8 August 2022 

European Financial Reporting Advisory Group  

Consultation on Draft European Reporting Standards 

Comment letter submitted via the consultation’s online survey 

Draft European Sustainability Reporting Standards 

The International Corporate Governance Network (ICGN) welcomes the European Financial Reporting Advisory Group (EFRAG) public consultation on Draft European Sustainability Reporting Standards (ESRS).  

Led by investors responsible for assets under management of around $70 trillion, ICGN is a leading authority on global standards of corporate governance and investor stewardship to support the preservation and enhancement of long-term corporate value, ultimately contributing to sustainable economies, societies, and the environment. Headquartered in London, our membership is based in more than 40 countries and includes companies, advisors, and other stakeholders. ICGN offers an important international investor perspective on corporate governance and investor stewardship to help inform public policy development and the encouragement of good practices by capital market participants. For more information on the ICGN, please visit www.icgn.org. 

We note that in the recently proposed European Union (EU) Corporate Sustainability Reporting Directive (CSRD) cited ICGN’s Global Governance Principles¹ as an authoritative global framework of corporate governance information of most relevance to users². This is an important development given that many ICGN Members use the ICGN Global Governance Principles in their voting policies and company engagements. Many governments also use the ICGN Principles in the evolution of national codes.  

We congratulate EFRAG on the extensive amount of work in putting together this comprehensive and wide-ranging consultation document on the ESRS. This is an important time in the development of sustainability reporting standards, both in Europe and globally. At the same time, you are aware that in addition to the EU, regulators and standard setters in major markets are also working towards establishing climate-related and general sustainability disclosure requirements. This presents a unique and historic opportunity for coordination to establish a truly global set of requirements that can meet the needs of both local and international markets, as well as non-financial stakeholders. We urge EFRAG, in its advisory role to the EU, to continue to observe these developments and work with regulators and standards-setters in key jurisdictions to add greater ambition and interconnectivity to this vision of a ‘global baseline.’³  

We would also like to recognise more broadly the EU’s global leadership in promoting sustainable finance, including a series of legislative initiatives that provide a strong foundation for the development of sustainability reporting standards.  ICGN has constructively engaged with the EU on many of these key initiatives, including the Non-Financial Reporting Directive,⁴ the Sustainable Corporate Governance initiative⁵ and the Sustainable Corporate Governance Due Diligence consultation.⁶ ICGN has broadly supported these EU initiatives, though we have expressed concerns in the past about elements of these initiatives that we found to be overly prescriptive and complex.  

Today’s letter contains a similar message of support — and caution. The ESRS have been carefully thought-through, which is reflected in their detail. Our caution relates to the overall complexity and granularity of the ESRS itself and the challenges it will bring for companies to comply with these requirements. Taken in aggregate and given the underlying detail of the ESRS we have concerns from a cost/benefit perspective and in terms of such a broad range of disclosure requirements dulling the focus on the most critical sustainability issues for companies. We agree with the suggestion of the Global Reporting Initiative to review these disclosure requirements with a view towards expressing some of the more detailed points as guidance or recommendations.  

ICGN has responded to similar climate and sustainability reporting consultations by the International Sustainability Standards Board (ISSB),⁷ the US Securities and Exchange Commission (SEC)⁸ and the Canadian Securities Administrators.⁹  Five key themes govern our overall approach to these consultations (including the EFRAG consultation), and we wish to underscore those here. 

1. Regulatory fragmentation. Standards-setters and regulators have a unique opportunity to achieve a global benchmark in sustainability reporting. A key threat to this is regulatory fragmentation which we see today: sustainability reporting standards varying by jurisdiction adding to the costs of corporate compliance and investor analysis. It is critical for the EU, the ISSB, the European Union and the United States (through the SEC) to work together to ensure a coherent global alignment — and to avoid fragmented standards. 

Related to this global baseline, ICGN strongly supports the decisions of the EU, ISSB and US SEC to base their standards for sustainability-related financial disclosures and climate-related disclosures on the requirements specified in the Task Force on Climate-Related Financial Disclosures (TCFD).¹⁰ We note that regulators in major markets also propose climate-related disclosures based on the TCFD. ICGN believes the direction of travel is clear, rapid, and accelerating and that the TFCD framework is an important common denominator. TCFD-aligned reporting is where the world is going, and the speed of regulatory developments will increase in 2022 and beyond. 

2. Fiduciary Duty. In the first instance, institutional investors are motivated by fiduciary duty to their clients and beneficiaries. With regard to sustainability reporting, it is entirely appropriate that climate reporting relate to matters that affect enterprise value— a company’s financial performance, cash flows, strategy and business model— all with a view to promoting sustainable value creation for investment beneficiaries. At the same time, we recognise that climate risk — and other sustainability factors — present clear systemic risks, not only for individual companies, but on the health of markets, economies, and society more broadly.  In this context we believe it is important to recognise that investor fiduciary duty also extends to addressing systemic risks such as climate change.  

3. Materiality. In the case of climate risk, as well as other systemic risks, we believe that sectoral factors are critical in the assessment of material risks for businesses and investors. Hence, we support the application of the SASB criteria by the ISSB in helping to differentiate climate and other sustainability risks sector by sector. We appreciate that the ISSB is building from the single materiality framework in IASB financial reporting standards, with a focus on enterprise value and relevance to investment decision-making.  

We also observe that even for many investors corporate sustainability reporting should be broader than the ISSB framework.  Shareholders make a number of important decisions beyond the decisions to value, buy or sell a company’s securities. These, include stewardship activities relating to monitoring, voting and engaging with companies. In these cases many long-term investors focused on sustainable value creation are likely to have a broader need for information than is encapsulated in the ISSB construction. This is particularly true for large institutional investors who are effectively ‘universal owners’ — widely invested across many markets and hence with an interest in addressing systemic risks that threaten markets and economies as a whole.  

At the same time, we also note the broader view of ‘double’ materiality, that is emerging in the European Union. While this concept may have greatest relevance to non-financial stakeholders, we believe it is also important for companies, boards and investors to have a better understanding of how a company may impact stakeholders and society more broadly. We appreciate the technical challenges that come with addressing double materiality in a measurement context particularly with regard to questions of scope and assurability.

4. Climate versus other sustainability factors. The systemic urgency of climate risk justifies an initial focus on climate relative to other sustainability factors. Many elements of climate risk are more readily quantified and measured than other sources of risk. But it is important that the EU also develop its standards in other key areas of sustainability including natural and human capital. 

5. Linking climate reporting to financial accounting. Many investors are looking beyond climate reporting as part of a sustainability report and are looking to link climate risks to financial reporting as well, relating to issues that affect asset values, profits, and cash flows.¹¹ It is critical for climate reporting standards to develop in a way that will allow material climate risks and planning to be reflected in financial statements. This development carries with it more potential for meaningful change by companies— and brings greater protections to investors. 

Please view the PDF for ICGN’s Consultation Survey response.

Conclusion 

ICGN again thanks EFRAG for undertaking this consultation. We are hopeful that our recommendations can help establish an international disclosure regime that is robust, yields globally comparable information for investors, is effective for addressing climate risks and positively incentivises ambition. Should you wish to discuss our comments further please contact Robert Walker, ICGN’s Sustainability Policy Manager (rwalker@icgn.org). 

Yours faithfully,  

Kerrie Waring 
Chief Executive Officer, ICGN 

CC:  George Dallas, ICGN Policy Director: george.dallas@icgn.org 
James Andrus, Financial Capital Committee Co-Chair:james.andrus@calpers.ca.gov 

Nga Pham, Financial Capital Committee Co-Chair: nga.pham@monash.edu