The Credibility Of EFRAG’s Sustainability Reporting Standards Is At Risk

Sustainability The Credibility Of EFRAG’s Sustainability Reporting Standards Is At Risk Robert G. Eccles Contributor Opinions expressed by Forbes Contributors are their own. Tenured Harvard Business School professor, now at Oxford University.

New! Follow this author to improve your content experience. Got it! Jul 17, 2022, 11:25pm EDT | Share to Facebook Share to Twitter Share to Linkedin Speed is not always your friend. Sometimes it’s better to take the time to make the right decision than to rush to meet a false deadline.

In this instance I am referring to the process to select the Chair of the “Sustainability Reporting Board” (SRB) which has been established under the European Financial Reporting Advisory Group (EFRAG). This is a very significant position to fill. I have no opinion on who should be selected and do not know the opinions of those who have a say in the matter.

But I do know that a number of people have expressed concerns about the speed and lack of proper debate and scrutiny in this process, as well as in the process to develop the first draft standards that preceded it. The reason I’m writing is to encourage the EU to have, and be perceived as having, a credible process for selecting the Chair of the SRB. Failure to do so will put both the standards they put forward and the EU’s “ Green Deal ” at risk.

But this is not simply an EU issue. It is one that matters to the world. Thus, it is important to put the work of EFRAG in a broader context.

Plants on a field with european flag as background and the text “green deal” getty The International Sustainability Standards Board (ISSB) and EFRAG have both issued exposure drafts of standards for sustainability reporting. The ISSB’s standards are based on the concept of “single materiality,” those sustainability issues that matter to enterprise value creation. EFRAG’s standards emphasize “double materiality,” those sustainability issues that also affect society in general along environmental and social dimensions.

The single vs. double materiality question is a hotly debated one . The Sustainability Taliban deride single materiality and want only double materiality or even more than that, so-called contextual materiality.

The Sustainability Flat-Earthers scream that sustainability destroys shareholder value or is even an existential threat to the United States of America. I am in the much duller Sustainability Pragmatist camp. I think enterprise value creation is important.

I also think that companies should deal with the negative externalities of their products and services. As a result, I think the work of both the ISSB and EFRAG is important and highly complementary. The former can establish a “global baseline.

” EFRAG can build on this to move further and faster and perhaps mark a future path for ISSB standards in some regards. After all, based on the concept of “ dynamic materiality ,” what is material from the perspective of impacts today can become material to enterprise value creation tomorrow. The line is a blurry and changing one.

Here the Global Reporting Initiative (GRI) has an important role to play. It has collaborated with EFRAG in the development of its sustainability reporting standards and has also signed a collaboration agreement with the ISSB. GRI can act as an “integrating mechanism” between two groups.

The quality of the standards developed by each organization is fundamentally important. Credibility comes from a high quality standard setting process, something well established for financial reporting, even though the process is always a complex and contentious one. Both the ISSB and EFRAG have had an interim process, pending appointment of their full Boards, to kick off the development of draft standards.

In the case of the ISSB, this has been done through a Technical Readiness Working Group; in the case of EFRAG, it was through a Project Task Force. MORE FOR YOU Is Carbon Capture Another Fossil Fuel Industry Con? Sustainable Fashion Wants Brands To Redefine Business Growth Trouble With Predicting Future Of Transportation Is That Today Gets In The Way As these standard setting processes now become formalized, their own credibility depends, in turn, on the credibility of the Chair and members of their Boards. And it depends, perhaps most particularly, on the stewardship by the respective Board Chairs of “due process” that, on the one hand, respects the constitutionally-defined roles of the Board and the expert or advisory groups intended to contribute to the standard setting processes and, on the other hand, ensures transparency and meaningful consultation with external stakeholders.

Each organization has a different process for appointing the individuals who will head up the bodies charged with developing their sustainability reporting standards. The ISSB was established under the authority of the IFRS Foundation. An elite executive search firm, Egon Zehnder, was used to recruit for the roles of the ISSB, starting with its Chair, Emmanuel Faber , and its Vice-Chair, Sue Lloyd .

