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Regulators get to grips with ESG reporting standards

Environmental, social, and governance (ESG) reporting standards have been firmly on the agenda for regulators this month. In one example, the trustees of the IFRS Foundation met in the first week of March to continue their analysis and discussions of the feedback received to their consultation paper on sustainability reporting (2020 Consultation).

Feedback to the 2020 Consultation confirmed an urgent need for global sustainability reporting standards and support for the Foundation to play a role in their development. The trustees are therefore continuing their work on the establishment of an international sustainability reporting standards board within the existing governance structure of the IFRS Foundation.

The trustees welcomed the February 2021 public statement by the IOSCO Board, announcing IOSCO's intention to work with the IFRS Foundation in developing a plan to establish a new board for setting sustainability reporting standards that meet the needs of the capital markets. This will include consideration of future endorsement of the new board and its standards. The Trustees recognise the importance for the public interest of reporting standards that address enterprise value, which captures expected value creation for investors in the short, medium and long term and is interdependent with value creation for society and the environment.

Based on the feedback to the 2020 Consultation, and encouraged by the IOSCO Board statement, the trustees say they have reached four key views about the strategic direction of a new board:

  1. Investor focus for enterprise value: the new board would focus on information that is material to the decisions of investors, lenders and other creditors.
  2. Sustainability scope, prioritising climate: due to the urgent need for better information about climate-related matters, the new board would initially focus its efforts on climate-related reporting, while also working towards meeting the information needs of investors on other ESG matters.
  3. Build on existing frameworks: the new board would build upon the well-established work of the Financial Stability Board’s Task Force on Climate related Financial Disclosures (TCFD), as well as work by the alliance of leading standard-setters in sustainability reporting focused on enterprise value. The trustees will consider the prototype proposed by the alliance for an approach to climate-related disclosures as a potential basis for the new board to develop climate-related reporting standards. To prepare for this work, the IFRS Foundation will initiate a process of structured engagement with the relevant organisations.
  4. Building blocks approach: by working with standard-setters from key jurisdictions, standards issued by the new board would provide a globally consistent and comparable sustainability reporting baseline, while also providing flexibility for coordination on reporting requirements that capture wider sustainability impacts.

The trustees say they intend to publish a feedback statement that summarises the responses received to their 2020 Consultation, and how that feedback informed the above decisions. Together with the feedback statement, the trustees will publish for public comment the proposed changes to the Foundation’s Constitution necessary to formalise establishment of a new board, including its composition. The trustees will continue to engage with the IFRS Foundation Monitoring Board and be informed of their views to proposed changes. Any changes to the Constitution are subject to a public consultation with a 90-day comment period.

Supporting the European Green Deal

Elsewhere, the European Commission has published two reports on development of EU sustainability reporting standards. These reports, which were prepared at the request of the Commission following an invitation from the Economic and Financial Affairs Council, are described as an important step in the development of corporate sustainability reporting across the EU. Both reports recognise the importance of coordinating the development of EU sustainability reporting standards with existing and emerging global initiatives. EU sustainability standards are necessary to meet the political ambition and urgent timetable of the European Green Deal. They are also necessary to ensure consistency of reporting rules at the heart of the EU’s sustainable finance agenda , especially the existing Sustainable Finance Disclosure Regulation, the Non-Financial Reporting Directive (NFRD), the Taxonomy Regulation, as well as with the requirements of forthcoming legislation on sustainable corporate governance and due diligence.

The first report proposes a roadmap for the development of a comprehensive set of EU sustainability reporting standards. It was prepared by a multistakeholder task force established by the European Financial Reporting Advisory Group (EFRAG).

A second report proposes reforms to EFRAG’s governance structure to ensure that future EU sustainability reporting standards are developed using an inclusive and rigorous process. It sets out, for example, how national and European authorities will be involved, while ensuring that the process also draws upon the expertise of the private sector and civil society.

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