Lighter-touch Corporate Sustainability Reporting Directive (CSRD) requirements for non-EU companies could backfire and increase reporting costs and complexity, according to members of the Institute of Chartered Accountants in England and Wales (ICAEW).
The European Commission has proposed exempting non-EU companies from reporting sustainability impacts beyond climate topics for their operations outside the bloc, under a “mixed approach” to reporting.
Companies will still be required to report both climate and broader sustainability impacts for their EU operations.
ESRS-40a, the reporting framework that establishes dedicated sustainability reporting rules for qualifying non-EU companies, is out for consultation by EU standard-setting body EFRAG until end-October.
But UK companies subject to CSRD are sceptical that the mixed approach will work in practice, according to recent discussions convened by ICAEW. The UK accounting body polled members after being approached by EFRAG to provide informal stakeholder outreach on ESRS-40a.
Ravi Abeywardana, director for sustainability reporting and assurance at ICAEW, said the organisation’s members do not believe the proposal would provide burden reductions. “In fact, it would introduce further complexity within the ecosystem, and ultimately costs as well.”
Members of the accounting body have raised questions about the feasibility of implementing a tiered reporting approach to global company operations.
“The essence of the mixed approach is to give options and flexibility to preparers, so long as they can meaningfully disaggregate the EU portion of their business,” said Xi Chen, ICAEW’s head of sustainability reporting and assurance.
“The problem is that it’s very difficult to disaggregate what’s EU and what’s global because many sustainability topics are not so easily delineated.”
Implementing the policy would also negatively impact comparability between EU and non-EU companies, and would “be very difficult from an assurance perspective”, he added.
The ICAEW is currently considering backing a reporting approach that automatically considers International Sustainability Standards Board (ISSB)-aligned disclosures as automatically eligible, which is then “topped up” with reporting on sustainability impacts.
The UK has officially adopted the ISSB framework but will pursue implementation on a comply-or-explain basis.
Under the EU’s proposals, non-EU companies that report against ISSB will need to complete an additional mapping exercise between the ISSB disclosure datapoints and that of the European Sustainability Reporting Standards (ESRS), in addition to impact reporting.
The ICAEW is due to publish a position on ESRS-40a before the end of the EFRAG consultation.
The mixed approach has already been the subject of pushback within EFRAG after its inclusion in the proposals at the behest of the Commission. Members noted that climate-only reporting limits transparency on areas such as human rights, and disadvantages EU companies which are subject to more stringent reporting requirements.
A note from EFRAG clarified that without “such a request [from the Commission] the EFRAG Sustainability Reporting Board would not have proposed the mixed approach as its own initiative”.
The proposals have also been criticised by sustainability reporting non-profit Frank Bold for adding to the risk of greenwashing and potentially resulting in disclosures that are “fundamentally incapable of providing a fair presentation of a company’s impacts”.