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Extra-financial standards : after 2022 you will nevers count as before

Olivier ABULI, advice and analyses consultant

May 24, 2022

It is a systemic revolution that will become compulsory on financial, fiduciary and insurance activities : at the end of March, the Wall Street regulator validated the opening of the consultation of a document intended to make the publishing of an annual standardized report about their exposure to climate risk mandatory for listed companies.

This announcement by the SEC came only a few days after the European Parliament adopted the draft of a new directive regarding the publication of a sustainability reporting (CSRD) ! The Commission had entrusted the elaboration of this directive to the European Financial Reporting Advisory Group (EFRAG) as part of a package that includes the taxonomy and aims to direct financial flows towards sustainable companies and technologies.

According to Arnaud Bergero, the Director of Operations of Goodwill-Management, who was interviewed by the Web TV, the time of declarations of intent and the narrative about the Corporate Social and Environmental Responsibility (CSR) of organizations is now over. This is what he sums up with the following expression : « ecological reporting will stop telling stories and start counting in earnest ».

2024 as a focal point

Brussels intends to negotiate a final law as soon as possible. The Commission's objective is to have it adapted to national laws by December 1st, 2022, so that it will be in force in the 2023 fiscal year.

On the other side of the Atlantic Ocean, the SEC's project deals with the reporting of greenhouse gas emissions according to the Kyoto Protocol Scopes 1 and 2 being certified by an independent service provider between 2024 and 2026.

Different contexts, cultures and perimeters

As it is constrained by its strict regulatory role and faced with political and economic oppositions, the SEC denies any ecological significance of its project... But it claims its legitimacy to intervene on a risk that could impact entire sectors and markets, putting forward its core mandate which consists in enlightening, informing and protecting investors. This is why it plans to require a report about the supervision and strategic analysis of the short, medium and long term climate risk consequences on the business model and financial results of companies, beyond the measurement of scopes 1 and 2.

The European Union, as for it, is acting as a regional power, with clear objectives to take the lead in addressing the challenges of decarbonization and energy-climate transitions. The overhaul of the EU's non-financial reporting directive will increase the number of companies subject to reporting requirements. As it is based on the selected criteria (i.e. exceeding two out of three thresholds : €20 million in balance sheet/ €40 million in sales/ more than 250 employees), the CSRD will apply to some 50,000 companies. The previous version concerned only 11,000 companies. At the same time, a complementary delegated act will force investment and insurance advisors to take into account the risks of sustainability impacts in the design of their products and their commercial practices.
But converging objectives...

Some analyses summarize the thus established situation thus as being merely the beginnings of a « battle of standards ». We should not obviously be naive and it seems quite logical that every major actor should try to preserve its interests by influencing the structure and timing of normative frameworks that will sooner or later be renegotiated and globalized.

Nevertheless, we think that the simultaneous approaches of the SEC and the EU offer similarities and a common foundation stone :

- the will to impose consistency, coherence and comparability in the reported data... in short, to move towards standardization ;
- on this basis, the objective consists in reassuring the markets by securing and directing investments to ensure the necessary capital is flowing for transformations ;
- backed by international reference protocols, existing or to be built : Kyoto for the SEC, the EU's commitment to « constructively cooperate with the main international initiatives and align itself as much as possible with them, while taking European specificities into account » ;
- in the end, the fact of betting on a powerful « flowing down » effect on economic actors of all sizes through the mechanical effect of acculturation and adaptation of value chains to the increased requirements on behalf of the most important clients.

Triple bottom line accounting and double materiality

An hybridization of standards and criteria for assessing company performance will soon therefore become the norm in the two main global markets. Accounting, which is used to count but also to account for all company activities, can no longer be restricted to reference systems inherited from the Industrial Revolution when socio-economic models are undergoing massive changes. As it has been the subject of methodological research over the past thirty years, triple bottom line accounting (financial/ environmental/ social) aims to reflect a « double materiality » by balancing the respective weights of financial and non-financial reporting.

Michel Frédeau, the Managing Director of the Boston Consulting Group says « Don't wait any longer, any delay will mean defeat for everyone ». Moreover, this « dual materiality » approach is not an insurmountable step.

At, simplicity and efficiency in supporting transformations are our DNA. We stick to the spirit of the common sense definition proposed in 2020 by the CSR Reporting website : « it is (simply) a study of the environmental impacts on the company and of the company on its environment ». solutions to decarbonise-(re)locate-digitise.

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