Europe’s three primary financial regulatory agencies, the European Supervisory Authorities (ESAs), announced today the publication of a joint letter regarding initiatives to establish global sustainability reporting standards. The letter was issued in response to a consultation paper launched in October by The IFRS Foundation aiming to assess demand for global sustainability reporting standards, and to determine the foundation’s role in the development of such standards.
In their response to the IFRS Foundation, the regulators – The European Banking Authority (EBA), The European Insurance and Occupational Pensions Authority (EIOPA), and The European Securities and Markets Authority (ESMA) – express their support for the IFRS initiative, particularly in light of the benefits a global standard would provide. The ESAs write:
“We support the IFRS Foundation’s initiative to consider the potential for globally accepted sustainable reporting standards to promote internationally consistent and comparable non-financial reporting. We also note that companies and financial institutions engaging in sustainable investments operate on a global scale, which calls for a common set of requirements.”
The regulatory agencies note, however, that a global standard would have to take account of regional and jurisdictional differences in sustainability and sustainable finance development. According to the ESAs:
“In order to be successful, it will be important that any future standards cater for jurisdictions, which are at different stages of development in the area of sustainable finance, while still making sure that the best and most advanced available practices are used as a basis for the development of these standards.”
The ESAs recommend that global standards development build on existing jurisdictional and international initiatives to build a high-quality set of internally recognised nonfinancial reporting frameworks, and emphasize the concept of “double materiality,” taking account of both sustainability risks on business models as well as the impact of businesses on sustainability factors. The agencies also stress that the standards must go beyond climate, and focus also on other relevant environmental, social and governance aspects.
While many companies have recently increased the practice of reporting on sustainability factors and initiatives, and despite the emergence of standards and frameworks including GRI and SASB standards and the TCFD recommendations, companies and investors often cite the lack of consistent and reliable sustainability disclosure as a key obstacle to integrating ESG into their businesses and investment processes. In their response letter, the ESAs note that the emergence of global sustainability standards would likely address many of these concerns:
“Relevant sustainability reporting is expected to become a powerful tool to enhance the efficiency of capital markets and a risk-based allocation of financing. For that, non-financial reporting has to become a reliable, standardised and transparent addition to financial statements. To enable trust in sustainability reporting, it is necessary that the basis of such reporting is clearly defined, and the reported figures are comparable across countries and industries.”