First-of-their-kind European Union standards for mandatory corporate sustainability reporting take effect in 2024, though it remains unclear how they will mesh with separate international standards and whether countries outside of the bloc will follow a similar approach.

The European Union has passed into law requirements for companies to report on the damage they cause to the world, as well as the financial risks they face from a changing environment. The rules apply to big EU companies and any foreign companies with a sizeable presence in the region.

The rules are being introduced in phases over the next few years, applying to the biggest EU companies next year. Foreign companies with EU revenues of €150 million ($164 million) or more must use them starting in fiscal year 2028.

Disclosure guidelines from the International Sustainability Standards Board also take effect in January 2024. But beyond the EU, so far only Brazil has announced concrete plans for businesses to meet the ISSB standards. Other countries including the UK, Australia, and Japan are considering incorporating these guidelines into national regulatory frameworks, though they haven’t committed yet.

While some companies already report sustainability information, the goal of the international standards is to make disclosures more consistent so that investors interested in the data can more easily make comparisons. The danger is that as countries develop their own national reporting requirements, multinational companies may be forced into issuing several different sustainability reports to satisfy regulators in the various places they operate.

“We hope not,” said Patrick de Cambourg, chair of the sustainability reporting board at the European Financial Reporting Advisory Group, now known as EFRAG. This group, which wrote the European sustainability reporting rules, is the European Commission’s accounting adviser.

“EFRAG is holding regular talks with non-EU colleagues who are developing their own reporting standards to foster convergence,” de Cambourg said. Wall Street’s top regulator, for example, is writing climate reporting standards for US companies to follow.

European companies will not have to report separately under ISSB standards, according to de Cambourg. “Companies using European Sustainability Reporting Standards will incorporate in their report the ISSB disclosure requirements,” he said. The global standards are aimed more narrowly at investors and tell companies to report on how their value could be hurt by sustainability risks.

However, the ISSB itself has cast some doubt over whether EU reporting will meet its requirements, raising the risk of companies having to double report along each of the standards.

Reporting Scope

Companies subject to the European rules must report on most aspects of environmental, social, and governance issues. That includes topics such as greenhouse gas emissions and biodiversity.

Europe’s disclosure standards already cover many areas the ISSB has yet to tackle. The international board’s first two standards only cover climate and general sustainability reporting. The board intends to write new rules covering the full range of ESG issues in time.

ISSB chair Emmanuel Faber was sharply critical of the EU’s broader approach in an October newspaper article, calling it “ambitious.” And in a call on Dec. 8, ISSB vice chair Sue Lloyd did not confirm that using European reporting standards would automatically meet ISSB rules too.

Lloyd denied that there was disagreement between the EU and the ISSB, however. “We’re frequently talking about interoperability,” she said.

Sustainability reporting rules from the ISSB and EU are largely comparable, Lloyd said, but there was a concern that the EU’s wider reporting requirements could make it tricky to spot ISSB disclosures within sustainability reports.

The two standard-setters are looking for ways to allow investors to pluck out ISSB disclosures from EU reporting, Lloyd said. One possibility would be digital tagging, so that information required by the global sustainability board could be highlighted, allowing investors to compare companies globally.

“We’re on the same side,” said EFRAG’s de Cambourg. “Europe supports the adoption or use of the global baseline.”

Phased Approach

Lloyd said that the ISSB is working with countries and companies to help others besides Brazil take up the new disclosure standards, which she pointed out were only published in June. She also said that there would be a phased approach, with less onerous initial requirements for less experienced companies and countries.

What remains to be seen is how many countries will require ISSB reporting, rather than following the EU’s lead in drawing up national rules designed to incorporate the global board’s requirements, at least to some extent.

The UK government has said that it intends to recommend companies use ISSB reporting standards if they are approved for national use, although it hasn’t confirmed whether disclosures will be mandatory. UK firms will not have to follow European rules now that the country has left the EU.

Additional countries such as Japan and Australia are developing their own national reporting standards, which could fold in the ISSB’s rules.

Japanese companies must publish sustainability reports from the fiscal year that ended March 31, 2023. The country’s standard setter has published its own draft climate and general sustainability rules, which are “in line” with the ISSB’s approach, the Sustainability Standards Board of Japan said in an October email.

Japanese companies already have to report on climate issues using a set of voluntary guidelines from the Task Force on Climate-Related Financial Disclosures that have been rolled into ISSB requirements. (Michael Bloomberg was chair of the Task Force on Climate-related Financial Disclosures. Bloomberg Law is operated by entities controlled by Michael Bloomberg.)

Australia is developing its own rules too, and “pursuing a policy of alignment with the ISSB,” Australian Accounting Standards Board Chairman Keith Kendall said by email in September.

Global Spread

Other countries are looking to follow the EU’s lead in developing broader reporting requirements, according to Carol Adams, a Durham University accounting professor who chairs the Global Reporting Initiative’s rulemaking board.

GRI’s impact reporting rules underpin the EU’s approach of making companies report on the damage they do to the world, in contrast to the ISSB’s narrower financial approach. The GRI disclosure requirements are used by around 10,000 organizations worldwide.

In addition to the European rules, “there are now mandatory requirements aligned with GRI Standards” in India, Colombia, and several other countries, Adams said.

The EU’s approach to corporate reporting requirements can carry weight internationally. The bloc‘s previous use of financial reporting rules from the sustainability board’s sister organization, the International Accounting Standards Board, helped spur their adoption by more than 140 jurisdictions globally.

While international accounting standards can take a decade or more to finalize, the ISSB’s sustainability standards were developed relatively quickly. The board was formed in late 2021 and it published its first standards in June 2023.

A challenge for the global board going forward will be broadening its work to cover more disclosure areas, such as biodiversity.

“As with the existing standards, we’ll look to build on things that are already out there,” ISSB’s Lloyd said. One of the models the sustainability board will look at is EU reporting, she said.

—With assistance by Kazuhiko Shimizu and Deborah Nesbitt