Latest / PwC's accounting podcast / Sustainability now: Proposed changes to EU reporting standards

Transcript

Sustainability now: Proposed changes to EU reporting standards · PwC's accounting podcast

0:00
SPEAKER_00: Thought leadership from PWC's national office.
0:10
SPEAKER_02: Hello, I'm Heather Horn, PWC's U.S.
0:13
SPEAKER_02: Sustainability Technical Leader, and welcome back to PWC's Accounting Podcast.
0:18
SPEAKER_02: This is Sustainability Now.
0:20
SPEAKER_02: In today's episode, we're back with our fourth installment on the latest updates on the European Commission's omnibus package, focused today on significant changes proposed to ESRS.
0:31
SPEAKER_02: And again, reminder, this is all just as proposed.
0:34
SPEAKER_02: To walk through these changes, I'm joined once again by Diana Stoltzwiss, National Office Partner, and also co-chair of our Global Environmental Technical Working Group and a familiar and welcome guest on our podcast.
0:47
SPEAKER_02: So a few quick notes before we get started.
0:49
SPEAKER_02: If you're listening and would like to watch this episode, check out the show notes for a link to the video.
0:54
SPEAKER_02: In addition, for further background on these changes and the omnibus proposal, I encourage you to check out our August episode as well as related publications also in the show notes.
1:04
SPEAKER_02: And that does include one publication focused on all of these changes to ESRS.
1:08
SPEAKER_02: So if you want to know more, I highly recommend you check that out.
1:11
SPEAKER_02: With that, let's get started.
1:12
SPEAKER_02: Diana, welcome back.
1:14
SPEAKER_02: Thanks, Heather.
1:14
SPEAKER_02: Good to be here.
1:15
SPEAKER_02: Thank you.
1:16
SPEAKER_02: So, Diana, before we get into the details of the changes, just to re-remind everyone, uh, can you just reset the stage for what's happening and what and what we saw in July?
1:28
SPEAKER_01: Sure.
1:28
SPEAKER_01: So back in February of this year, the European Commission adopted the omnibus package.
1:34
SPEAKER_01: And what that contained was a number of different provisions.
1:37
SPEAKER_01: But the one that we'll focus on today is they proposed to make changes to the ESRS, so the European Sustainability Reporting Standards.
1:45
SPEAKER_01: The goal was really to simplify the standards, make them easier to use, reduce the reporting burden, those types of things.
1:51
SPEAKER_01: So after the omnibus package was adopted, the European Commission then sent a request to FRAG and asked FREG to provide what they called technical advice.
2:03
SPEAKER_01: The technical advice was originally due by the end of October.
2:07
SPEAKER_01: Now it's extended, so it's due November 30th.
2:10
SPEAKER_01: But what that was was really an amended ESRS.
2:14
SPEAKER_01: So revisions to the standards consistent with the objectives that were laid out.
2:18
SPEAKER_01: So FRAG took the mandate.
2:25
SPEAKER_01: And then we saw at the end of July that they put out the 12 amended standards, a log of amendments, which was really helpful to show what the changes were made to each of the standards, the basis for conclusions was helped support why the changes were made.
2:41
SPEAKER_01: And then they also had a public survey consultation.
2:44
SPEAKER_01: So that's where they went through.
2:46
SPEAKER_01: It contains, I think, 30 plus questions, maybe 35 questions, where it goes through and asks about certain of the provisions that were made.
2:54
SPEAKER_01: And so that was a package.
2:57
SPEAKER_01: I think there was a couple other supporting documents as well.
2:59
SPEAKER_02: Yeah, and I think Diana is very interesting because since those uh documents have all come out, we've spent a lot of time, uh you and I working with our EU colleagues and our global colleagues, actually people from around the globe, developing the firm's positions and working through the these standards and responding to the questionnaire, which we're almost almost done with.
3:19
SPEAKER_02: And so we're gonna give a preview of a bit of that today.
3:21
SPEAKER_02: I will say, you know, when you were running through those documents, I do definitely encourage our listeners, slash viewers, to check out the basis for conclusions in particular, to the extent they have questions, because I do think they did a nice job explaining why they made some of the changes they made.
3:37
SPEAKER_02: So I I thought that that document was of interest and sometimes maybe less of a focus from people.
3:43
SPEAKER_02: So something as people are thinking about the changes.
3:45
SPEAKER_01: Yeah, I think that was an important thing to highlight because if you did have questions on specific provisions, I do think a lot of these supporting documents at least help provide some of the rationale as to why the change was made.
3:54
SPEAKER_02: Agreed.
3:55
SPEAKER_02: All right, so Diana, as we said, we've been spending a lot of time on the amended ESRS.
4:01
SPEAKER_02: And I guess for this podcast, we'll say amended ESRS, we might say ESRS V2, new ESRS, and I think pretty consistently we'll refer to those old ones as ESRS V1 or the current ESRS.
4:13
SPEAKER_02: But in general, how would you current characterize our firm's perspective on the work that FRAG has done?
4:21
SPEAKER_01: I think overall we think it was pretty impressive at what FRAG did.
4:25
SPEAKER_01: One of the comments that we had had in the initial letter that we had submitted back, I think it was in April or May, to May, back to FRAG was making sure that there was the appropriate due process, that this was a huge task that they were undertaking to revise 12 different standards covering such a wide range of sustainability topics.
4:45
SPEAKER_01: And I think it's very impressive the work that was done in such a short period of time.
4:49
SPEAKER_01: I think they really took the mandate from the European Commission really into made that concept come through in the amendment.
4:58
SPEAKER_01: So the simplification, reducing the reporting burden, making it easier for the standards to be used.
