As the IFRS Foundation is working to establish the International Sustainability Standards Board (ISSB), many, including some SEC commissioners, expressed support for such global effort to create consistent, comparable, and reliable environmental, social, and governance (ESG) standards in response to increasing investor demand.
However, Robert Herz, a board member of the Value Reporting Foundation, criticized the European Union’s effort to create its own separate sustainability standards.
The Value Reporting Foundation was formed in June by merging the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB). It is part of a move towards establishing consistent ESG standards around the world.
“I am always weary of politics, vested interests in different parts of the world,” Herz said in a recent interview. “The European Commission [in May 2021] told its EFRAG—which is the group that reviews IASB standards for the EU—to develop a set of standards by June 2022 for use. So, that to me is not a promising move.”
EFRAG is European Financial Reporting Advisory Group. And Herz was referring to a letter written by Mairead McGuinness, European Commissioner for financial services, financial stability, and capital markets union, inviting the EFRAG to quickly start the technical work to develop draft sustainability reporting standards. This work is to be undertaken in parallel with the negotiations of the European Commssion’s proposed Corporate Sustainability Reporting Directive (CSRD).
ESG, especially climate change issues are global in nature, and many large companies also operate internationally. Having different sets of standards depending on region or country would drive up costs for companies that need to follow different sets of standards and make it more difficult for analysts to compare corporate information provided to them.
Financial Reporting vs. Non-Financial Reporting
With Europe potentially coming up with its own set of ESG standards, it is unclear how well global investors will be served. And this may be a missed opportunity to create one high quality set of international sustainability standards.
For example, in terms of financial reporting, it took decades to come up with a set of accounting rules that are largely converged, though with some differences to account for unique domestic circumstances.
“The difference with the non-financial reporting and ESG reporting is, in the world of financial reporting, we started with many, many sets of standards; every country having its own,” said Herz, who served as chairman of the FASB and was previously a member on the IASB. “We narrowed it down to U.S. GAAP and IFRS and therefore undertook convergence efforts to get them closer. But in the world of ESG reporting, we have a different starting point. We could have global standards. [But] the political interests and politics are going to be around these things.”
However, Europe seems to be keenly aware of the importance of international cooperation. And its goals of convergence may mitigate problems of having disparate standards around the world.
On July 8, EFRAG signed a landmark cooperative statement with the Global Reporting Initiative (GRI).
“European sustainability reporting standards should build on and contribute to the progress of existing standards and frameworks that are widely used by companies,” Sean Berrigan, Director General for Financial Stability, Financial Services and Capital Markets Union, European Commission, said in a statement. “I welcome this Statement of Cooperation… as an important step towards promoting convergence between European and global sustainability reporting standards.”
And Herz welcomed the effort. “I found it encouraging in that it seems to emphasize international cooperation, including with the IFRS Foundation,” he said.
SEC’s Role in ESG Reporting
In the meantime, as debates continue over how the U.S. SEC should approach ESG reporting, Herz said he hoped that the commission would support international effort.
“I think it’s important that there be comparability around the world,” he said. “If they wanted to have, like most countries have, some kind of endorsement mechanism, set up a committee or something, to look at this new standards board puts out that it’s ok for the U.S. that would be o.k. for me, too.”
But at least one SEC commissioner, Hester Peirce, is against it.
In a July 1 statement, Peirce urged the IFRS Foundation not to wade into sustainability standard-setting because doing so would “improperly equate sustainability standards with financial reporting standards, undermine the Foundation’s current important, investor-centered work, and raise serious governance concerns.”
“Strong financial reporting standards are the bedrock of our capital markets,” Peirce stated. “They enable investors to make informed decisions about how to allocate capital. We must be careful not to compromise accounting standard-setting in an effort to achieve objectives other than high-quality financial reporting, no matter how noble those objectives may be.”
This article originally appeared in the July 15, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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