Global asset managers are concerned that the European Union’s regime for corporate sustainability reporting does not fully match their needs and that it could risk making Europe less attractive for international investors as the rules remain to be aligned with an alternative international approach that is gaining traction in international accounting discussions in the IFRS community.
In an interview, Amanda Young, chief sustainability officer at UK-based asset management firm abrdn, which holds some 552 billion euro in assets, made a strong plea for an international, global framework for corporate sustainability reporting and expressed her concern that a mix of reporting standards may increase the greenwashing risks.
“The corporate sustainability reporting directive was set up to mainly achieve EU political goals for changing corporate behaviour. It was not set up for asset management,” Young told Investment Officer. “They are using that as an excuse.”
CSRD in competition with ISSB
EU representatives, led by the French presidency of the European Council, last month reached a political agreement on new sustainability reporting standards for European companies that are due to enter into force from 2025. The EU framework, which is currently open for consultation, has been developed in parallel with a similar global initiative known as the International Sustainability Standards Board, or ISSB.
The ISSB is being discussed in the International Accounting Standards Board, which also determines the widely used IFRS accounting standards. The ISSB is developed specifically for global investors and seeks to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.
“I would argue that the ISSB is better suited to asset managers,” said Young. “What I would like to see is how the ISSB, the international sustainability standards board, ultimately comes together with something like the CSRD because the ISSB was set up to serve investors, to give them data, consistent data so that they could think about implementing that in their portfolios.”
EU initiative ‘politically driven’
Compared to the EU, Young said, the ISSB is better placed to consider the needs of investors that invest across the globe, also in companies that are not subject to EU reporting requirements.
“The commitments behind the CSRD have political drivers because we want to see change in corporate behaviour. There is a subtle shift between what politicians want and what investors need,” she said. CSRD “was not set up for investors, right? They have used investors to say: your corporate reporting isn’t good enough. Absolutely ticks the box, but is that right?”
In Young’s view, the EU is competing with the ISSB initiative. “They are all competing to be the best,” she said.
The sustainability lead at abrdn said she supports the basic idea of getting companies to adhere to timelines and new reporting standards, but underlines the importance of a common set of metrics so that companies, and their investors, do not have to consider different reporting standards, and a fragmented reporting environment.
“What I’m slightly concerned about is that we then end up with these different acronyms, competing to try and achieve the same outcome: really good company reporting, but with different motivations.”
Principles-based vs rules-based
“I like precisely the ISSB framework because it is risk based, sector based, principles based,” Young said, referring to the EU’s rules-based approach . “They’re not trying to have a one-size-fits-all approach. As an investor you want to focus on the things that are material to the business.”
The UK’s financial regulator FCA also has expressed its support for the ISSB standards. “It’s going to be slower than the CSRD because it doesn’t have the same sort of time frames. And it’s only it’s quite focused on certain areas at the moment, climate change being one of the core areas. What I like about it is that it’s principles based. What worries me about things that are too stringent in the rules based, you get a box-ticking approach where people say like ‘I’ll just do the minimum I need to do in order to get to that’, rather than thinking about this big part of a strategic vision for a future direction.”
Asked if she sees a risk of misalignment between the UK and Europe and between Europe and the rest of the world, Young said collaboration between all actors involved in these discussions should be promoted in order to prevent this
“I really hope not. It’s why we should be promoting collaboration, bringing things together, stop competing in this landscape for, you know, ultimately money. Without it all of this ends up with a few people becoming very wealthy because they are able to provide solutions to companies. Actually standardisation is massively supportable because it does provide us with much easier frameworks.”