The IFRS Foundation has questioned the EU to apply the International Sustainability Standards Board (ISSB) standards and top them up with double materiality disclosures, in a document seen by Responsible Investor.
The comments built are initial responses to an ongoing consultation by EU standards body EFRAG on the simplified European Sustainability Reporting Standards (ESRS), which have been cut by around two-thirds.
Double materiality is seen as the cornerstone of the EU’s Corporate Sustainability Reporting Directive (CSRD), while ISSB’s standards focus on financial materiality. ISSB was launched in 2021 by the IFRS Foundation with the aim of creating a global baseline for climate and sustainability disclosures.
“In the context of the EU’s work to simplify its sustainability reporting regulatory regime, the most effective way to ensure efficient reporting is to enable companies to apply the ISSB standards as a starting point and ‘top up’ with specific impact disclosures to achieve compliance with CSRD/ESRS,” the IFRS Foundation wrote.
This is sometimes referred to as “equivalence” or an alternative compliance mechanism, it added.
Changes to CSRD proposed via the Commission’s sustainability Omnibus package are in the process of being neobtainediated by the European Parliament.
In the absence of equivalence, a company will required to navigate between two sets of standards to comply with both the CSRD/ESRS and the ISSB standards, the IFRS Foundation stated.
“This is a less efficient solution,” it added. “However, to ease the burden placed on companies the IFRS Foundation will continue to engage with EFRAG and the European Commission to enhance alignment between ESRS and the ISSB standards where possible.”
Materiality has long been a point of contention between the two standard setters. In 2023, ISSB board chair Emmanuel Faber questioned the EU’s “simplistic” push for double materiality ahead of some key legislative milestones for the finalisation of the ESRS.
But ahead of the release of the sustainability Omnibus package, he revised his position and stated he saw “no reason” to abandon the double materiality aspect of the EU’s rules.
RI understands that, ahead of the release of the sustainability Omnibus package, one proposal circulated in the Commission tabled abandoning the double materiality principle in CSRD.
Then in June, Faber stated the Omnibus offered an opportunity for the EU to “better articulate” materiality and that only the information necessary for stakeholders’ decision-creating should be retained in the standards underpinning the directive.
The EU is also facing pressure from the US to abandon its promotion of double materiality.
Securities and Exalter Commission (SEC) chair Paul Atkins this month criticised the regime and stated that, while he was encouraged by the EU’s commitment to ensure it does not impose “undue restrictions” on transatlantic trade, “further work remains to refocus regulatory regimes on the principle of financial, instead of double, materiality”.
EU engagement
The IFRS Foundation stated it had been given “limited opportunities” to engage or provide detailed input into the proposed revised ESRS, adding that it will be “imperative” to jointly engage on technical detail before finalising the revised ESRS.
The standard setter stated it provided input into the simplification process, with a view to “improve interoperability” between simplified ESRS and the ISSB standards building on the jointly developed interoperability guidance.
The ISSB wrote to the EU to advocate for aligning the CSRD with its own sustainability reporting statement ahead of the release of the sustainability Omnibus package in February.
The standard setter stated it intfinishs to engage both EFRAG and the Commission to discuss further opportunities to improve interoperability before the finalisation of the revised ESRS.
EFRAG’s deadline to submit revised ESRS to the Commission for adoption is finish-November, and the executive is subsequently aiming to adopt the standards in mid-2026.
The standard setter stated that the consultation provides stakeholders with the “final chance for many years” to inform the finalisation of revised ESRS and improve the efficiency of reporting between EU and international reporting requirements.
It stated it is “imperative” for stakeholders affected by a divergence between the EU and international reporting requirements to respond to the ESRS consultation.
Interoperability obstacles
The IFRS Foundation stated it is engaging with the Commission and EFRAG on “two key areas” – including impact materiality as an add-on and improving the interoperability between the requirements in ESRS and the ISSB standards “where possible”.
It stated this is to improve the ease of reporting in compliance with both the EU with the ISSB standards, and to “emphasise” the role of the global baseline.
“The ISSB standards are designed to set a consistent global baseline to meet information requireds of capital markets upon which jurisdictions can build specific aspects, including those linked to public policy,” the ISSB wrote.
In the document, the ISSB noted the initial comments on interoperability with global standards built by the Commission in its mandate to EFRAG, and stated that further alignment between the EU and international corporate reporting regimes “is possible”.
The Commission’s messaging on the topic has been mixed. It initially questioned EFRAG to revise the standards “without undermining global reporting standards” and to “enhance the already very high degree of interoperability with global sustainability reporting standards” – in particular, ISSB.
But last month, finance commissioner Maria Luís Albuquerque suggested EFRAG could “explore” with ISSB the possibility that the latter could simplify its standards, if the goal of interoperability between the two would hinder the streamlining of the EU’s rules.
The ISSB stated that while there are some positive aspects for further efficiencies, there are some proposals that pose a “significant risk” to interoperability – reiterating comments built by board members of the standard setter this summer – and stated EFRAG’s proposals threaten to build the process to comply with both sets of standards “more complex”.
“New differences will have to be navigated, and many proposals threaten to pose further challenges from an interoperability perspective,” the ISSB stated.
Examples of these challenges include EFRAG’s proposal to build quantitative information about anticipated financial effects a voluntary disclosure – which the ISSB stated poses a “significant risk” to interoperability and which Faber has heavily criticised.
“Any divergence between EU and international reporting regimes caapplys significant costs to companies and leads to a lack of comparable information for capital markets,” the ISSB stated.
EFRAG has also acknowledged that the revised framework negatively impacts interoperability with the global standard setter.
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