2 September 2022

The conflict between double & single materiality is more a narrative than a reality - ISSB's Faber tells MEPs

The EU's ECON committee organised an exchange of views with the chairs of the International Accounting Standards Board (IASB), the IFRS Foundation Trustees and the International Sustainability Standards Board (ISSB), but the topic du jour is indeed sustainability and MEPs had their sight on ISSB chair Emmanuel Faber.

After initial introductory remarks by the IFRS Foundation Trustees chair Erkki Liikanen, the IASB chair Andreas Barckow and Faber, both Liikanen and Barckow could have kicked back and put their legs up as all questions (bar two) from MEPs were related to sustainability.

In particular MEPs were eager to hear from Faber on cooperation and alignment between the ISSB and EFRAG's work.

Markus Ferber of the Christian Democrats kicked off the Q&A asking where there could be room for improvement in that cooperation.

There is cooperation and the frequency of exchange has accelerated since the final CSRD text was agreed giving clarity on substance and timing, Faber reassured.

"I believe that the substance is more or less aligned on climate, and we need to review this in a lot of detail because the worst is to be close but not identical."

What needs to happen going forward, which is a discussion that has already started, he continued, is a mutual recognition of the importance of the materiality definition.

EFRAG's work is rooted in double materiality and Faber said the ISSB is "embracing [this approach] when it comes to looking at all the impacts, significant impact that companies are going to have on their ecosystem. But then we filter that with the financial materiality as defined by the accounting standards".

Faber said: "So that recognition of this limit as far as we're concerned, in the work of EFRAG, is of the essence to be able to capture where we can align on climate."
He said that going forward there is also an opportunity for the ISSB to use EFRAG's European Sustainability Reporting Standards (ESRS) as a potential resource to direct companies who want, or need to, report on topics that the ISSB has not yet been looking at.

Another important area of cooperation and alignment will be around the internationalization of the sector-specific SASB standards, Faber added. The ISSB has started work on this and the EFRAG sustainability board floated the idea, during a meeting this summer, of looking at the SASB standards when designing its own sector-specific standards in an effort to align with the ISSB.

"If I had one ask that will be for time," Faber told MEPs. "I think friends at FISMA and EFRAG are working under huge pressure, I understand [why] and like it as a European citizen, but when I'm on the other side of the table, that makes it super difficult. I would feel a huge sense of responsibility if we weren't able, for a matter of weeks or a couple of months, to design something [aligned on climate]."

Sustainability standards for SMEs

Ferber also asked the ISSB chair about the international standards setter's plans for SMEs.

While there is an IFRS for SMEs in accounting, when it comes to sustainability standards, the ISSB is starting from a completely different position, Faber replied. Coincidentally, the ECON meeting was held on the same day (31 August) that the IFRS Foundation announced the appointment of the former World Bank vice president Jindong Hua as vice-chair of the ISSB.

Hua "will be entirely in charge of the proportionality strategies, progressivity and global inclusion of both SMEs and developing economies", Faber said.

He noted that approaches to SMEs sustainability reporting may vary across geographies, but there were some interesting ideas that could serve as inspiration. He took the example of China where there is talk of using an algorithm to directly come up with an SME's CO2 footprint.
"Digitalisation overall will support SMEs," Faber said.

This prompted Pascal Durand, rapporteur for the CSRD and member of Renew Europe, to ask if the IFRS Foundation recognised EU sovereignty in setting sustainability standards. Durand then asked what the international standard setter's views on Scope 3 emissions were and how they fitted into the puzzle.

"Who am I to pretend that I could not recognize the sovereignty of the EU in defining what the EU believes is right for the EU," Faber replied before clarifying that what he meant is that he "would hope that our EU colleagues in the discussions feel that the price of aligning is such that it's worth having some more time if needed".

Paul Tang of the Progressive Alliance of Socialists and Democrats noted that Europeans are "very much attached to the double materiality [and] want the work from EFRAG to flourish".

Yet, he said he could imagine a situation where the concept of single materiality and double materiality do not lead to the same standards and maybe could lead to conflicts. "Will the work of the ISSB promote the work of EFRAG or will hampered it?," he asked.

The conflict between double and single materiality is probably more of a narrative than a reality, Faber replied. "And yet, I cannot guarantee that there can't be a situation like the one that you're describing."

This called for a constructive and cautious approach, he continued. On the constructive side, the ISSB global strategic agreement with GRI to ensure there are no conflicts between the GRI's impact materiality solutions and the ISSB's financial materiality solutions, Faber explained.

"So that there is no missing link, there is no overlap and there is, of course, no contradiction between the two," he said. "And we did that because we're convinced that, fundamentally, there is no opposition. There is a pillar one and pillar two, as GRI puts it. And I hope that our work with GRI will inspire us maybe to address some standards and to work on the thin limit between impact and financial materiality."

On the cautious side, Faber said that it is important to recognise the intersection between what the ISSB and EFRAG do. It is not a matter of one feeding into the other or one being equal to the other, he argued, but rather to acknowledge and highlight the intersection of the two.

"The bigger the intersection, the simpler the life of companies will be and the more effective standards will be," he said. "Because we will be able to leverage with that [intersection] the huge amounts of money that capital markets can move towards the transition."

Recognising that there is an intersection, Faber argued, "respects the fact that maybe, indeed, there could be one standard on which, by lack of luck or by design, there is contradiction". In this case EFRAG and the ISSB "will need to agree that [they] disagree and [they] can't agree for the time being".

He concluded: "We need to be cautious absolutely, to not derail the European ambitious and yet, I would really say I see ample opportunities to leverage the capital markets through that intersection definition."