Their credentials are impeccable. High Angle View Of Empty Chairs In Auditorium getty EFRAG is in the process of selecting the Chair of the SRB, which requires that the European Commission nominate a candidate for appointment by the General Assembly of EFRAG. The nomination follows a Commission-led interview process with applicants, and advisory inputs from both the European Parliament and European Council.

It is worth noting that EFRAG is not a part of the European Commission, but a private association of member organizations, established under Belgian law. Its role in interpreting financial accounting standards for EU use has now expanded to the very different task of developing sustainability reporting standards, and it is the European Commission that will ultimately sign off on those standards. EFRAG’s members consist of national standard setters, European stakeholder organizations, and (since recently) some civil society organizations.

They constitute the General Assembly, which is charged with major decisions and appointments. Its Administrative Board is responsible for EFRAG’s organization, administration and finance, as well as for due process for both the Financial Reporting and Sustainability Reporting pillars. Each of these pillars has a Board and a Technical Expert Group (TEG) The SRB is currently interim-chaired by Prof.

Kerstin Lopatta , a Board Member and Professor at Hamburg University, until the formal Chair is in place. Chiara del Prete , a former partner with Mazars, currently chairs both the Financial Reporting TEG and the Sustainability Reporting TEG (the latter as Acting Chair). EFRAG is funded both by the European Commission and through private contributions of its member organizations.

You can see EFRAG’s organizational structure here . The EFRAG Sustainability Reporting Board Chair appointment is in many regards a political process. There’s obviously nothing wrong with this if it is done in a rigorous and transparent way that goes beyond the political connections of candidates to consider their credentials for the role.

This decision will set the course for whether the EU’s standard-setting progress will have the necessary robustness and credibility at this most fragile and important moment in the European project of sustainability reporting. What first brought my attention to the significance of this process is a joint letter submitted by the French (afep) and German (Deutsches Aktieninstitut) business associations submitted to Ms. Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union European Commission on April 6, 2022.

It notes the importance of allocating “sufficient time for serious discussions on the draft standards” and raises concerns about the “hasty approach” being taken. Similarly, a letter dated July 1, 2022, from the Confederation of Swedish Enterprise,The Council for Swedish Financial Reporting Supervision, FAR (The Institute for the Accountancy Profession in Sweden), and Nasdaq Sweden expresses concerns that “the restricted consultation will reduce the prospects for both the EFRAG (European Financial Reporting Advisory Group) and respondents to perform an adequate analysis and evaluation of the proposals, as well as conducting an appropriate impact assessment. ” luxurious blue Leather sofa texture background getty Voices expressing concerns about the speed with which the provisional standards were developed were soon joined by voices expressing concerns about the process for selecting the Chair.

The Commission has narrowed down the candidates to three: Patrick de Cambourg, former partner and chairman of Mazars and current head of the French accounting standard setting authority, who chaired the Project Task Force of EFRAG that developed the initial draft standards and is a member of the Board that will finalize them; Tjeerd Krumpelman, who heads up sustainability reporting for Dutch Bank ABN AMRO, and leads the group exploring integrated thinking and strategy for the International Integrated Reporting Council among other work on sustainability reporting; and Dawn Slevin, who heads an environmental consultancy and has been part of an expert group contributing to the EU’s Green Sustainable Finance Taxonomy. These candidates’ names were apparently passed to the European Parliament on the last day of June, and its Committee on Legal Affairs (“JURI”) held a hearing on July 13 with the candidates and a vote on the 14 th , leading to a slim majority for Mr. de Cambourg (apparently 12 to 10 to 1).

I have seen an email chain indicating that Member States were at first only sent the CV for Mr. de Cambourg (bizarrely even before the hearing and vote in the Parliament), until some States objected and sought fuller information and debate. They now seem set to take a vote on July 24 or 25.

It remains unclear whether there will first be a debate. In sending the candidates’ names to the Parliament (and presumably similarly to the Council), the European Commission indicated that Mr. de Cambourg was their “principal” candidate.

There may be an inherent logic in his continuing in the role that he has begun. At the same time, that would suggest some review of how that process has gone. In the hearings held by the JURI Committee in Parliament, one parliamentarian asked what would seem like a particularly purposeful question in this regard.

