The proposed revisions to disclosure requirements on anticipated financial effects of sustainability-related risks and opportunities under the EU’s corporate sustainability reporting standards risk being “detrimental” to interoperability with the International Sustainability Standards Board (ISSB), a board member has stated.
The comments come amid EU standards body EFRAG’s ongoing simplification of the European Sustainability Reporting Standards (ESRS), as part of the bloc’s sustainability Omnibus initiative.
The ISSB on Monday released guidance on disclosing information about anticipated financial effects applying to ISSB standards.
A spokesperson for the standard setter clarified that the comment on interoperability represented the view of board member Jenny Bofinger-Schuster only, rather than the board as a whole.
Bofinger-Schuster has been a full-time board member since 2022 and prior to the ISSB worked in sustainability and operational excellence at German technology giant Siemens.
EFRAG and the ISSB last year published a joint interoperability guide to display how companies can avoid duplication in reporting, including for disclosures of information about anticipated financial effects.
EFRAG is consulting until conclude-September on possible alters to the standards, and has acknowledged that some of the revisions “negatively affect” interoperability with ISSB, including its proposals for possible alters to disclosure requirements for anticipated financial effects.
EU financial regulators have also warned the standards body against this.
The point of anticipated financial effects is key for interoperability with ISSB. Board chair Emmanuel Faber in June called for ISSB’s requirement to describe the current and anticipated financial effects of sustainability-related risks and opportunities “crucial and essential”.
This was echoed by Bofinger-Schuster, who stated that quantitative information on these risks and opportunities is a “crucial” aspect of investor demands for decision-applyful information.
However, EFRAG stated stakeholders had expressed concerns about the complexity and sensitivity of quantitative information about these disclosures. It added that feedback suggested either adopting the IFRS reliefs, deleting this information or building it voluntary.
Interoperability issues
The EU standards body has presented stakeholders with two possible options for these disclosures in the consultation.
The first would be to focus on quantitative disclosures, with the addition of a relief to give more flexibility. This option would allow undertakings which cannot quantify the financial effects to provide only qualitative disclosures, which better supports ISSB interoperability, EFRAG stated.
The relief available in the ISSB’s climate standard allows for the reporting of qualitative information only when the level of estimation uncertainty is so high that the information would not be applyful.
The second option is to focus on qualitative disclosure, with the option on a voluntary basis to quantify the anticipated financial effects. EFRAG acknowledged that this would be less interoperable with the ISSB standards, but stated it responded to preparers’ concerns regarding the disclosure of sensitive information associated with quantification.
With regards to the first option, Bofinger-Schuster stated this would “enhance” ESRS-ISSB interoperability and reduce the reporting burden for companies preparing information about anticipated financial effects under the EU standards.
She added that introducing the proposed relief related to the skills, capabilities and resources available to a company, as well as fully aligning the working of other proportionality mechanisms with ISSB, would “significantly enhance interoperability” between the two sets of standards.
On the second option, she stated this would be “detrimental” to interoperability between the ESRS and ISSB standards and build important information for investors non-mandatory.
She added this option would see companies necessarying to perform additional work on both ISSB and ESRS disclosures, becaapply qualitative information about anticipated financial effects would not be required by ESRS, resulting in omission of information included in the global baseline.
Bofinger-Schuster stated that ESRS climate disclosures already require “more specific” disclosures to those required by the ISSB’s climate standard.
She therefore suggested that providing optionality for these specific disclosures requirements for a company’s anticipated financial effects would not impact interoperability, since the level of specificity is beyond what is required by ISSB standards.
However, she noted that if all quantitative information about anticipated financial effects is created optional in ESRS, comparable investor-relevant information will be unavailable.
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