ISSB must consider “burden” of complex standards for SMEs

ISSB must consider “burden” of complex standards for SMEs

The ISSB’s two exposure drafts must be revised to ensure accessibility and comparability, experts say

ISSB must consider “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 the ability of small businesses to achieve compliance.

“Not only is it about getting to grips with what exactly they’re required to report, but also making sure they’re calculating it in the correct way,” she says.

“It’s going to be very hard for businesses to establish that level of comfort and understanding in 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), with a view to standardising sustainability disclosures.

The move was accompanied by the publication of prototype climate disclosure requirements; in March 2022, the ISSB published two fully-fledged exposure drafts for public consultation.

“These two sets of standards are just the start,” says Carroll. “We’re concerned about the burden it’s going to put on businesses, whether it’s resources or bringing the right people in.”

Yen-Pei Chen, senior policy manager corporate reporting and tax at ACCA, expresses similar concerns regarding the capacity of smaller businesses.

While the standards are “urgently needed” to provide a global base line for sustainability reporting, ensuring compatibility with the capacity of SMEs should be a priority, she argues.

“SMEs are a major part of the global economy and they form a vital part of any supply chain. Even if SMEs are out of scope for the ISSB standards, demands for disclosure will come through from larger entities reporting on their supply chain activities.”

ISSB action needed

ACCA has recently levelled such criticism directly at the ISSB, submitting comments letters in response to the draft standards.

For instance, it has highlighted the global skills shortage and that the demand for sustainability reporting talent far exceeds the supply, calling on the ISSB to support the global effort to upskill and build capacity in this area.

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

Most notably, it has called on the ISSB to consider 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 nearly a third of mid-market businesses globally cited a lack of clarity around new regulations and requirements as a barrier to their progress on sustainability.

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

“That would make it easier for entities to manage the process, build the systems in and then be able to get compliant quicker.”

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

“This is going to be really challenging for preparers, so we’d like to see some guidance making it a bit clearer,” she says. “For example, how far they should go in the value chain and what actually needs to be reported as a minimum requirement.”

“Maximum alignment is essential”

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

Most notably, the European Financial Reporting Advisory Group (EFRAG) is pushing ahead with producing its own set of standards, as per a 2020 mandate from the European Commission.

It released its first set of exposure drafts for public consultation in April 2022, which were produced in parallel with negotiations on the EU’s Corporate Sustainability Reporting Directive – a piece of legislation that will seek to mandate sustainability reporting and assurance.

“This isn’t necessarily the ISSB’s fault, but EFRAG has gone ahead and done their own thing, and our view is that it doesn’t build on the ISSB – it more sits alongside it,” says Carroll.

“Between the two of them, they need to sort that out. Otherwise, you could end up with disparity between what companies are doing and potentially lose comparability as a result.”

ACCA has also expressed concerns regarding a lack of global alignment. In a comment letter submitted in response to the exposure drafts, it 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, says Chen.

“Maximum alignment is essential to keep costs down for companies and to make sure that stakeholders can have easily comparable information on sustainability-related issues.

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

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