Europe

EU gathers pace on green agenda

The EU is doubling down on its Green Deal, but is alert to the challenges facing European companies, according to Commission President Ursula von der Leyen. As Europe comes to terms with some of the devastating impacts of the hottest summer on record yet, von der Leyen used her annual showpiece ‘State of the EU’ speech to set out the case that economic modernisation and decarbonisation go hand-in-hand. 

For the profession, this policy imperative plays out with the growing attention to implementing the Corporate Sustainability Reporting Directive (CSRD) and applying the now-finalised first set of European Sustainability Reporting Standards (ESRSs), which will be almost certainly adopted by Council and Parliament by mid-October or (at the latest) mid-December. The CSRD and ESRSs are covered more fully in the article European sustainability reporting developments: what does it mean for UK companies?

Some last-minute changes were made to the standards before Commission adoption in late July, including alignment of the definition of financial materiality with that of the International Accounting Standards Board and International Sustainability Standards Board (ISSB).

The European Financial Reporting Advisory Group (EFRAG), meanwhile, moved to agree a joint interoperability statement with the Global Reporting Initiative, while also issuing a draft ESRS-ISSB interoperability mapping table and continuing to work on guidance relating to the double materiality assessment and value chain. The latter should be issued for comment in the autumn, with final guidance expected in early 2024. A web-portal for technical questions on the application of ESRSs is also expected to go live in October. 

In a pre-election period, with growing rumblings of discontent regarding the EU’s greening efforts, the Commission’s focus on facilitating life for companies comes as no surprise. The announcement in September of an EU SME Relief Package, outlining more measures to simplify reporting requirements, plus the presentation of the changes to the ESRSs, including the extended phase-ins and work on the Listed SME ESRSs, are a sign of intent. 

The package is due to be complemented by further proposals in the autumn to reduce reporting obligations by 25%, in part via adjustments to the SME thresholds in the Accounting Directive and the development of a harmonised definition for small mid-caps. Mapping of reporting ‘burdens’ and the drawing up of targeted ‘rationalisation’ plans will continue next year.

The Commission trusts that it has given a clear sense of the direction of travel. The elections in June 2024 will signal whether Europeans agree with the pace and destination.

Japan

ISSB’s Request for Information ‘Consultation on Agenda Priorities’

In May 2023, the International Sustainability Standards Board (ISSB) published a Request for Information Consultation on Agenda Priorities to seek feedback on four potential projects – three new sustainability themed projects and a project on integration in reporting. 

As well as new projects, the Japanese Institute of Certified Public Accountants (JICPA) believes foundational work to support the implementation of the first two IFRS Sustainability Disclosure Standards is also important. In this regard, we recommend the ISSB focuses on developing guidance in areas where there is a strong practical need, for example on assessing and making the judgements required to apply the standards. 

However, if the ISSB is to achieve its mission of establishing a global baseline in sustainability disclosure standards, new projects are also important and we would like to see the ISSB work expeditiously to develop disclosure standards beyond climate. Having said that, we recognise the feasibility challenges of pursuing multiple projects simultaneously on various topics with finite resources. A practical approach may be to develop principle-based standards that include high-level requirements in a timely manner and subsequently drill down to add more granular requirements.

While all three new sustainability themed projects proposed (biodiversity, ecosystems and ecosystem services, human capital and human rights) are important from a sustainability disclosure perspective, JICPA believes human capital should be the priority. Human capital is fundamental to creating value for all businesses and has significant social impacts. Like climate change, it is strongly connected to financial information and is an area where the ISSB is more likely to be able to develop decision-useful disclosure requirements for the benefit of financial capital providers. 

Integration of financial and sustainability reporting is fundamental to enhancing the usefulness of corporate reporting and achieving the ultimate goal of reporting that supports better decision-making in the capital markets. JICPA suggests the IFRS Foundation places a high priority on this project. 

With reference to the Integrated Reporting Framework, we suggest establishing a complete picture of corporate disclosures by reflecting feedback received in the Exposure Draft IFRS Practice Statement 1, Management Commentary, and by ensuring consistency, including consistency of terminology, with IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.

Read JICPA’s full response to the ISSB’s consultation.

Susanna Di Feliciantonio, Head of European Policy, ICAEW
Takeshi Takada, Manager, Japanese Institute of Certified Public Accountants