5:04
SPEAKER_01: I think we've seen that in the amended ESRS and we're really impressed with the product that came out.
5:09
SPEAKER_01: I think another thing that I would highlight is they seem to have really listened to feedback.
5:14
SPEAKER_01: They did a lot of outreach in a very short period of time and really incorporated that feedback into the amendments that we saw.
5:22
SPEAKER_01: We still have things that we think they could do to improve, but I think it was a really impressive effort in a very short period of time.
5:28
SPEAKER_02: Yeah, and I think I would just echo the simplification in particular that they did address a number of practice issues, a number of places where they did receive feedback.
5:37
SPEAKER_02: And I know we've talked quite a lot about the fact that given the current maturity of reporting, finding some areas to simplify is something we we find important.
5:46
SPEAKER_02: So we'll highlight some more of that as we go through, but let's dive into a bit of the details.
5:51
SPEAKER_02: So can you give us just an overview of then exactly what was changed?
5:57
SPEAKER_01: Sure.
5:58
SPEAKER_01: I think overall we saw a real streamlining of the disclosures overall.
6:02
SPEAKER_01: So we saw overall the length of the standards was significantly reduced.
6:05
SPEAKER_01: The number of data points was reduced as all as well.
6:09
SPEAKER_01: Um I think that that one of the changes that they made, and this was a big point of feedback, I think, from a number of dis different stakeholders, was making sure that all the mandatory requirements are in one place.
6:23
SPEAKER_01: Before they were spread out, sometimes they were in the application requirements, sometimes they were involved, there were voluntary requirements in there as well.
6:30
SPEAKER_01: So it was a little bit hard to understand what are the mandatory requirements.
6:34
SPEAKER_01: So they've grouped all the mandatory requirements within the standard.
6:38
SPEAKER_01: So they're not separately somewhere else that you have to go looking for, which I think is very helpful.
6:43
SPEAKER_01: Second, they moved the application requirements, which previously had come at the end of the standard.
6:49
SPEAKER_01: Now they're embedded within the standard, and there's a explicit reference to what paragraph the application requirement is intended to clarify or provide additional guidance related to.
7:02
SPEAKER_01: So that's really helpful too to making the requirements easier to use.
7:06
SPEAKER_01: Maybe one other thing to touch on is the non-mandatory implementation guidance.
7:11
SPEAKER_01: This is a new document that has been created by FRAG.
7:14
SPEAKER_01: It's unclear whether that will be part of the delegated act or not.
7:18
SPEAKER_01: But what they did was take some of these voluntary disclosures or other guidance that used to sit within the application requirements otherwise that helped explain the standards, provide examples, potentially how you create different tables to present the information, include that in a non-mandatory guidance.
7:35
SPEAKER_01: So we'll see how that evolves as well.
7:37
SPEAKER_02: Yeah, and I think, Diana, one of the other things we saw, and there's this number that's been sort of brandied about, a 57% reduction in data points.
7:45
SPEAKER_02: But from the analysis that we've seen on the standards, lots of different actually parts of our firm have done analysis on that, some of the member firms, and then obviously we've also looked at it.
7:55
SPEAKER_02: Are we really thinking then that this is a 57% reduction in effort?
7:59
SPEAKER_02: No.
8:00
SPEAKER_01: Okay, that's the short, the short answer is no.
8:03
SPEAKER_01: Maybe I'll give a little bit of context to that answer.
8:07
SPEAKER_01: So when we think about the reduction in the overall data points, as I stated, they've also removed a lot of the voluntary data points.
8:14
SPEAKER_01: So these were data points that companies were not required to provide disclosures at all previously.
8:20
SPEAKER_01: And so they've been completely removed from the standards.
8:22
SPEAKER_01: So that was part of the reduction.
8:24
SPEAKER_01: I think also when we think about entity-specific disclosures, they are still part of the standards and the requirements that companies are required to report under.
8:35
SPEAKER_01: And so if a company's identified a material impact risk or opportunity, they need to provide material information about that IRO.
8:43
SPEAKER_01: And so they might have to provide information anyway, even if a specific disclosure requirement or a voluntary requirement has been removed.
8:50
SPEAKER_01: So I think overall, even though I think we agree that there's been an improvement in simplification of the standards, I don't think that reduction data points translates to exactly a reduction in effort.
9:01
SPEAKER_02: Yeah, I definitely think though understanding of the standards is substantially improved.
9:05
SPEAKER_01: Yes, and I think they're much easier to understand and use.
9:08
SPEAKER_02: Yes.
9:08
SPEAKER_02: All right, so let's keep going then.
9:10
SPEAKER_02: So when we start to talk about the two, let's start with the two cross-cutting standards, so ESRS one and ESRS two, and there were a number of changes there that were made to reduce the reporting burden and increase uh flexibility.
9:24
SPEAKER_02: So, what would you highlight?
9:26
SPEAKER_01: I think one of the things that I thought really was helpful was the reduction of the duplication between ESRS two and the requirements around disclosures around your identification of impacts, risks, and opportunities, your strategy and business model, some of your governance disclosures.
9:45
SPEAKER_01: Originally there was a lot of disclosure requirements in ESRS II, and then there were incremental requirements in each of the topical standards.
9:53
SPEAKER_01: It was confusing to understand what are the actual disclosure requirements, are these duplications, is it incremental, and just caused a lot of confusion.
10:01
SPEAKER_01: So I think the streamlining of including those broader disclosure requirements in ESRS II, and then only including more metrics and targets and specific things within the topical standards makes it much easier to understand and use the standards and streamlines it.
10:16
SPEAKER_01: I think we saw an overall reduction in a lot of those general disclosure requirements.
