Insights
To improve the alignment of sustainability reporting standards globally, the International Financial Reporting Standards Foundation (IFRS) and European Financial Reporting Advisory Group (EFRAG) created an interoperability document. Published on May 2, 2024, it provides essential guidance and represents a pivotal step in harmonizing global sustainability reporting standards. The alignment aims to enhance the comparability, reliability, and transparency of sustainability disclosures, facilitating better decision-making for stakeholders and fostering a more sustainable global economy.
This interoperability document is especially relevant in jurisdictions where new climate impact laws are being enacted, as it offers a cohesive framework that ensures compliance with both international and regional standards. By integrating the concept of double materiality from the European Sustainability Reporting Standards (ESRS)—which includes both financial materiality and broader environmental and social impacts—into the IFRS framework, the interoperability document helps businesses streamline their reporting processes. This alignment not only aids in regulatory compliance but also dictates the methods for reporting transparency of disclosures, which is crucial for stakeholders and regulators focused on climate impacts. The guidance also offers practical support for companies to avoid duplicative efforts and improve the efficiency of their sustainability reporting.
The following information may be of particular interest to accountants and auditors, financial analysts, CFOs and financial controllers, sustainability officers, regulatory compliance professionals, investors and fund managers, consultants and advisors, and technology providers. Topics covered in this article may help address questions such as, but not limited to:
The growing emphasis on sustainability has led to the development of various reporting standards worldwide. The IFRS, known for its financial reporting standards, and EFRAG, responsible for the ESRS, have recognized the need for coherent and comparable sustainability reporting frameworks.
In 2020, IFRS formed the International Sustainability Standards Board (ISSB) to develop globally accepted sustainability disclosure standards. In 2022, they integrated the work of the Sustainability Accounting Standards Board (SASB), and in 2024, they assumed the monitoring of climate related disclosures from the Task Force on Climate-related Financial Disclosures (TCFD). IFRS S1 and IFRS S2 fully incorporate the TCFD recommendations.
Also, in 2020, The European Commission initiated the revision of the Non-Financial Reporting Directive (NFRD) to improve the quality and comparability of sustainability information disclosed by companies. As part of this initiative, EFRAG was tasked with developing the European Sustainability Reporting Standards (ESRS). In 2021, the Corporate Sustainability Reporting Directive was adopted, and a task force to develop ESRS was launched. In 2023, ESRS was finalized, including comprehensive standards on climate change, human rights, and governance May 2, 2024, IFRS and EFRAG publish the interoperability guidance.
Navigating changing regulations across a multi-jurisdictional market is complex and can be costly and time consuming. What is collected, how it is collected, where it is stored, and to whom and when to report it to can be challenging to sort out, specifically for companies that are doing business in EMEA, in California, New York, or in other areas with emerging impact regulation. Simplification and clarification of requirements is critical. The alignment between IFRS and ESRS is crucial for businesses aiming to operate on a global scale as it ensures consistency and comparability in sustainability reporting. This harmonization allows multinational corporations to streamline their reporting processes, reducing the complexity and costs associated with meeting diverse regulatory requirements in different regions. By adopting these interoperable standards, businesses can enhance their transparency and credibility, building trust with global investors, customers, and other stakeholders. Moreover, this alignment supports better risk management and strategic decision-making by providing a comprehensive view of a company's sustainability performance.
1. Scope and Focus Alignment
2. Materiality and Relevance
3. Reporting Requirements and Format
4. Assurance and Verification
5. Global Applicability
The interoperability document can be particularly beneficial in states where climate impact laws are being enacted by providing a cohesive framework that aligns with both international financial reporting standards and specific regulatory requirements. As states increasingly mandate detailed disclosures on climate-related risks and impacts, this document helps businesses integrate these new requirements seamlessly into their existing reporting processes. Double materiality and impact assessment in the ESRS framework can provide helpful guidance while SEC climate impact rules and state level regulations are being reviewed and implemented.
Experts can be invaluable in navigating the complexities of implementing these aligned standards. Experienced consultants can provide tailored guidance on integrating sustainability disclosures into existing reporting frameworks, ensuring compliance with both IFRS and ESRS requirements. Businesses should also consider enlisting experts to assist in developing robust data collection and assurance processes, enhancing the accuracy and reliability of sustainability reports. Leveraging consultant expertise can streamline the transition, mitigate potential challenges, and, ultimately, support businesses in achieving their sustainability objectives more effectively.
We would like to thank our colleague Andrea Korney for providing insight and expertise that greatly assisted this research.
Andrea Korney is a Vice President of Sustainability for J.S. Held’s ESG & EHS Digital Solutions group, having joined the team in November of 2022 as part of J.S. Held's acquisition of Frostbyte Consulting. Throughout her career, Andrea has demonstrated her passion for inclusive stakeholder relations in the mining and energy sectors, focusing on reducing barriers and creating opportunities for diverse employees, business owners, and industry partners through policy and regulation influence, workforce development, and sustainability outreach. Andrea’s 25+ years of experience in energy and metals extraction includes longstanding roles in oil and gas, power generation, and mining across North America and Russia. Her focus in these roles has included HR, corporate services, global supply chain and logistics, stakeholder relations, Native American relations, and government affairs.
Andrea can be reached at [email protected] or +1 725 567 0668.
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