Patrick de Cambourg, president of the ANC, and chair of the EFRAG Project Task Force on European Sustainability Reporting Standards, discusses the European proposal in the context of global sustainability reporting developments. Interview by Vincent Huck
In announcing reaching an agreement on CSRD in the trilogue, the EU institutions in their press release confirmed EFRAG as its technical advisor, does that reinforce once and for all that the ESRS will be the benchmark standards at European level?
The political decision taken by the EU on 21 June, finalizing the trilogue is that, due to the EU ambition in terms of sustainable development and finance, there is a crucial need for reliable data on environmental, social and governance matters. So there is a crucial need to establish a platform of reliable corporate data. And reliable data can only come from the preparers themselves. The EU has made a political decision on the basis of an agreement between Council and Parliament to take a major step forward to create a mandatory regime applying to "large" entities (under the EU definition of "large"). In terms of what comes first and how to make the system compatible at a global level, it's a political question that has been addressed and finalized by the political institutions of the EU: the EU and global dimensions shall be considered to the maximum extent possible.
After a year of Stakhanovite work on European standards, did you feel reinforced in your convictions and beliefs by seeing the EU acknowledging EFRAG in the outcome of the trilogue?
First of all, I'm not a politician, I'm a standard-setter operating under the umbrella of the legislative proposals coming from the political institutions – it's not for me to decide.
On the other hand, it's true that EFRAG has demonstrated its capacity to work independently in the financial reporting sphere, but also, since the creation of the corporate reporting lab, beyond the financial reporting sphere. And the various task forces that have been created by a EFRAG, including the one which I have chaired since September 2020, demonstrate EFRAG's capacity to mobilize resources, elaborate drafts and work on the basis of consensus. A consensus that is established from a multi stakeholder perspective, which is very much in the DNA of the EU standard-setting approach.
So I think it was the Commission's intention to keep EFRAG as its technical advisor, and it has now been endorsed by the political institutions – the Council and the Parliament. We are grateful, and we feel we have a significant responsibility as a consequence.
With a political agreement on the table, the ball is now in a way in EFRAG's camp, because the standards are the backbone of the CSRD....
That is why Commissioner Mcguiness asked us back in May 2021 to revive the task force that had conducted the preparatory work.
The task force was revive in June 2021, with 35 members from 13 Member States coming from the various stakeholder groups: auditors, preparers, users, NGOs, academics, trade unions.
We divided the various topics to cover and we established nine clusters.
We worked really hard up to Christmas to produce working papers..
From Christmas to April was what we called the consensus building phase, where opinions were consolidated to amend then working papers and create the 13 exposure drafts that have been put forward for public consultation at the end of April.
These exposure drafts are not perfect, there are still elements that need to be improved and a number of very important questions that need to be addressed.
Now, this is what has been done, what's coming next? Working hard to design exposure draft is one thing, finalising standards is something else. And that is what EFRAG needs to do by November.
Exposure drafts are not carved in stone, and we are going to fine tune them. We expect between 800 to 1,000 responses to the public consultation which the secretariat will use to fine tune and modify the drafts, before delivering our technical advice to the European Commission.
Because technically speaking, EFRAG is a technical advisor, it is the Commission that will take the final decision on what is enforceable following its own process.
The Commission process involves consulting with the ESAs, translating in the 24 languages of the Union, and taking into account the possible outcome of the scrutiny period of Council and Parliament.
At the same time, EFRAG organises also a cost benefit analysis. EFRAG has launched a call for candidates and the selection process has been finalized with a very reputable Brussels player in that field.
We also organised 12 to 15 outreach events to explain our work and also to get feedback ahead of the end of the consultation period.
So many many things are happening at the same time to fine tune the standards.
As you said there are important questions that need to be addressed, and one of the biggest criticisms to EFRAG work is the question of a lack of prioritisation...
We are not deciding on what are the priorities... have a look at the CSRD. We may have a role in terms of depth, i.e. how far we need to go. But as regards the list of topics that we need to address, it's not our call. We have to apply the Level 1 provisions and they are pretty precise.
Unlike the ISSB who has the freedom to choose its agenda, we have to comply with the political framework that gives us the direction of travel.
So I think part of the criticism you mention in this regard comes a bit too late, because the political decision has been taken now.
However the devil may be in the detail, the legislative level is key but that doesn't mean we should underestimate the importance of the standards. They should be workable and create the right level of data. It's not an easy task, because it's always a compromise between the ones that want less and the ones that want more. So we are navigating in between, somehow, but not at the expense of the quality of information and at the expense of the coherence of the reporting.