10:21
SPEAKER_01: They used to be called minimum disclosure requirements.
10:23
SPEAKER_01: Now they're general disclosure requirements, but they've reduced those and really focused on what is material information.
10:31
SPEAKER_01: So I think those were both really important.
10:33
SPEAKER_01: And then one other thing to highlight, it was very rigid before in how your sustainability statement had to be presented.
10:40
SPEAKER_01: So four parts, certain information in each of these parts, very, very prescriptive.
10:45
SPEAKER_01: And I think that both users and preparers felt that in sometimes that hindered the ability for entities to tell their sustainability story for the information to be cohesive and to flow.
10:57
SPEAKER_01: And so they've allowed a lot more flexibility with providing information in appendices or in tables or in other places, more cross-referencing of information.
11:07
SPEAKER_01: So you're reducing duplication, as well as allowing companies to provide an executive summary to help communicate and tell their story more effectively.
11:16
SPEAKER_02: All right, so definitely some changes there.
11:19
SPEAKER_02: So if we keep moving then, Diana, one of the areas that's also gotten quite a lot of attention is materiality and different aspects of double materiality.
11:28
SPEAKER_02: So, what did we see in terms of changes to materiality in the amended ELSRS?
11:34
SPEAKER_01: Well, my favorite one was that they have now allowed the application of materiality of information across the standards.
11:41
SPEAKER_01: I think we think this is critically important to making sure that the statements really contain information that's relevant to users and to the preparers.
11:50
SPEAKER_01: Before there were certain disclosure requirements that are required to be provided regardless of the outcome of the materiality process.
11:58
SPEAKER_01: We think that the application of materiality across the standards is a real improvement and will improve the quality of reporting as well.
12:05
SPEAKER_01: A couple other things that they've done in the materiality section.
12:09
SPEAKER_01: One is they've introduced what's called practical considerations for determining your impacts, risks, and opportunities.
12:15
SPEAKER_01: This is really to help companies streamline their processes, I would say.
12:21
SPEAKER_01: So under the ESRS, companies are required to perform certain components of their identification of material impacts, risks, and opportunities, disclosures around their materiality process.
12:33
SPEAKER_01: And I think under Wave One reporters, we heard a lot of companies say that this process was somewhat disconnected from other risk management processes that they had or due diligence processes, and that they had to develop this entire process to really meet the standards.
12:48
SPEAKER_01: I think there was a recognition that companies should use, leverage the processes that they have and the information that they're already gathering to identify their material IROs and have it be more integrated within the company overall.
13:01
SPEAKER_01: And so this practical considerations is, I think, trying to help make sure that companies understand that the intention is for companies to leverage existing information.
13:11
SPEAKER_01: If you think something's material, you don't go have to go through a whole big process to justify it.
13:15
SPEAKER_01: You can just acknowledge that it's material.
13:18
SPEAKER_01: Yeah.
13:18
SPEAKER_01: So I think those were really positive and hopefully we'll ease some of this process that the companies felt that they had to do that maybe they didn't feel was really value add.
13:28
SPEAKER_02: All right.
13:29
SPEAKER_02: Let's stick with then easing the reporting burden.
13:32
SPEAKER_02: And in addition to these changes that reduce the burden, there are actually now some specific reliefs included in the standard.
13:40
SPEAKER_02: So can you run through those reliefs and provide some perspective on them?
13:44
SPEAKER_01: Sure.
13:44
SPEAKER_01: One area where we've heard a lot of feedback was around acquisitions and dispositions, especially, you know, if a company did it late in the year, the ability to get the information to do this double materiality assessment and be able to get the information to report on the identified material impacts, risks, and opportunities could be really challenging for companies.
14:03
SPEAKER_01: So there's a new relief that's been introduced where for acquisitions, if a company makes an acquisition at any point during the year, they're able to defer the incorporation of that in the sustainability statement by one year.
14:17
SPEAKER_01: Also, if a company has had a disposition, then they are able to exclude the information around the sustainability-related impacts, risks, and opportunities beginning at the beginning of the year.
14:31
SPEAKER_01: Another relief that we saw introduced that we think is important is related to reporting of metrics.
14:38
SPEAKER_01: So we talked about this previously, where sometimes a company might have a specific subsidiary or a certain activity that really drives the impact risk or opportunity, but historically they were required to measure, let's say, water consumption for the entire organization, even if it was really driven by a manufacturing part of their business.
14:57
SPEAKER_01: Now the standards have clarified that you can report the metric related to the significant driver of the impact risk or opportunity, which I think is really positive.
15:06
SPEAKER_02: Yeah, so although we'll require companies to be precise and making sure they're properly defining what that impact risk or opportunity is.
15:13
SPEAKER_02: So I think it is a big help, but also will, you know, again, will require that additional refinement in the assessment.
15:20
SPEAKER_01: Agreed.
15:21
SPEAKER_01: And then a couple other things which are related is one is they've introduced the required use of reasonable and supportable information without undue cost or effort, which was a concept that is also in the IFRS sustainability disclosure standard.
15:36
SPEAKER_01: So enhances, we'll talk a little bit about interoperability later, but that does enhance interoperability, and we think is an important concept to be introduced, just given the our understanding of the challenges that entities face in gathering and reporting on this information.
15:51
SPEAKER_02: Okay, Diana, before you go on to the partial metrics, let me ask you a quick question on the I was gonna reasonable and supportable information without undue cost or effort.
16:03
SPEAKER_02: And you mentioned interoperability with ISSB, and we did see some similarity to the ISSB that uh FREG has proposed to limit the use of that uh relief.
16:15
SPEAKER_02: I'll use that term instead of the very long term.
16:18
SPEAKER_02: Right.
