Main points: The IFRS Foundation and EU/EFRAG approaches are opposed in all key aspects; The EU/EFRAG approach is likely to contribute to addressing sustainable development (including climate change). The IFRS Foundation approach is likely to be a distraction from it; The IFRS Foundation has the backing of IOSCO, but the EU has legislative powers.
A couple of days ago, I received a brief email update from the IFRS Foundation on their approach to Sustainability Reporting Standard Setting and a 228-page document from the European Financial Reporting Advisory Group (EFRAG) on theirs. The latter contains 54 proposals and supporting information. The IFRS Foundation have yet to provide the analysis supporting their approach. (They also did not provide evidenced analysis supporting the proposals in their initial Consultation Paper.)
The relative rigour through which the proposals have been arrived at is perhaps the reason for significant differences on all key aspects of approach:
| IFRS Foundation | EFRAG | |
| Audience | Investors | All users of sustainability reporting and affected stakeholders, including with respect to potential future impacts |
| Scope | Climate first, then other ESG matters | Sustainable development issues – including the impact of an organisation’s products and services and its broader value chain. |
| Materiality | Information material to investors, lenders and other creditors | Double materiality – including material impact of an organisation on sustainable development. |
| Foundations | TCFD recommendations and the (conceptually flawed) prototype standard | ‘Overarching principles’ to i) support an inclusive range of stakeholders; and ii) be principles-based. Build on initiatives that have similar goals |
The IFRS Foundation have been silent on several key matters that the EFRAG report further commits to. This includes EFRAG commitments to:
The IFRS Foundation approach is not sustainability reporting. It will not address sustainable development and will (according to research) almost certainly hinder it. The good news it that while IOSCO has declared its support for the IFRS Foundation standards (without having seen them) and may well go on to make them mandatory for member stock exchanges, the European Union trumps that with the power to mandate its standards in all member states. Most global corporations will therefore have to apply them anyway.
The IFRS Foundation and the EU have different timeframes. The IFRS Foundation have always moved slowly and are starting well behind the EU’s timetable.
This article was first posted on www.drcaroladams.net
