EU V IFRS: Fundamentally different approaches to sustainability reporting

Posted by Carol Adams - Mar 11, 2021

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:

  • explicitly reference the need to align with Agenda 2030 and address a broad range of sustainable development issues.
  • require the use of science-based targets wherever feasible.
  • explicitly address SME reporting through SME-specific reporting.
  • build on robust conceptual guidelines.
  • include reporting on approach to strategy, implementation, and governance.
  • sector agnostic, sector specific and entity specific disclosure requirements.

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.

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