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People:Olivier Boutellis-Taft
Accountancy Europe CEO Olivier Boutellis-Taft gives his assessment on CSRD and the sustainable standard setting process. Interview by Vincent Huck.
In a recent webinar by Accountancy Europe you called CSRD the 'hot topic' of the moment – fair to say you are upbeat about the directive?
I'll take a step back, and refer to the latest IPCC report from April 2022, which basically says: we have three years to change the world, or the Earth will be hell. It's about a fundamental shift in the conditions that have made life possible on this planet. And even though this information has been around for a long time, we at large, even I, who are not scientists did not want and some still do not want to see it.
There are many politicians in the West who have started to realize that the environmental issue is massive, much bigger than they thought, and they need to do something about it.
In the member states, where people have pretty short-term electoral deadlines, it seems to be a little bit more difficult. But at European level, it seems to have been a little bit easier. And that probably explains why the EU, as a bloc, is the most advanced quasi-governmental structure putting a set of proposals on the table to actually address this challenge, and try to become carbon neutral in a reasonable timeframe.
The CSRD is a cornerstone of that. Because putting transparency of the impact of business on the environment and people is actually an incentive to get business to change. It's the basic application of the principle of 'what gets measured gets done', provided of course we measure what really matters and fosters effective change and not start yet another compliance merry-go-round.
CSRD goes into trialogue until June, a process that perhaps more than any other politics is based on compromise, what are the key battlegrounds where is there potential danger that the directive gets watered down?
This is a moving target are these negotiations as taking place as we speak.
There is a battle on the application date. And I always like to quote the commission who responding to business complaining that this is too much change too quickly, said: the commission is not setting the agenda, climate is setting the agenda.
The other main battle is on the scope, as you would expect. The Council is basically arguing for the directive to be applied to publicly listed and large companies as well as listed SMEs.
Where I'm a bit confused by the parliament's position is that they want to exclude listed SMEs – I don't understand why - and they want subsidiaries consolidated in a group to report individually, and that doesn't really stack up for me.
The parliament wants to include non-EU companies, which would make sense from a competitiveness level-playing field angle, but also from the angle of 'doing the job' because climate is not an EU-only issue. It's interesting that this is supported by several businesses and NGOs, so businesses and NGOs can sometime agree!
The parliament also wants to add high risk sectors, which is well intended but not so easy to do, because you need to define these sectors and very often, they will anyway be captured by the reporting standards.
The final battleground is close to the hearts of accountants, and that is around sustainability assurance. Everybody agrees that we need assurance on the disclosures.
The commission is starting with a requirement for limited assurance, which is then expected to move to full assurance after some years. Where there is disagreement is that the commission's proposal is for that assurance to be provided by the statutory auditor, as a default rule, and that the member states could open this market to other providers.
We are fine with this as we are not claiming a monopoly here, but the parliament introduced an amendment to this original proposal and wants to prevent the statutory auditor from providing assurance on the sustainability report. Their reasoning is that it would contribute to enhancing choice on the audit market.
Our assessment is that this is going to have exactly the opposite effect so it's not going to meet the objectives that they've set for themselves - diversifying the offer of auditors - it is going to significantly restrict these choices.
We expect a review of the audit rules early next year, we think it would be much better to deal with these matters when we deal with the audit, rather than hijack CSRD with something totally unrelated to the CSRD.
But anyway, the Council and the Presidency are now offering a compromise (which also is evolving), the idea is that next to the financial auditor, the member states may allow another auditor or an alternative assurance provider. So we now have one of those fascinating EU debate on whether the rule will say 'member states may allow another provider', or, 'member states shall allow another provider' - one word, but a pretty big difference, because the second option may lead to more fragmentation in implementation across Europe.
It's fascinating that in a way, the battlegrounds are the same one as for the NFRD: scope, audit...
Well the NFRD had audit as a option, now under CSRD it would be mandatory. This is more demanding, NFRD was sort of a baby trying to find its feet and trying to walk. But the massive difference between the two directive is the level of awareness around climate risk. And there is today a realization by politicians that their responsibility is at stake.
The central piece of CSRD are the standards being developed at EFRAG, which will dictate what gets reported and how, but there are already some concerns that these standards may drive a tick the box approach rather than a more risk based approach, is that correct?
The risk-based approach is going to be dealt with by the materiality assessment to apply reporting standards. We are awaiting EFRAG's publication of their standards, but there are already some concerns expressed that it will be too overwhelming up to the point where it becomes anti-practical.
If the standards are too complex, they will drive a tick the box approach rather than having standards that are simple and that are aimed at measuring the amount of change basically, and not reporting on each and every possible detail.
Where do you stand on this?
We are concerned that it is just too complicated, therefore will trigger a lot of pushbacks from companies who will feel too overwhelmed. It is not by trying to seek perfection in reporting that we're going to change the planet. On the contrary, we should have simple and focused reporting on what really matters right now. And what really matters right now is climate and carbon, with the main objective being not that companies report but company reduce their carbon footprint very rapidly. That's what reporting should be for, not reporting for the sake of reporting - this is not an academy exercise.
We are obviously waiting for the standards, but where would you want to see more simplicity, why is there this nervousness that what EFRAG is doing is too complicated?
Yes that is a fair point because you can be concerned by the same thing for different reasons. We should be clear, these are not the standards, these are the working papers. However, it's an indication of the thinking behind the standards, and it is the thinking that is a concern.
Businesses are concerned that this is too much information, too many requirements, too much details. I.e. too much cost, the famous reporting burden.
Our concern is that we think change and rapid change is indispensable. And we're not going to create change by frightening people and by overwhelming them with masses of demands and details.
We seem to be seeking exhaustivity and perfection, that would have been great 20 years ago, when we still had time to implement gradually. But going back to the IPCC report that I mentioned at the start of this conversation, we now only have three years to change. So if that what we want, the only thing that matters is not academic perfection. One thing that matters is to measure how companies are seriously cutting their carbon footprint and changing their business model to do so.
It is interesting that EFRAG was mandated by the commission to come up with the standards when we know that there is no great love between EFRAG and the IFRS Foundation and there is no great love between the IFRS Foundation and some people at the EU... are we witnessing a sort of EU exit of the international standard setting?
That is certainly not what we would like to see. What we would like to see is cooperation and alignment.
But it is interesting that member states are split on this. While there is an understanding that we need something specific in the EU to help companies deliver on their various obligations coming from the taxonomy and other pieces of legislation. But that doesn't mean turning the EU in a reporting fortress. And you already have a majority of companies including in countries that traditionally have not been great fans of the IFRSF that want to have convergence or alignment between the international standards and the EU standards. And some countries are even more in favor of having international standards rather than EU standards.
From what you said earlier, it would seem, you are more aligned with the ISSB approach yourself?
I'm very supportive of the EU project. Because I think the EU is really showing the necessary leadership here and also because there are specific EU needs that we must address. However, I start being concerned on the standardization work where we seem to put perfection over practicality and effectiveness. But I was also concerned by the IFRS Foundation original rejection of double materiality which is absolutely fundamental to this discussion. But they're evolving. I'm looking at it from an efficiency perspective, not from a political perspective. Europe has done well, the CSRD is really an important piece, and they are showing real leadership. They need to continue up to practicalities.