13 July 2022

The will is there.... Now what is the way?

European Members of Parliament have today (13 July) grilled the three candidates for the role of chair of EFRAG's Sustainability Reporting Board on a wide range of topics, including connectiveness of European and international standards, burden on SMEs, double materiality, resources and governance issues at EFRAG.

Broadly aligned in their answers to the MEPs' questions, Dawn Slevin, Patrick de Cambourg and Tjeerd Krumpelman all highlighted that there is a political will for sustainability standards as well as a will in industry to see this project succeed. Now is the time to pave the way.

The European Parliament JURI committee will deliberate this afternoon before voting tomorrow on their preferred candidate.

The Council is planning to announce its preferred candidate on 20 th July (date to be confirmed), a spokesperson told Corporate Disclosures.

The Commission will then make the appointment but it didn't give Corporate Disclosures any timeline on this.

Slevin was keen to emphasize her technical expertise as an SME entrepreneur across various sectors as key attributes for the position. Krumpelman highlighted his practical professional experience in sustainability reporting as a key differentiator and De Cambourg emphasized his pro-Europeanism and experience in standard setting as the drivers behind his application.

On a question on the ISSB versus EFRAG standards, Krumpelman said: "There is no problem with different standards. In my view, it does not have to be the goal to go for one single global set of standards for all companies. What we need to do here in Europe, and what we need to ask of others as well, is [find] how standards align and how they differ so that companies know where there is and there isn't an overlap."

He took the example of double materiality versus single materiality, arguing that the two concepts are not contradictory but complementary. "Double materiality adds on the single materiality, it doesn't contradict it."

"I'm not against an international standard but I'm not a big believer that it will happen in the next couple of years," he concluded.

Slevin went further, arguing that standard setters who have not embraced double materiality today, will certainly do so in the future. By not looking at impact materiality and only focusing on financial materiality, the reporting would miss the full picture, she said.

"Those standard setters that don't understand that yet or haven't got the backup of their people and businesses to say the truth, will come around to that thinking," she said. "It's a matter of persuasion, demonstration and discussion."

A united Europe who does businesses internationally will "win hearts and minds of the economies that have different standards and standard setters" on this issue, she said.

De Cambourg noted that EFRAG had "extended its hand to the other initiatives from the start", calling the process co-construction, "because we feel that by having a proper dialogue, of course, there might be differences in concepts, but where we are on similar grounds, we should be very close. There is no reason why we shouldn't be".

"For me the priority is not to create double reporting requirements for sure," he said. "And therefore, the idea of aligning ESRS and other standards to the maximum extent possible is paramount."

The European standard setting model has a competitive advantage over the international standard setter due to its political nature, De Cambourg was keen to emphasize.

"I have to be very careful with standard setters that are supposed to be inspired by a universal wisdom because we all know that universal wisdom is tainted by a culture so I prefer an organized culture on the basis of a democratic process." he said. "We are well placed to demonstrate that double materiality in particular is the future and that you cannot have a financial materiality approach without addressing impacts first."

MEPs asked the candidates for their thoughts on the lengths of the proposal documents (400 pages) and numerous proposed disclosures, and how that could not be a burden for companies, especially SMEs.

Slevin replied: "People do refer to the length and breadth of the sustainability standards and they often point to the numbers of pages but it seems to me that they do this for sustainability and not for other types of standards that are in place."

There seems to be a bias against sustainability standards to a degree, she continued. "Because it's new and requires a whole restructuring of our economy, and I think people are fearful of this."

She added: "Companies have to learn, and we'll learn, how to delve into the disclosure requirements and decide what are the specific sectoral standards that apply to their different segments, to their different international jurisdictions, and they have to look at the materiality of all of the different risks and opportunities and the impacts that their supply chain is having."

Still, she concluded, SMEs can't be overburden and larger companies that engage with SMEs will have to understand how important they are and not pass on the burden of reporting.

De Cambourg took responsibility for the lengths of the ESRS exposure draft, as he chaired the technical group that produced them, but he said: "It is difficult to solve the very complex issues of sustainability without having a number of disclosure requirements. There is no silver bullet."

He argued that there should be an agreement on what is decision-useful first and then there can be an agreement on timing. That, he said, was the number one objective: Achieving the right balance between not compromising the relevance but creating a proper phasing in.

Krumpelman said it had to be clear that more than 400 pages will be needed, that there will "be more before there will be less".

"Is this a burden for companies?," he asked. "I've never heard them complain on financial standards. I work in a financial institution and I always say, 'you know what is really difficult, really difficult is financial accounting. It takes hundreds of people in a bank to do it and it takes hundreds of auditors to check it.'"

All candidates said they embraced a multi-stakeholders approach, saying they would enable all interested parties, including NGOs, to have a say. Similarly, questioned over EFRAG's limited resources and budget vis-à-vis the IFRS Foundation, the candidates said that when there is a will there is a way, even if more will be needed.