ESMA, EBA reiterate that IFRSs do not hamper sustainable investment behaviour

  • ESMA (European Securities and Markets Authority) (dark gray) Image
  • European Union Image

17 Jul 2020

In April 2020, the European Commission (EC) published a consultation on a renewed sustainable finance strategy and in that context tried to reopen the debate on whether IFRS rules hinder sustainable investment behaviour despite contrary findings from the Fitness Check on the EU framework for public reporting by companies in 2018, corresponding analyses by the European Securities and Markets Authority (ESMA) and the European Financial Reporting Advisory Group (EFRAG) following the Fitness Check, and the European Banking Authority (EBA) report on undue short-term pressure from the financial sector on corporations.

Question 16 of the EC consultation had asked: "Do you see any further areas in existing financial accounting rules (based on the IFRS framework) which may hamper the adequate and timely recognition and consistent measurement of climate and environmental risks?" Possible answers to choose from had included "impairment and depreciation", "provisions", "contingent liabilities" and "other".

In its response, ESMA writes:

ESMA does not think that there is evidence that IFRS Standards hamper the adequate and timely recognition and consistent measurement of climate and environmental risks. As discussed in ESMA’s report on undue pressures on corporation (ESMA32-22-762), ESMA believes that the primary objective of endorsed accounting standards is and should continue to be to promote transparency, which is the approach which is ultimately the most beneficial for the performance of capital markets, including their capacity to support sustainable and long-term investments.

While climate-change risks and other environmental risks are not covered explicitly by IFRS Standards, the Standards do address issues that relate to them and require companies to consider and disclose their impact, whenever those are material and relevant to the amounts recognised in the financial statements.

In fact when preparing IFRS financial statements, companies need to consider whether emerging risks, including climate and environmental risks, currently or potentially affect the amounts and disclosures reported, and what information about the effect of such emerging risks on the assumptions made in preparing the financial statement is material and thus should be disclosed to users.

On the other hand, comments about the company’s overall approach to climate-related and other business risks do not belong inside the financial statements and should rather be disclosed in the management report. The transparency provided by IFRS Standards therefore constitutes and should continue to constitute only one ofthe pieces of the complex jigsaw, which need to encompass also high quality ESG disclosures.

Similarly, the EBA response to the consultation states:

The EBA report (and relevant studies mentioned in the report) found no evidence to suggest that the fair value measurement and ECL measurement approach under IFRS would result in distortions of the investment process triggeringundue short-term pressures in financial markets. There is no evidence yet on the consequences of the implementation of IFRS 9 on long-term investment practices, yet it is important to continue assessing its impact and monitor its implementation.

In addition, the IASB has confirmed that IFRS Standards (implicitly) cover climate change risks and other emerging risks (if material and relevant for the financial statements) in “IFRS Standards and climate-related disclosures” (November 2019).

Deloitte supports this stance. In our comment letter, we state: "Existing financial accounting requirements do not in our view hamper the adequate and timely consideration of climate and environmental risks in the recognition and measurement of assets and liabilities of entities in their financial statements."

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