16:18
SPEAKER_02: And so that they've sp it appears to us that they're specifying areas where you can use it, and then you wouldn't otherwise be able to apply it.
16:26
SPEAKER_02: And in some ways, this reminds me of the original ESRS's immateriality of information that we could use at some places, but not others.
16:33
SPEAKER_02: And I think that was found to be a real limitation.
16:36
SPEAKER_02: So I know this is something we commented on or we are we will be commenting on in our comment letters.
16:42
SPEAKER_02: So can you just provide a little more perspective on that?
16:44
SPEAKER_01: Yeah, I think we think it to your point should be able to be applied across the standard.
16:48
SPEAKER_01: So if a company is unable to get the information without undue cost or effort, that they should be able to make certain other disclosures.
16:56
SPEAKER_01: But I think we think it's critically important that any time an entity applies this concept, that they do make specific disclosures.
17:04
SPEAKER_01: So they make disclosures around how they've tried to obtain the information, what progress they've made during the reporting period, the limitations, the information that is provided, information, you know, qualitative information about that and the limitations that exist.
17:19
SPEAKER_01: So we think it's an important concept, but we think that it's very important that it is paired with certain disclosures.
17:28
SPEAKER_02: Well, and I think, Diana, this is then leads into what you were starting to talk about with this partial metrics, because right now there is this provision that if you can obtain information from part of your business, but not the rest of the business, or maybe part of a metric, but not the whole metric, you can sort of disclose what you have, this partial metric, and then provide these additional qualitative disclosures.
17:50
SPEAKER_02: I know this is something we had a huge amount of debate about within PwC.
17:54
SPEAKER_02: Is this helpful?
17:55
SPEAKER_02: Is this not helpful?
17:55
SPEAKER_02: Is this valuable?
17:56
SPEAKER_02: Is it not?
17:57
SPEAKER_02: Right.
17:57
SPEAKER_02: So can you share some perspective on how we think about that and where we landed?
18:01
SPEAKER_01: Yeah.
18:02
SPEAKER_01: So I think to your point, there was a great amount of debate around this, around, I think there was a concern on one side that this could obscure material information or not provide relevant information to users if you're reporting about a very small amount, or even a potential for greenwashing if you're getting it from positive parts of your business that reflect positively in the metric, but not for others.
18:24
SPEAKER_01: So I think that where we landed was understanding that there are data limitations out there and there are challenges around obtaining this information.
18:32
SPEAKER_01: And so it's important that there's some way to set an objective boundary, reporting boundary.
18:39
SPEAKER_01: So maybe I'll give an example, might be the most helpful, is we've heard that there's a lot of challenges in reporting around substances of very high concern.
18:47
SPEAKER_01: Some of these substances, there's not currently a methodology where companies can even measure these substances.
18:54
SPEAKER_01: And so say your business uses 10 different substances of very high concern, but there are techniques for three of those.
19:00
SPEAKER_01: We think if you can set an objective boundary to say we're able to report these three, these seven, we're not able to report, this is why we're not able to report, that that information is meaningful to users, but it it it goes both paired with setting this objective boundary and providing these additional disclosures around how that's been set and what the limitations are in that reporting.
19:23
SPEAKER_02: Yeah, so you were saying basically you can't say I'm reporting these from some factories, but not others.
19:30
SPEAKER_02: Or, you know, I you need to have some way of saying I'm reporting them from, you know, again, these types, uh, these specific types of uh of chemicals.
19:42
SPEAKER_02: Or we had another example where there's some information that's reported by companies in the EU that's not reported by companies in other parts of the world.
19:50
SPEAKER_02: So if you're using something from your supply chain, and again, there's a very objective reason why you can only report it from part of your supply chain, but otherwise saying, Oh, I'm gonna pick some from this country and some from another country, I think that's where we start to run into.
20:04
SPEAKER_02: Yes.
20:05
SPEAKER_02: Okay, let's keep going and talk just more broadly about the reporting boundary.
20:10
SPEAKER_02: And there were definitely some very large questions on the reporting boundary that came up in the set one, right, or in the V1 implementation.
20:20
SPEAKER_02: So, what's been done in these amended ESRS to address some of that?
20:24
SPEAKER_01: One of the biggest questions that we heard, or parts where companies really just didn't know how to deal with it, was around leases and how should a lessee versus a lessor treat it.
20:34
SPEAKER_01: We dealt with a lot of different questions around that.
20:36
SPEAKER_01: So the ESRS has provided very clear guidance on how leases would be treated, which I think is helpful.
20:42
SPEAKER_01: So a lesssee would report the impacts, risks, or opportunities related to the leased asset as part of their own operations, whereas the less or would report any impacts, risks, or opportunities related to that leased asset as part of their value chain.
20:55
SPEAKER_01: So very clear guidance, which is really helpful.
20:58
SPEAKER_01: There still are a lot of other types of arrangements out there.
21:01
SPEAKER_01: So the ESRS says you follow your consolidated financial statements.
21:05
SPEAKER_01: There's still a lot of types of arrangements where it's hard to know what that really means and how the entity is involved with those different types of arrangements.
21:14
SPEAKER_01: You could come to different conclusions on whether they should report as part of their own operations or their value chain.
21:20
SPEAKER_01: So we still have comments around joint operations, is an area where there's a couple provisions, but a holistic approach we think would really be important.
21:30
SPEAKER_01: So I think the ESRS, it's been positive that they've addressed some of these.
21:33
SPEAKER_01: Lisa's was a big question.
21:35
SPEAKER_01: They they made um great progress in providing guidance on that.
21:39
SPEAKER_01: But there still are some types of arrangements where we need more clarity.
21:43
SPEAKER_02: All right.