Lara Wolters pointed to the significance of working methods, and notably inclusiveness and consensus. She noted that she was hearing that stakeholders involved in the process to date “do not always feel like that inclusiveness and consensus is there at the moment. ” The question struck me precisely because I have spoken with a number of people from business, accounting, civil society, and academia who have been close to the process over the last many months who have uniformly—and in many cases energetically—highlighted such concerns.

One central figure in the process has observed to me the widespread antipathy generated by the management of the process to date among those charged with the work, with views ranging from full opposition to, at best, neutrality. Another painted a disturbing picture (a “hot mess” to be precise) of members of the Project Task Force being steamrollered and sidelined by EFRAG leadership, the use of divide and conquer tactics to push through individual agendas, and deliberate efforts to obfuscate the fact that large contingents of the task force had fundamental disagreements with the approach and architecture reflected in the draft standards. (It is noteworthy that the cover note that accompanies the draft standards out for comment states that, “The EFRAG SRB has not reviewed or discussed the E[xposure] D[raft]s and therefore has not taken any position on their content at this stage.

”). 1912: Travellers gulp down hot beverages while waiting for their trains at a Great American Tea . .

. [+] Company cafe situated in a station. (Photo by MPI/Getty Images) Getty Images Moreover, I am told that various people involved in the process have suffered from burnout from the high pressure, autocratic and chaotic management approach being taken.

A crushing pace of work that apparently continues. Note that members of the SRB and TEG are all there on an unpaid, part-time basis; only the Chairs of each body are compensated. That choice of structure surely must have implications for the timelines within which work can reasonably be done and done well.

The continuing pressure on the process may be seen as the only way to finalize the first set of standards for Commission approval by the end of the year. Yet at what price? Responsibility for deciding on the Chair of the Board now continues with the European Council—comprised of EU member states—to provide their independent assessment of all candidates’ credentials and make a recommendation to the Commission. Given what is at stake and the narrow vote in the JURI committee of the Parliament, it is of paramount importance that this process is not rushed and scrutiny is increased rather than decreased.

I realize that, as an American, many may think it is presumptuous of me to be expressing a view about how the EU is going about filling the role of the Chair of the SRB. Let me also acknowledge the even deeper set of problems that exist in the U. S.

as I’ve explained in my recent piece “ Grift Capitalism: The GOP’s Brilliant Strategy For Ripping Off Ordinary Americans . ” Happily, the EU is looking to be a leader and seeing how addressing climate change can be a form of economic competitive advantage. And it is recognizing the relevance and importance of considering wider environmental, social, and governance issues in parallel.

Good for them. And much appreciated by me as a citizen of the world. While not a silver bullet, EU standards for sustainability reporting have a unique role to play in achieving more sustainable business practices, incentivized by informed markets and other stakeholders.

Their foundation must be a strong one. It is at risk of being built on quicksand. Continuing with my temerity, let me offer just three modest—perhaps obvious—recommendations for what needs to be done to ensure that the right person is selected as the Chair of the SRB.

Those involved in the process can determine whether these recommendations are sensible ones and if they have already been met. If the answer to their sensibility is “Yes” but the answer to them having been followed is “No,” then perhaps the EU should consider simply taking a bit more time to get this right. My recommendations are: 1.

Those involved in the nomination process should consider the credentials of candidates in two regards: a. Their experience in issues of sustainability and sustainability reporting, including reporting across the full range of environmental, social, and governance topics. b.

Their skills in stewarding complex, multi-stakeholder processes in an inclusive and consensus-building manner with full regard to due process. 2. In both regards, the focus should not just be on claims made in hearings or interviews, but on evidence provided.

How can they demonstrate the quality of processes they have contributed to, stewarded or overseen, and not just the fact that processes were completed? 3. And just as candidates for any job would normally bring some references to bear, some due diligence to gain insights as to candidates’ past performance will be relevant and necessary, with a focus on people with experience of the candidates’ skills in the process, as well as substantive elements of this role. The ISSB hired a professional search firm to provide this kind of scrutiny for its Board candidates, including the Chair and Vice Chair.

With the legitimately different process followed by the EU, it is up to its own institutions to provide the same kind of scrutiny in order to set up the future standard setting process for the success it deserves. This is important to the EU and to the rest of the world. Follow me on Twitter or LinkedIn .

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