally.

The IASB and its governing body, the IFRS Foundation, have resisted such a proposition arguing that their remit is exclusively “financial”. 

Nonetheless, the IASB has not severed ties completely with “non-financial reporting” and it is updating the guidance for management commentary; the narrative reporting that provides additional context to understand companies’ financial statements.

As reported by RI, the IASB has at least responded with curiosity to the idea of creating a second board for non-financial reporting standards for a sustainability reporting twin of accounting’s IFRS.

Among those calling for this is Eumedion, the Dutch corporate governance and stewardship group.

Rients Abma, CEO of Eumedion’s Executive Director, told RI: “We hope that the IFRS Foundation will speed up its process to define its position in the current discussion on non-financial reporting standard setting, before being confronted with a European fait accompli.”

Only the IASB knows whether Dombrovskis’ words represent  relief or a missed opportunity for the relevance of the organisation. The IFRS Foundation declined to comment. 

Dombrovskis will deliver a key-note speech tonight (Feb 18) at an invitation only event organised by EFRAG and the IFRS Foundation. Perhaps he’ll report more details then!