21:43
SPEAKER_02: And I think probably some of our listeners probably have questions about GHG, but we'll get to that in a few minutes for later.
21:50
SPEAKER_02: Yeah.
21:50
SPEAKER_02: So then um just kind of continuing in order of the ESRSs and sticking to ESRS one and ESRS two, one of the things that was very interesting.
22:00
SPEAKER_02: In the exposure draft, is there was actually a question in the exposure draft itself, effectively, where they give two options of what companies should do for anticipated financial effects.
22:12
SPEAKER_02: And again, I think this was an area where they have stated they really want feedback because there's pros and cons of both of these.
22:19
SPEAKER_02: So can you share what was proposed and then some thoughts?
22:23
SPEAKER_01: Sure.
22:23
SPEAKER_01: For anticipated financial effects, this has been an area where companies have a lot of questions and find it really challenging, especially when you think about your impacts over impacts, risks, and opportunities.
22:34
SPEAKER_01: Well, it'd be really your risks and opportunities.
22:35
SPEAKER_01: You're risking your opportunities over the short, medium, and long term.
22:38
SPEAKER_01: And when you get into those longer-term time horizons, providing quantitative information about that.
22:43
SPEAKER_01: So there's two options.
22:45
SPEAKER_01: One is providing quantitative information about your risks and the impact on your financial position, your financial performance and your cash flows over the short, medium, and long term.
22:56
SPEAKER_01: If an entity is not able to provide quantitative information because it's either not separately identifiable or the measurement uncertainty would be too great to provide material information or relevant information to users, then an entity would provide qualitative disclosures about the financial impact of that risk or opportunity and additional disclosures around the limitations, why they were not able to provide quantitative information.
23:24
SPEAKER_01: The second option would be to provide qualitative information only, but have the option for the entity to provide quantitative information.
23:31
SPEAKER_01: I think we as a firm think that providing quantitative information is really important.
23:36
SPEAKER_01: We think that it enhances connectivity with the financial statements, you know, that are look where companies are having to make calculations when you're thinking about impairment analyses or thinking about the valuation of financial assets, where you're having to think about cash flows over a longer period of time.
23:52
SPEAKER_01: I think we think that there are techniques that are out there, whether that's scenario analysis.
23:57
SPEAKER_01: The standards also do introduce the ability for entities to provide a range versus a single data point.
24:03
SPEAKER_01: So I think some of these things that companies are concerned around, around uncertainty, can be addressed through some of these various ways.
24:10
SPEAKER_01: Obviously, also the narrative disclosure around the quantitative information is really important.
24:16
SPEAKER_01: I think we also feel that providing actual quantitative information about the impacts on the financial statements when you're thinking about your risks or opportunities helps provide credibility too to the sustainability statement around your policies and your the actions that you're taking to address these uh material IROs.
24:36
SPEAKER_01: And then I think the last point that I would make is the ISSB standards do are similar to option one, where you provide quantitative information unless these certain conditions are met, and then you provide qualitative information.
24:48
SPEAKER_01: So we think that it enhances alignment.
24:51
SPEAKER_01: We do think that the flow of the ISSB standards and how they talk about when you would provide quantitative versus qualitative information is clearer.
25:00
SPEAKER_01: And so we would encourage FRAG to more closely align with the language in the ISSB standards, but there is interoperability between option one and the IFRS sustainability disclosure standard.
25:13
SPEAKER_02: All right, that's a mouthful.
25:15
SPEAKER_02: So one other point maybe to make on these, and we're not going to spend much time today on the topical standards and changes, but I do think a simplification, a large simplification actually in this case, was previously each of the e-standards also had a requirement for anticipated financial effects.
25:31
SPEAKER_02: So you had this in ESRS two, and then supplemental requirements, and it's always very unclear how they work together.
25:38
SPEAKER_02: So four of those are gone.
25:40
SPEAKER_02: We do still have the requirement in ESRS E1, and there's a specific question on this requirement.
25:46
SPEAKER_02: So what's our perspective on this sort of remaining requirement in the topical standards?
25:52
SPEAKER_01: I think the same question remains, Heather.
25:54
SPEAKER_01: I think we had seen that this interaction between having required disclosures in ESRS2 and then incremental ones in the topical standards just creates confusion.
26:02
SPEAKER_01: So we again said two things, I would say.
26:05
SPEAKER_01: One is are the disclosures in E1, are those incremental to the disclosures required in ESRS two, or do those satisfy the disclosure requirements in ESRS two?
26:17
SPEAKER_01: And then I think the second point is these reliefs.
26:20
SPEAKER_01: So if you're not able to provide the quantitative information because it meets the conditions, are you able to therefore default to qualitative information?
26:28
SPEAKER_01: And it's not clear that that relief or that provision extends to E1.
26:35
SPEAKER_01: And so I think that needs to be clarified as well.
26:37
SPEAKER_02: Okay, very helpful.
26:38
SPEAKER_02: And I know we comment on that in our letter.
26:40
SPEAKER_02: So we I mentioned briefly G.
26:43
SPEAKER_02: And so I did want to come back to it.
26:44
SPEAKER_02: Now, we were talking about the reporting boundary, and FREG has clarified the reporting boundary for uh stress in E1 or for GHG, and I do think it's helpful from the point of view they've now said follow financial control so it matches the rest of the sustainability statement, and is a method that's permitted by the GHG protocol and so would be interoperable from that point of view.
27:08
SPEAKER_02: But then they do require a supplemental disclosure that would uh require disclosure of entities under operational control, basically if that information is meaningful.
27:17
SPEAKER_02: I mean, they provide more criteria.
27:19
SPEAKER_02: And so, any perspective to give on that?
