ISSB must take into account the “burden” of complex standards for SMEs

The “volume and complexity” of new draft sustainability reporting standards could threaten the resources and financial security of already vulnerable SMEs, market participants have said.

According to Sarah Carroll, director of sustainability reporting at Grant Thornton, the granular and abrupt nature of new draft standards could affect small businesses’ ability to comply.

“Not only is it about understanding exactly what they’re required to report, but also making sure they’re calculating it correctly,” she says.

“It’s going to be very difficult for companies to build that level of comfort and understanding into their own reports and results.”

In November 2021, the International Financial Reporting Standards Foundation (IFRS) announced the creation of a new International Sustainability Standards Board (ISSB), to standardize sustainability reporting.

This decision was accompanied by the publication of prototype climate disclosure requirements; in March 2022, the ISSB published two full exposure drafts for public comment.

“These two sets of standards are just the start,” says Carroll. “We are concerned about the burden this will place on businesses, whether it is resources or recruiting the right people.”

Yen-Pei Chen, senior policy officer for corporate reporting and taxation at ACCA, voices similar concerns about the capacity of small businesses.

While standards are “urgently needed” to provide a global baseline for sustainability reporting, ensuring compatibility with SME capacity should be a priority, she says.

“SMEs are an important part of the global economy and they are a vital part of any supply chain. Even though SMEs are not covered by the ISSB standards, requests for disclosure will come from larger entities reporting on their supply chain activities.

ISSB action needed

The ACCA recently addressed these criticisms directly to the ISSB, submitting comment letters in response to the draft standards.

For example, he highlighted the global skills shortage and the fact that the demand for sustainability reporting talent far exceeds the supply, calling on the ISSB to support the global effort to improve skills. and capacity building in this area.

He also urged the Board to consider developing an implementation roadmap to ensure consistent implementation across the globe and limit the shock factor for businesses.

Grant Thornton’s response was similar. The firm also submitted comment letters in response to each of the ISSB’s exposure drafts (general and climate-related).

In particular, he asked the ISSB to take into account the needs of SMEs by “phasing in” the standards.

In doing so, it draws on research from the firm’s International Business Report, which found that nearly a third of mid-market companies globally cited lack of clarity around new regulations and requirements. as an obstacle to their progress in sustainable development.

“We think it’s really important to phase in the requirements so that small businesses aren’t all hit at once,” says Carroll of Grant Thornton.

“This would allow entities to more easily manage the process, integrate systems and achieve compliance more quickly.”

Carroll particularly laments the ISSB’s “Scope 3” emissions: the requirement for companies to report all indirect emissions, such as those created by suppliers.

“It’s going to be very difficult for preppers, so we’d like to see some guidance to make it a little clearer,” she says. “For example, how far they have to go in the value chain and what should actually be reported as a minimum requirement.”

“Maximum alignment is essential”

Grant Thornton’s comment letters also raise the issue of global alignment as a key issue. The firm argues that while it supports the ISSB’s intention to make the new standards a baseline, much more work needs to be done to align them with proposals from other standard setters.

Most notably, the European Financial Reporting Advisory Group (EFRAG) is continuing to produce its own set of standards, in line with the European Commission’s 2020 mandate.

It published its first set of exposure drafts for public comment in April 2022, which were produced alongside negotiations on the EU directive on corporate sustainability reporting – legislation that will seek to make reporting mandatory. and sustainability assurance.

“It’s not necessarily the ISSB’s fault, but EFRAG has gone ahead and done its own thing, and we feel it’s not relying on the ISSB – it’s sit next to him instead,” says Carroll.

“Between them, they have to sort this out. Otherwise, you could end up with a disparity between what companies are doing and potentially lose comparability as a result.

The ACCA also expressed concerns about a lack of global alignment. In a comment letter submitted in response to the exposure drafts, he urged EFRAG to consider reporting in accordance with ISSB standards.

This would be a critical step in overcoming the current “alphabet soup” of different frameworks and standards, Chen says.

“Maximum alignment is essential to reduce costs for businesses and to ensure that stakeholders can have easily comparable information on sustainability issues.

“This fragmentation could get worse unless there is a conscious effort to align these requirements with ISSB standards.”

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