‘Group of Five’ ESG standards bodies launch climate reporting ‘prototype’

Main players aim for a unified contribution to IFRS’s ESG standardisation project

The five main bodies in the field of sustainability reporting are launching a climate reporting “prototype” standard to feed into the ESG reporting project of the IFRS Foundation accounting body.

The IFRS project could, potentially, become the sole source of global mandatory environmental, social and governance (ESG) disclosure standards in the near future.

The ‘Group of Five’, as they call themselves, would go down to four if plans to set up the Value Reporting Foundation go ahead next year, with the merger of the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC).

The Climate Disclosure Standards Board (CDSB) will enter “exploratory discussions” to join the Value Reporting Foundation, potentially boiling down the so-called alphabet soup to just three bodies, the others being the Global Reporting Initiative (GRI) and CDP [the former Carbon Disclosure Project].

The prototype launched today by the Group of Five aims at building a picture of what their respective standards and frameworks can offer to the IFRS Foundation if it decided to set up a Sustainability Standards Board (SSB) as suggested in the ongoing consultation about its role in this area. IFRS refers to International Financial Reporting Standards.

Industry sources do not discard the idea that an expanded Value Reporting Foundation could become the nucleus of a Sustainability Standards Board. 

“We show the relevant components of our frameworks and standards, along with the recommendations set out by the TCFD [Task Force on Climate-related Financial Disclosures], could form the basis for development of a climate-related financial disclosure standard,” the group stated in the paper. 

The Group of Five distinguishes between three types of “lenses” to explain their approach to materiality. First, a big lens of “sustainability reporting” to cover “all ‘material’ matters that represent significant impact” to stakeholders. 

“Such reporting is designed to inform assessments and decisions by a wide range of users who want to understand a company’s positive and negative contribution to sustainable development,” the paper stated. 

Second, a middle lens to cover reporting on sustainability matters that influence enterprise value, but not necessarily measured in monetary amounts. This is called “sustainability-related financial disclosure”.

Third, a small lens that also covers enterprise value, but “affects monetary amounts accounted for and disclosed in the financial statements''. This is referred to as “financial accounting and disclosure”.

The Group of Five aims to demonstrate the technical synergies of the latter two lenses (i.e. enterprise value reporting), and therefore why the IFRS foundation is well-placed to take ownership of this task in the global arena.

At the same time, the European Commision is working on a potential set of mandatory standards to support the review of the Non-Financial Reporting Directive (NFRD), although those standards aim for a double materiality approach, which some want it also applied to the future IFRS work. See ESMA’s announcement yesterday. 

It is understood that the work of the Group of Five is focused on the global standardisation process that could be led by the IFRS Foundation, beyond the regional European project that could bear fruit at an earlier stage, as the NFRD would be reviewed during 2021.