27:22
SPEAKER_02: And then let's talk about some of the other um recommendations that we have.
27:25
SPEAKER_01: I think it was helpful that they selected one of the methods that was allowed by the GHD protocol.
27:31
SPEAKER_01: Previously, they had had what we called the additional approach, and I think it just did not allow for interoperability with the GHD protocol, therefore not also not interoperable with the IFRS disclosure standards.
27:45
SPEAKER_01: And so it created a lot of challenges that we saw.
27:47
SPEAKER_01: So I think ideally we would have liked to see that they allowed any of the reporting boundary options under the GHD protocol, but at least selecting one helps with interoperability.
28:00
SPEAKER_01: So I think a positive move.
28:02
SPEAKER_02: And I definitely think in this case, we even said in our May letter that if you're going to pick one, pick this one because there is then also alignment with the rest, the sustainability statement.
28:11
SPEAKER_02: And I do think that's something actually, if you go back to all of our comment letters over the years, we've had that connectivity with financial statements as a key point.
28:20
SPEAKER_02: So I think interesting from that perspective.
28:23
SPEAKER_01: And I think we continue to say that in this letter as well is that some of the disclosures related to connectivity of the financial statements were removed.
28:32
SPEAKER_01: It still maintains that connectivity with the financial statements is important.
28:36
SPEAKER_01: But I think we think a lot of those explicit disclosures, especially around data and assumptions and where they're not consistent between the sustainability statement and the financial statements, that that should be clearly disclosed in the sustainability statement.
28:48
SPEAKER_01: There's a few other disclosures too, but we do think that connectivity is really important.
28:52
SPEAKER_02: And to be clear, that's broadly that is not specific to G emissions.
28:57
SPEAKER_02: Um, in fact, that relates to a lot of other things, including the other discussion we were having on anticipative financial aspects.
29:03
SPEAKER_02: So that said, that I think overall we are supportive of the changes that have been made to the uh organizational boundary in ESRS E1.
29:13
SPEAKER_02: We still have some comments on GHG because this was one of the biggest points of confusion, or I shouldn't say confusion, difficulty for Wave One reporters.
29:23
SPEAKER_02: So, what are some of the recommendations that we're making now?
29:26
SPEAKER_01: Yeah, so in the original ESRS or ESRS V1, they used the term shall consider, shall consider the GHG protocol.
29:35
SPEAKER_01: They've maintained that shall consider language.
29:38
SPEAKER_01: This was in some of our initial comments.
29:40
SPEAKER_01: We maintain it.
29:40
SPEAKER_01: We think shall consider is confusing.
29:42
SPEAKER_01: We're not sure what that means, what companies are supposed to do.
29:46
SPEAKER_01: So we think it should be changed to shall apply so that it's clear that you follow the GHG protocol, unless there are provisions that are inconsistent with the ESRS.
29:56
SPEAKER_01: The ESRS would take precedent over the GHG protocol, but being clear where ESRS doesn't address it.
30:04
SPEAKER_01: And as we know, GHG reporting can be very complicated.
30:06
SPEAKER_01: And so there's a lot of questions.
30:08
SPEAKER_01: So having a robust framework is important.
30:11
SPEAKER_01: The second thing is minimum boundaries is a real challenge when you're talking about scope three.
30:15
SPEAKER_01: Scope three reporting is hard regardless, but at least having minimum boundaries to know how to report is really important.
30:23
SPEAKER_01: It also provides consistency across entities.
30:26
SPEAKER_01: So when you're comparing the emissions of scope three between different entities, you would understand what is being reported in that, what is being measured.
30:36
SPEAKER_01: So we think an explicit statement to follow for scope three, the minimum boundaries in the GHD protocol is an important provision that should be explicit in the standards.
30:47
SPEAKER_02: All right.
30:47
SPEAKER_02: So Diana, thank you for that on the minimum boundaries.
30:50
SPEAKER_02: And I do think that will be helpful, although our uh listeners slash viewers will need to check out my uh episode I did with Colin Powell that will be coming out in a few weeks about what the GHG protocol is proposing for the minimum boundaries, because maybe not quite as easy after that.
31:05
SPEAKER_02: But nonetheless, I think right now we are very supportive of pointing uh to the GHG protocol, with one exception.
31:12
SPEAKER_02: And so for category 15, uh the original EO stresses did have specific guidance for financial institutions, cause a huge amount of confusion and a number of questions just because the GEC protocol is so old and there has been some evolution.
31:28
SPEAKER_02: So I think we have a good recommendation for how they could fix that.
31:31
SPEAKER_02: So what are we recommending?
31:33
SPEAKER_01: Yeah, I think specifically for scope three, category 15, that we think that they could specify additional asset classes that could be included in the minimum boundary.
31:42
SPEAKER_01: So I think they can look to what acceptable methodologies are out there and determine that for now, recognizing that there could be changes needed over time.
31:50
SPEAKER_02: Yeah.
31:50
SPEAKER_02: And again, I think the other piece of all of this that we included previously, and I think is important, is if they accept our recommendation, they will also need to be able to have some mechanism in place to be monitoring the changes happening with the GHG protocol.
32:06
SPEAKER_02: All right, so that's a lot of detail.
32:08
SPEAKER_02: That was probably our only detailed item and truly detailed item we're going to talk about.
32:13
SPEAKER_02: I think for the topical standards, there's a lot of changes.
32:16
SPEAKER_02: And to the extent companies have specific questions, I would recommend they check them out.
32:20
SPEAKER_02: And as we said, look at the basis and these tables of what's changed, I think are very helpful.
32:25
SPEAKER_02: Right.
