Out-Law News 2 min. read

Paradoxes in sustainability reporting highlighted by ESMA chair

The need for international standards that still cater for domestic differences, rules that are robust while allowing reporting entities some flexibility, and the need for completeness without imposing an impossible burden on smaller companies, are the "three main apparent paradoxes in the area of sustainability reporting", a senior EU regulator has said.

Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), the EU's securities markets regulator, highlighted the issues in a speech earlier this week at a time when corporate reporting obligations in relation to sustainability have been bolstered, and taken on greater significance, in light of the global drive to reduce carbon emissions and meet climate change targets.

Corporate law expert Tom Proverbs-Garbett of Pinsent Masons, the law firm behind Out-Law, said that the issue of mixing mandatory and voluntary reporting is a further "paradox" with the potential to complicate environmental, social, and corporate governance (ESG) reporting for businesses.

"Encouraging voluntary reporting in excess, or absence, of mandated standards has become a common approach, but ensuring that this side by side system can exist without compromising any sense of overarching integrity remains a challenge," Proverbs-Garbett said. "This is particularly so where sectors choose to report in excess of those standards, or in different ways, on a regular basis, such that it becomes a norm. How do standards, domestic or international, flex in those conditions?"

The International Financial Reporting Standards Foundation (IFRS), a US-based not-for-profit organisation that develops global accounting standards, is currently consulting on whether there is a need for global sustainability standards and what role it might play in developing them if so. In his speech, Maijoor described the consultation as "an initial but important step in the development of international sustainability reporting standards".

He said the need for international cooperation in the development of ESG disclosure standards is important to account for "the international flow of investments" that will drive the transition to a 'greener' global economy, and the associated need for investors to assess the sustainability credentials of investees based in other jurisdictions as part of that process.

"The relevant assessments can be made much more effective and efficient by the availability of a set of generally accepted international reporting standards," Maijoor said.

Proverbs-Garbett said there would be challenges with the implementation of such international standards in terms of accommodating jurisdiction-specific needs.

"Maijoor's neat solution is a modular set of international standards – i.e. those that are internationally recognised but can be used in units and rearranged in order to suit local needs," Proverbs-Garbett said. "The risk is that such an arrangement could settle around a minimum common denominator. As Maijoor points out, the only way such an approach would inspire investor and market confidence is if the most advanced standards available from time to time could be built in and maintained. And this is a difficult proposition when seeking to agree international norms."

One of the new measures to bolster ESG reporting in Europe in financial markets is the introduction of a new Disclosure Regulation, which takes effect next March. It requires financial firms to disclose how they integrate sustainability considerations into their processes in a standardised way.

The European Commission also published draft legislation that will require investment firms to integrate sustainability preferences into their products earlier this year.

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