Amid significant developments in global reporting standards, it is a crucial time to recognise the potential for cooperation and interoperability. Alignment between the EU’s Corporate Sustainability Reporting Directive (CSRD) and the recently published IFRS S1 and IFRS S2 of the International Sustainability Standards Board (ISSB) has created possibilities for the reporting standards to be used in cohesion.
Why is this crossover important?
By aligning on particular measures of the CSRD and International Financial Reporting Standards (IFRS), companies can ensure that by complying with one set of standards, they are also complying with the other. This will lead to vast benefits in efficiency and costs for firms as their internal processes evolve to meet new ESG requirements. As regulatory frameworks for sustainability become increasingly important in the corporate world, consistency, comparability, and interoperability will be critical.
What are the implications of the EU standards?
The European Commission adopted the European Sustainability Reporting Standards (ESRS) in July 2023. Firms obliged to comply with the CSRD must report against the ESRS. The CSRD outlines the reporting requirements, whilst the ESRS provides a more specific framework for reporting sustainability data that firms must be CSRD compliant.
For more information on the CSRD, read our previous articles on preparing for CSRD compliance and recent changes to its implementation process.
What are the implications of the ISSB standards?
The ISSB formally issued its first set of standards in June 2023. The standards have been in development since the ISSB was created under the IFRS Foundation in 2021, following COP26 discussions. The IFRS S1 covers general requirements for disclosure of sustainability-related financial information, such as governance processes and strategies for managing sustainability risks. The IFRS S2 covers climate-related disclosures, including risks and opportunities. The measures are intended to be used together.
The standards aim to improve reliability and are widely recognised as a key framework in corporate sustainability reporting. They will come into effect on January 1st 2024 and will likely be adopted by major economies, including the UK, Japan and Singapore.
How have the respective bodies promoted interoperability?
Since the EU Commission issued the ESRS, it is understood that mechanisms will be implemented to promote alignment in reporting between the Commission, EFRAG and ISSB. Cooperation between the respective bodies intends to create interoperability between the standards. This aims to improve efficiency and costs for companies that apply both ISSB standards and ESRS, making it easier for firms to adopt long-term sustainability goals.
Since the announcement of the ISSB standards, there have been updates in successive drafts to ensure a substantial overlap between them and the EU standards. EFRAG has also published updates to promote interoperability. Their Cover Letter, published in November 2022, dedicates a section to considering alignment with other international reporting standards:
“The draft ESRS now follows the same structure as the ISSB (Governance—Strategy—Risk Management—Metrics and Targets) as first proposed by the Task Force on Climate-related Financial Disclosures (TCFD) with the necessary adaptations to account for the double materiality principle and to secure an efficient interaction between the general disclosures and the various topics that the ESRS have to cover according to the CSRD. Content-wise, we have sought to align all the key concepts and definitions, including financial materiality and value chains, and the Disclosure Requirements are often literally the same as proposed by ISSB, with changes and additions made where the CSRD or other EU legislation requires this.”
Prof. Dr. Kerstin Lopatta – Acting Chair of the EFRAG SRB, 22 November 2022
The fundamental goal is to ensure that requirements align enough ro consider an intersection, avoiding distinct reporting requirements that serve the same purpose. EFRAG evidence this in recent research, which stated that reporting requirements for companies disclosing under the ESRS and ISSB standards will essentially be obliged to report the same information to each, thus reducing the risk that companies will be required to report separately.
To maximise the benefits of interoperability, companies need to be clear on where the intersection is between the standards:
- Both will be based on the Task Force on Climate-Related Financial Disclosures (TCFD) framework.
- EFRAG and ISSB have also worked closely with the Global Reporting Initiative (GRI), to ease the transition for companies that are already using existing standards.
- The ESRS and IFRS align on how they define a value chain, as both standards require firms to collect and disclose information from their value chains and their own operations.
- Both also call for aggregation and disaggregation of information to not obscure material information.
- All IFRS S2 disclosures are covered in ESRS. Key additions to ESRS E1 include: greater detail on potential financial effects from physical and transitional risks, compatibility between internal carbon prices and those used in financial statements and financial planning, the specific target on greenhouse gas (GHG) emission reduction and remuneration tied to this target in ESRS, and a range of identified targets, including 2030 and 2050 targets.
This EFRAG document provides further detail on how additions to the ESRS have maximised opportunities for interoperability.
How will stakeholders continue to promote further alignment?
From now on, the European Commission, EFRAG and the ISSB will continue to collaborate to ensure maximum alignment on future drafts of their standards. They have announced that further guidance material will be published to assist firms in understanding the reporting requirements. Their joint work will also include digital tagging of disclosures to drive additional crossover.
We believe interoperability is crucial for ESG reporting to make genuine material impacts. The relationship outlined in this article should help set an example for what is needed moving forward, demonstrating the benefits of creating standards that organisations and nations can coalesce around.