At its September 2023 meeting, the Professional Accountants in Business (PAIB) Advisory Group discussed the important role of the profession and PAIBs in the adoption and implementation of standards for sustainability-related reporting and disclosure. This critical dialogue underscores the significant influence professional accountants have in shaping the future of corporate reporting and sustainability. As financial stewards and advisors, their expertise is pivotal in ensuring that businesses worldwide achieve their financial and sustainability objectives and enable the financial markets to allocate capital to businesses that are driving the global transition to a sustainable economy.
David Madon, Director, Sustainability, Policy and Regulatory Affairs, provided an update on IFAC’s sustainability work program and highlighted four key priorities for the profession to drive:
- An integrated mindset and the importance of professional accountants, whether working inside of companies, providing advisory services, or advising corporate boards, in championing the adoption of an integrated mindset to connect and enhance the quality of financial and non-financial information.
- Enabling a global corporate reporting system based on the adoption of IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board to serve the needs of global capital markets. Preferably local regulators will require these standards (as a number of jurisdictions have already communicated including Brazil, Kenya, Nigeria and Zimbabwe) and/or investors will expect companies to use these standards in their disclosures. Jurisdictional requirements should be additional and interoperable with the ISSB standards recognizing the value of a global baseline based on a building blocks approach.
- High-quality global assurance and ethics with the development of the international standard on sustainability assurance, ISSA 5000, developed by the IAASB with public interest oversight, and a strong ethics framework for all sustainability assurance providers being developed by IESBA
- Capacity building across the profession globally to enhance understanding of sustainability and reporting requirements, to provide relevant education and professional development, and elevate the role of professional accountancy organizations in advancing sustainability.
Eric Duvaud, Director Sustainability Reporting Standards, Autorité des Normes Comptables (ANC), and Member of EFRAG Sustainability Reporting Technical Expert Group provided an update on the scope of the European Union’s sustainability legislation in the context of the EU’s Sustainable Finance Framework, and the key features of its reporting requirements within the Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS). Eric explained the scope, key features and requirements of both the CSRD and ESRS.
The European Commission (EC) published its Work Programme for 2024, establishing its main priorities including a focus on small and medium-sized enterprises and an aim to achieve a 25% reduction in the costs associated with EU reporting requirements to maintain the competitiveness of European businesses. To achieve this 25% reduction, the EC’s proposal is to:
- Postpone the adoption of sustainability reporting standards for certain sectors and for certain third-country undertakings: from 30 June 2024 to 30 June 2026. This will allow companies to focus on the implementation of the sector-agnostic standards. The EC has issued a Call for feedback for rationalisation on the rationalization of reporting requirements with a deadline 28 November.
- Adjust the size thresholds for companies - increased by 25% to reflect inflation. For example, Medium-sized and large undertakings: balance sheet totals of 25m€ instead of 20m€ and net turnover of 50m€ instead of 40m€. Member States are to apply the new thresholds at the latest from 2024.
EFRAG published its work programme for 2024 including:
- ESRS XBRL taxonomy: in Q1-2024 EFRAG will issue for consultation
- Sector-specific standards: finalize exposure drafts for the first two sector-specific standards (Oil and Gas, and Mining, Quarrying and Coal), as well as drafts documents on its approach to developing the standards and classifying sectors, in the first half of 2024
- Q&A access point: starting from mid-Oct 2023, EFRAG will launch the ESRS implementation Q&A process, a centralized access point to address some stakeholder inquiries and issue responses
- SMEs: issue an exposure draft on issuing ESRS for listed SMEs (mandatory) in January 2024 and in Q1 2024 for non-listed SMEs (voluntary)
- Double materiality: final guidance on double materiality assessment and value chain in Q1 2024. The current draft is available on the EFRAG website.
The United States
The US’s SEC proposal to enhance and standardize climate-related disclosures in the US was also discussed. The SEC’s proposals would require a domestic or foreign registrant to include certain climate-related information in its registration statements and periodic reports, including Form 10-K (annual reports), covering
- Climate-related risks on strategy, business model and outlook over the short, medium and long-term, including detailed physical and transition risks identified to have an actual or likely material impact
- Greenhouse gas (GHG) emissions – Scope 1, 2 & 3, with exceptions for scope 3. For accelerated and large accelerated filers certain emissions would be subject to assurance
- Governance, oversight and risk management processes related to climate risk
- Information about climate-related targets and goals, and transition plan, if any.
The SEC’s proposal issued in March 2022 (summary of proposal available on the SEC website and on the AICPA website) remains under discussion and review. The following key issues remain under consideration arising from the comment letters to the SEC:
- The SEC’s legal authority to promulgate the rule
- Scope 3 emissions disclosure requirements
- The cost of compliance with the proposed rule
- Industry-specific metrics and global consistency
- The 1% disclosure threshold for the financial impacts of climate-related events and risks.
For more information, see Summary of Comment Letters for SEC’s Proposed Climate Risk Disclosure Rule, Lee Reiners and Morgan Smith Duke Financial Economics Center - Climate Risk Disclosure Lab.
The SEC has not indicated when it intends to release its final climate disclosure recommendation.
The state of California has recently enacted two laws, similar to the requirements proposed by the SEC, that will require companies that do business in California to disclose their direct and indirect (GHG) emissions and the financial risks they face as a result of climate change.
The Climate Corporate Data Accountability Act (S.B. 253), requires companies to disclose and obtain assurance on their GHG emissions. The Climate-Related Financial Risk Act (S.B. 261), requires companies to produce a climate-related financial risk report. The new laws are estimated to impact 5,400 and more than 10,000 entities, respectively.
The risk report must be reported in accordance with the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), or in accordance with a framework that is equivalent, such as the International Financial Reporting Standards Sustainability Disclosure Standards or a comparable framework issued by another governmental entity such as the SEC.
The SEC’s proposed rules differ in the following respects:
- Apply only to publicly traded companies;
- No annual revenue threshold for determining which companies must report; and
- Include some safe harbor provisions related to Scope 3 emissions, which have been deemed material by the company, and only require reporting where GHG goals or targets have been set.
Further information on developments in California and with the SEC and resources on climate and sustainability can be found on the AICPA website.
The discussions in this session of the September 2023 PAIB Advisory Group meeting highlighted the responsibilities of professional accountants in driving sustainability and enhanced corporate reporting. As global markets evolve, the adoption of sustainability reporting standards becomes an imperative, and the role of accountants in promoting an integrated mindset, fostering globally connected reporting, ensuring high-quality assurance and ethics, and enhancing capacity-building is critical.
The contribution of professional accountants to advancing sustainability, as discussed at this meeting, will undoubtedly shape the way businesses report and respond to the risks and opportunities presented by a changing world.