In such a context there is no antagonism between the EU's ambition and the ambition of the IFRS foundation, it is a matter of co-construction..
What were you thinking of when you said 'important questions that need to be addressed'?
Our consultation has three sections.
One, we are asking stakeholders to give us an indication on the general relevance of the disclosures we are proposing on three grounds: the architecture of the standards, the implementation of the CSRD principles and the overall relevance of each ESRS.
Relevance is key, reporting should not be a tick the box exercise, it is designed to provide meaningful information.
Meaningful information has five qualities: relevance, fair representation of the phenomenon you depict, maximum comparability, understandability and verifiability.
So our first question is what is relevant, what do you need to know? And for certain standards we expect people to maybe tell us: 'this is not fundamental, or you are missing this'.
The second section is about the possible phasing-in options. If you assume that you have defined a reasonably relevant level of information that is needed, you can always argue that some of that information doesn't have to be disclosed right away. Here there are a number of possibilities, it could be left for a second set of standards, or a future set of standards, or it could be an optional disclosure.
The third section is a more granular one, since we have 137 disclosure requirements proposed. We ask stakeholders to choose the ones that are the most relevant to them and give us more granular feedback on what they want to see improved.
How different do you expect the final standards to be from the exposure drafts?
I'm not expecting anything. I want to take into account all the inputs that we will receive between the beginning of the public consultation and the finalization of the standard. As a board member, it's my duty to consider the remarks that we receive from all constituents, and to see if they are justified as compared to the requirements that we have under the CSRD. And also if they are coherent with the other remarks. And, you know, if someone is telling us it's way too much, and you should focus on 'climate first and the rest later', well I'm afraid that is not our responsibility.
Although that is the path taken by the ISSB...
Again, even if we have different approach there is no antagonism between EFRAG and the ISSB.
Yes, at the moment the ISSB has a draft standard on climate, and a draft standard on general requirements, that is taking into account the SASB standards.
But as things stands at this stage, I seriously consider that ESRS are compatible with IFRS S1 and IFRS S2.
But most people disagree with you and for example point at the use of different language as a difference....
But where is the difference? Can you spot it?
Not really, the big discussion is that the TCFD and the ISSB have four pillars: governance, strategy, risk management, targets and metrics.
People say the ESRS don't have the four pillars so we are not compatible with the TCFD & ISSB. That is wrong!
Governance, strategy and risk management are covered by ESRS 1 and ESRS 2. And targets and metrics are covered for each topic by ESRS E1 to E5, ESRS S1 to S4 and and ESRS G1 and G2.
So what it comes down to is really along the lines of: I prefer a champagne flute versus a champagne coupe, does it make the champagne different?
I mean: look at the US GAAP, after 10 years of discussion on convergence, the conclusion was: different but equivalent in substance and overall seriousness. You can be listed in the EU on the basis of US GAAP and you can be listed in the US on the basis of IFRS.
In addition, from a digital standpoint we could dream about a concept I call multi-tagging. If you take a data point that is deemed equivalent under an ESRS reading, TCFD reading, ISSB reading, SASB reading – that same data point can be used four times, and the reader can just choose the reading she or he wants.
In a world of new technologies, would it really be difficult to do?
The first time we met was in London in 2015 I asked you about non-financial reporting, you replied: it will never happen financial reporting will always remain financial reporting and non-financial is not part of accounting! Today you are spearheading the European standards, which have fully embraced double materiality, so what has changed?
Only fouls don't change their minds! No but seriously, it is hard to go back and explain the mindset from eight years ago, in all honesty I don't remember saying this. And I'm a bit surprised that I would have said this, because when I was at Mazars I wrote the foreword of a book on intangible capital, so back then I was already convinced by the importance of non-financial disclosures.
I'm sure that what I said back in 2015 is: 'do not change the conceptual framework of financial reporting'. Which was a temptation for some organisations.
But that would be a big mistake because the benefit of financial reporting is to inform about past and future cash flows on the basis of very clear concepts: obligation, control and likelihood. The limits of financial reporting are also the strength of financial reporting.
So I said early on that financial reporting is fundamental, it's pivotal, don't change it. But you have to realize that there is a gap between the book value and the market value of businesses. Therefore you need additional information to explain that gap: negative and positive externalities, intangibles...
And I explained this in the report I produced for France's finance minister Bruno Le Maire in 2019. So... maybe I was wrong in 2015.
You call yourself a pro-European, but does it mean you are anti-international?
On the contrary! On the contrary! I urge jurisdictions to move forward with sustainability reporting. And big efforts should be conducted between jurisdictions and together with international initiatives, such as ISSB or GRI, to create a platform.
People:Patrick de Cambourg
