When it comes to sustainability standards, the needs of mid-market businesses must be taken into account, said Grant Thornton International recently.
According to the firm, it has submitted two comment letters to the International Sustainability Standards Board (ISSB) to urge them to consider the needs of small and medium-sized entities (SMEs) when setting new standards.
The ISSB, formed by the International Financial Reporting Standards (IFRS) Foundation after last year’s UN climate change conference, COP26, published two exposure drafts (EDs) in March 2022 for comment — one on general requirements and a second on climate disclosures.
“While we support the ISSB’s prioritisation of climate over other sustainability topics and the use of the Task Force on Climate-Related Financial Disclosures (TCFD) framework in the proposed standard for climate-related disclosures, we believe there are some serious flaws in both EDs where improvement could be made after talking to experts around our global network,” said Trent Gazzaway, global leader service lines & industries, GTIL.
Phasing in setting sustainability standards needed to support mid-market compliance
Grant Thornton said it has observed anxiety among its mid-market clients surrounding the implementation of the proposed standards in the general requirements ED.
The Grant Thornton International Business Report 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, the firm noted.
“We’re concerned that many mid-market companies, who do not have the same resources as larger companies, may crush under the weight of these changes in such a short period of time , especially as it intends to publish standards on environmental, social, and governance areas, in addition to these two EDs on general requirements and climate disclosures,” Gassaway pointed out.
Setting the bar too high is likely to affect the ability of the mid-market to comply, he said.
“We believe that the ISSB should phase in the standards, particularly in areas which are complex, such as metrics and targets,” he noted.
“They should also prioritise overall significant risks and opportunities, by implementing climate-related standards first, and then other environmental, social and governance standards later,” he advised.
Another area of concern for Grant Thornton is the lack of consistency between the use of the terms “significant” and “material”, across both EDs,
“Simply put, we would like to see “significant’ replaced by “material” throughout the general requirements ED, because our view is the concept of materiality is better understood, particularly by preparers and those charged with governance,” Grant Thornton pointed out.
The firm said it believes that the use of the term “significant” is confusing because businesses do not understand the disclosure objectives of the standard.
“We think the board needs to clarify its intention of the proposed standards in terms of what businesses need to report. This may or may not result in the word “significant” being removed,” Grant Thornton advised.
“For example, our current reading of the proposed IFRS S1 and IFRS S2, is that entities would be required to complete two climate-related risk and opportunity assessments — one for each standard, which presumably is not the intention of the ISSB,” the firm added.
Global alignment is key
While Grant Thornton said it support the ISSB’s ‘building block’ approach and intention that these two standards form a baseline, it believes much more work must be done to align them with standards proposed by other standard setters so that jurisdictions can build on them as envisaged by the ISSB.