32:26
SPEAKER_02: I did want to take a step back and talk about some of the conceptual areas that have been addressed or that there could be questions about that I know that FRIG is asking about in the questionnaire and then that we have spent quite a lot of time on the as a firm.
32:43
SPEAKER_02: So first one is fair presentation.
32:45
SPEAKER_02: Yes.
32:46
SPEAKER_02: And they asked, you know, questions also in May around compliance for spare presentation, and we were supportive of a fair presentation then.
32:55
SPEAKER_01: So what is the proposal now?
32:57
SPEAKER_01: We continue to support fair presentation.
32:59
SPEAKER_01: We think it's a really important concept to include within the standards.
33:03
SPEAKER_01: It aligns with both that concept is in financial reporting.
33:06
SPEAKER_01: The ISSB standards also include the concept that it is a fair presentation framework.
33:12
SPEAKER_01: So we think it's important.
33:14
SPEAKER_01: We think that a fair presentation will require an entity to provide material information that's necessary for a complete, neutral, and accurate depiction of its material impacts, risks, and opportunities, which we think is really important.
33:28
SPEAKER_01: That's the whole purpose of the sustainability statement.
33:30
SPEAKER_01: So we think it enhances the quality of reporting as well as potentially provides a more complete view of the entity's sustainability matters.
33:40
SPEAKER_01: So we've been very supportive of it.
33:42
SPEAKER_01: I think the one caveat that we have is as with financial reporting, it's management is responsible for the sustainability statement, just as they're responsible for the financial statement.
33:52
SPEAKER_01: So I think having management make an explicit statement that the report is prepared on a fair presentation basis is important.
34:00
SPEAKER_01: So that is one recommendation that we've made, as well as providing a little bit more clarity around what fair presentation means.
34:07
SPEAKER_01: The ISSB standards include some additional language that we think is really helpful in understanding the concept of fair presentation.
34:15
SPEAKER_01: So we would encourage FRAG to mirror that information.
34:19
SPEAKER_02: Yes, and I realize I don't think I was clear in my question that they are proposing to go to a fair presentation to say that this is a fair presentation framework.
34:28
SPEAKER_02: So that's context for what Diana just said.
34:31
SPEAKER_02: So another concept that there's been a lot of discussion on, and I think some debate in some ways is about interoperability.
34:40
SPEAKER_02: Um, and specifically interoperability with the ISSB standards.
34:45
SPEAKER_02: And this was one of the pillars that came from the European Commission.
34:48
SPEAKER_02: It's actually in the original uh CSRD as well to be interoperable to the extent possible.
34:55
SPEAKER_02: And so I do think there's been a focus on where are they being interoperable and where are they actually going to waive from interoperability.
35:02
SPEAKER_02: And so, what's our perspective on the changes that have been made and how this has um it now aligns?
35:10
SPEAKER_01: Yeah, and I think I would just start by saying overall we're supportive of interoperability.
35:14
SPEAKER_01: But I think the caveat to that is we do acknowledge that, especially coming out of wave one, there was a lot of learnings of challenges that companies had where the standards were really challenging to apply and additional guidance was needed.
35:26
SPEAKER_01: And some of those were in areas where there was interoperability.
35:31
SPEAKER_01: And so FRAG recognizing the need for simplification and for the ease of application of the standards did make changes in some of these areas.
35:40
SPEAKER_01: I think we think that those are important to that simplification is a really important goal.
35:46
SPEAKER_01: And I think you touched on this earlier, where sustainability reporting is in its evolution, that making it easier for companies to adopt, making it easier for them to apply, making the the requirements clear is really critical to help advance sustainability reporting and with still high quality reports.
36:04
SPEAKER_01: Yes.
36:04
SPEAKER_01: That's a huge caveat.
36:05
SPEAKER_01: Yes, yeah.
36:06
SPEAKER_01: Um, and so I think there was a couple of places where we did see it move away from interoperability.
36:11
SPEAKER_01: We still think those are positive.
36:13
SPEAKER_01: One great example of that is leases that we talked about earlier, that that was a real area where clarification was needed.
36:19
SPEAKER_01: And FRAG provided that.
36:20
SPEAKER_01: And that's not in the ISSB standards, but we think that potentially could be considered.
36:25
SPEAKER_01: So we're supportive of interoperability overall, but recognizing that there's also a need for simplification clarity while maintaining high-quality reporting.
36:36
SPEAKER_02: Yeah, and I think overall as well, I would say that we think FREG made a large steps towards interoperability.
36:45
SPEAKER_02: And I think in particular, one of the challenges we had in writing our guidance, I know companies have had as they thought about maybe applying both the ISSP standards and ESRS, is that there are many places where similar words were used to describe what we think were intended to be the same thing.
37:04
SPEAKER_02: But sometimes that could result in differences.
37:07
SPEAKER_02: And so we did see a lot more alignment of language.
37:10
SPEAKER_02: And you've already mentioned there's a few places that were recommending that additional language be picked up from the ISSB.
37:16
SPEAKER_02: So I think maybe summarized, I think we could say that we are supportive of the changes made.
37:22
SPEAKER_02: We think FRAG made a lot of changes in a positive direction, but we also think the cases where they went, I'll say further than the ISSB, we are supportive given the circumstances.
37:34
SPEAKER_02: That's a great summary.
37:35
SPEAKER_02: Thank you.
37:36
SPEAKER_02: Uh I almost want to end on that note, but I do have a couple more questions for you.
37:41
SPEAKER_02: So as companies look ahead, well, preparers, users, anyone who really is interested in this process, what do we expect to happen next?
37:52
SPEAKER_01: Well, I think so.
