EU v IFRS: Fundamentally different approaches to sustainability reporting

by Carol A Adams

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 likely won’t.
  • The IFRS Foundation has the backing of IOSCO, but the EU has legislative powers.

Yesterday, 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 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.

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Comments

  1. Andrew Watson says:

    ‘Everyone’s wrong’

    One of my favourite scenes in The Big Short is Michael Burry’s first meeting at Goldman Sachs where he negotiates to buy an instrument to bet against the US housing market.

    He’s asked why, as the bond will only pay out if millions of Americans don’t pay their mortgages and that’s never happened before. Isn’t it a foolish investment?

    Says Burry “Well based on prevailing sentiment, the markets, banks and popular culture, yes it’s a foolish investment but………..everyone’s wrong”

    And so it is here. When given the option to go left and follow the path marked ‘technical accounting & double entry bookkeeping’ everyone turned right marked ‘everything else’.

    The clues for decision making and reporting of decisions related to the net zero transition and all SDG’s are all within technical accounting. They’re already there, if you carefully follow the path.

    What are the chances that people vested in ‘everything else’ will back up and ask how they got into this mess of competing philosophies in the first place?

  2. According to a preliminary search on Google there are more than 45,000 stock listed companies in the world, and more than 27 million private enterprises. (Could be as high a 100 million private companies worldwide).

    The latest report from KPMG refers to 5,200 reports worldwide, most using GRI. https://home.kpmg/au/en/home/insights/2020/11/sustainability-reporting-survey-2020.html

    I have seen dispatches from GRI and others that there are roughly 8 – 10,000 annual sustainability reports.

    This is a huge mismatch. We simply do not have adequate data and reporting capabilities.

    Initiatives noted by Carol in her review will take years before any of the new standards are prepared, approved, promulgated, fully implemented, gain traction and provide significant traction. Where is the urgency?

    If sustainability reporting is to lead to significant actions, outcomes, and results, we will need to see ALL listed companies provide data and a majority percentage of private companies to provide their data as well. Neither the IFRS Foundation activity nor the EU/EFRAG initiative are fit for purpose.

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