The European Securities and Markets Authority (ESMA) has responded to the IFRS consultation on targeted amendments to the IFRS Foundation constitution to accommodate an International Sustainability Standards Board (ISSB) to set IFRS Sustainability Standards. ESMA welcomes the IFRS initiative to consider establishing the ISSB to develop high-quality standards, building on the best practices arising from the existing reporting frameworks and standards. ESMA supports the direction of the proposed amendments to the Constitution to give effect to the establishment of the new Board and sets out considerations for further improvement of the proposals within its response letter.
In its letter, ESMA notes that it supports the efforts already envisaged by the Trustees to secure proper funding to the ISSB while preserving its independence. ESMA also emphasizes the importance of ensuring continuous interaction between the EU initiatives for standardization of sustainability reporting and the future work of the ISSB. In its response to the IFRS consultation, ESMA has set out the following key considerations for further improvement of the IFRS proposal:
- ESMA suggests for IFRS to establish a roadmap to move from the constitutional arrangements that are applicable to the inception phase of the new Board, to those that will be effective once this initial phase has been successfully completed. In that respect, ESMA would expect that the proposed ability of the ISSB to comprise an unspecified "minority" of part-time board members to be time-limited. After this period, ISSB would have the same maximum number of part time board members as for the IASB (maximum three members). This would grant ISSB the necessary flexibility in its first years of operation, while ensuring that in due time the same governance rules apply to both ISSB and IASB. Similarly, given the transitory nature of the assignments, it can be considered to include all provisions relating to the inception of ISSB in a separate sub-section of the Constitution. These transitional provisions could also include the composition of the Board with the proposed initial larger number of part-time members in the first years of operation, as suggested earlier. The roadmap could envisage the timely establishment of an interpretations committee on matters related to the application of the sustainability reporting standards after a certain period, following the publication of the first reporting standards.
- The proposed rules of procedure for the publication of an Exposure Draft by ISSB differ from those that are applicable to IASB. It would be important to maintain alignment with the well-tested due process adopted by IASB, unless there are specific reasons for diverging from it. Following the same due process will afford the new Sustainability Standards the same legitimacy as the IFRS.
- ESMA has considered the matters on which no substantive amendments are proposed, most notably in relation to the role of the Monitoring Board and the creation of a multi-stakeholder expert consultative committee. ESMA emphasizes the importance for IFRS to establish the multi-stakeholder expert consultative committee as soon as possible, as this would permit it to contribute to setting up the initial workplan of the new Board from an early stage and promote interoperability with regional standard-setting initiatives as soon as possible. In this respect, ESMA notes that the European Commission proposal on the Corporate Sustainability Reporting Directive (issued on April 21, 2021) sets a higher level of ambition for sustainability reporting standards with a double materiality reporting perspective.
- ESMA suggests revisiting the current proposal for the naming convention of the future sustainability standards, which are referred to as the "IFRS Sustainability Standards." The acronym "IFRS" refers to "financial reporting" and, as such, it may be misleading when used in relation to the international sustainability reporting standards. ESMA is providing this feedback in light of its mandate to consider sustainable business models and the integration of ESG factors across the multiple areas of sectoral legislation that fall within its remit, with the objective of promoting high-quality, comparable, and reliable sustainability reporting.
Related Link: ESMA Response to IFRS Consultation
Keywords: International, Europe, EU, Banking, Securities, ISSB, IFRS Constitution, Sustainability Standards, Reporting, CSRD, ESMA
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