37:53
SPEAKER_01: The next big deliverable is going to be the FREG's gonna take all this feedback that they're getting over the past 60 days, which is great that the comment period was extended.
38:02
SPEAKER_01: They'll make amendments to the ESRS and then they will deliver a finalized package of amended ESRS to the European Commission by November 30th.
38:11
SPEAKER_01: I think that is a good point in the process.
38:14
SPEAKER_01: I will caveat there could be additional changes by the European Commission.
38:18
SPEAKER_01: We saw that with ESRS V1 that they made changes, some pretty significant.
38:23
SPEAKER_01: So we can't anticipate that there could be additional changes, but I think it will give a good starting point for companies to start evaluating what is reporting under ESRS going forward gonna look like.
38:34
SPEAKER_01: And so companies can start to respond by any changes they want to make to their DMA, starting to think about what are their material impacts, risks, and opportunities, what's the information I'm gonna be need to gather.
38:47
SPEAKER_01: So I think it at least will be a point from which companies can start to move forward.
38:52
SPEAKER_02: Yeah, I mean, I think one thing on the process that we understand from a due process perspective, the European Commission will also have a comment period.
39:00
SPEAKER_02: Yes.
39:01
SPEAKER_02: So for companies that maybe didn't submit comments by the September 29th deadline, they they may have another opportunity.
39:08
SPEAKER_02: Uh, but in addition, I think it's very important to note for Wave One reporters, ESRS V1 is still applicable for 2025.
39:18
SPEAKER_02: Yes.
39:18
SPEAKER_02: I think the European Commission or maybe one of the commissioners has said that their goal is to make sure that companies would be able to apply the V2 for 2026.
39:29
SPEAKER_02: But again, if you're a current reporter, yes, think about the points Diana said.
39:33
SPEAKER_02: But also make sure you're you're ready for this year end.
39:37
SPEAKER_02: Um I think obviously for companies maybe that haven't started reporting, then they can really focus on some of these.
39:42
SPEAKER_01: Yes, I should have made the distinction between the wave one.
39:44
SPEAKER_01: And I think the one thing is the wave one companies do have the quick fix, which is helpful in making sure that the provisions that were allowed, those transitional provisions, are extended for another two years.
39:56
SPEAKER_01: So no new companies, I always like to say no new companies are coming in and no new requirements, at least during these two years until we f see the finalized set of the amended ESRS.
40:06
SPEAKER_02: Yes, I guess unless you went public during this period or otherwise went into the wave one criteria.
40:13
SPEAKER_02: But yes, I think overall completely agree with that summary.
40:17
SPEAKER_02: And then Diana, maybe last question for you is we, you know, we talked about sort of this process, we talked about what companies should be doing.
40:25
SPEAKER_02: But as companies then are reflecting on these changes and what they may mean and what this may mean from their sustainability statement, any sort of final words of wisdom that you would think about as if you were in the position of, you know, you're the sustainability controller of how you're gonna talk about this within your organization?
40:45
SPEAKER_01: Yeah, I think it it comes back to the goal is really for sustainability to be integrated into your risk management.
40:52
SPEAKER_01: And part of your business strategy is how are you thinking about these impacts, risks, and opportunities and how are they changing your business strategy over the short, medium, and long term?
41:01
SPEAKER_01: And hopefully that's not changing on what the reporting.
41:05
SPEAKER_01: I think some of those requirements were very prescriptive.
41:07
SPEAKER_01: So companies felt that they had to provide additional information that maybe wasn't meaningful.
41:12
SPEAKER_01: But I think now, hopefully, with the streamline that you can really focus on how do you want to tell your story, how do you want to communicate about how sustainability is impacting your business and how you're responding to it.
41:24
SPEAKER_01: And so I think if you stay with that, is really the purpose of this, is a really a communication tool, is um will be helpful to guide this journey forward.
41:35
SPEAKER_02: I think that's an excellent summary.
41:37
SPEAKER_02: Thank you very much.
41:38
SPEAKER_02: And thank you to all of our listeners uh for joining us today.
41:42
SPEAKER_02: As always, we appreciate it.
41:44
SPEAKER_02: And please stay tuned for next week's episode, continuing our series.
41:48
SPEAKER_02: But in addition, we are expecting more developments on the content proposal in October.
41:54
SPEAKER_02: So also look for a specific update from me and Diana as some of that progresses.
41:58
SPEAKER_02: So again, Diana, thank you.
42:00
SPEAKER_02: And thank you to our listeners.
42:01
SPEAKER_02: Uh, to make sure you never miss any of our episodes, please subscribe on your favorite channel and or uh please subscribe to our newsletter at viewpoint.pwc.com.
42:12
SPEAKER_02: Thanks again for joining us today.
42:14
SPEAKER_03: That's our show for today.
42:16
SPEAKER_03: Tune in next week for more fresh episodes so that you never miss any of our audio content.
42:22
SPEAKER_03: Follow the PWC Accounting Podcast wherever you listen to your podcasts.
42:27
SPEAKER_03: And to stay up to date on all our latest accounting and reporting news, sign up for our newsletter at viewpoint.pwc.com.
42:36
SPEAKER_03: From Thought Leadership at PWC, I'm Heather Horn.
42:41
SPEAKER_03: Thanks for tuning in.
42:52
SPEAKER_00: PwC refers to the U.S.
42:54
SPEAKER_00: member firm or one of its subsidiaries or affiliates, and they sometimes refer to the PWC network.
43:00
SPEAKER_00: Each member firm is a separate legal entity.
43:03
SPEAKER_00: Please see www.pwc.com slash structure for further details.
43:09
SPEAKER_00: This podcast is for general information purposes only and should not be used as a substitute for consultation with professional advisors, including accountants and lawyers.