The leader of the body tasked with developing worldwide standards for sustainability reporting has called for a pause on EU work towards legislation in the field in order to achieve global alignment.

Questioned on 31 August at the European Parliament, Emmanuel Faber, Chair of the International Sustainability Standards Board (ISSB), said that his organisation has been in close contact with agencies involved with crafting the EU’s upcoming Corporate Sustainability Reporting Directive (CSRD).

The European Parliament and Council recently struck a provisional agreement to pass that legislation, with the aim that it would take effect from 1 January 2024. Faber said the deal had sparked an “acceleration of exchanges” between ISSB officials and the European Financial Reporting Advisory Group (EFRAG) – the independent agency that is shaping the directive, in collaboration with EU body the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA).

At the heart of those exchanges are efforts to find common ground between the differing approaches to reporting that have informed, respectively, the development of the ISSB’s global standards and the scope of the directive.

While the ISSB is following a model of single materiality – focusing on sustainability data in a primarily financial context – the EU is observing double materiality: information relevant to both a company’s finances and its upstream and downstream climate impacts.

‘Huge prize’

Appearing before the European Parliament’s Committee on Economic and Monetary Affairs, Faber said that the recent provisional deal had brought clarity on both the substance and timing of the CSRD. However, he stressed: “If I had one ask, that would be for time. Our friends at EFRAG and FISMA are working under huge pressure, and I understand why … But when I’m on the other side of the table, that makes it super difficult.”

In Faber’s view, a pause on the EU side “for a matter of weeks, or a couple of months,” would create space for the ISSB to finalise what would ultimately be a “huge prize” for Europe: “The first building block of the global baseline.”

Further in-depth talks with the EU bodies, Faber argued, would enable that building block to address the materiality gap. Following their discussions so far, he said: “I believe that the substance is more or less aligned on climate.” However, he pointed out: “We need to review this in a lot of detail because the worst is to be close, but not identical.”

He explained: “What needs to happen – and that’s the start of a discussion already – is the recognition, mutually, of the importance of the materiality definition of EFRAG … which we are embracing when it comes to looking at all the significant impacts that companies can have on their ecosystem. But then we filter that with the financial materiality.”

Capital leverage

Emphasising his plea for alignment, Faber said: “There is an intersection between what we do, and what EFRAG does. It’s not one or the other.” As such, he pointed out: “The bigger the intersection, the simpler the life of companies will be, and the more effective the standards will be because we will be able to leverage with [those standards] the huge amounts of money that capital markets can move towards the transition.”

He noted: “We need to be cautious, absolutely, to not derail the European ambitions. And yet, I would really say I see ample opportunities to leverage the capital markets through [our] intersection.” With that potential in mind, Faber added: “I would hope that our EU colleagues in the discussions feel that the prize of aligning is such that it’s worth having some more time if needed.”

Commenting on Faber’s stance, ICAEW Financial Reporting Faculty Technical Manager, Laura Woods, says: “If effective reporting is to be achieved, we believe it is imperative that the EU works towards greater interoperability between EFRAG’s European Sustainability Reporting Standards (ESRSs) and the global baseline that the ISSB is developing. Therefore, we hope that Emmanuel Faber’s plea for more time to enable better alignment is duly considered.”

Read ICAEW’s official response to the draft ESRSs.