EFRAG’s SRB Vice Chair Professor Kerstin Lopatta Discusses Sustainability Reporting – Forbes

I was introduced to Professor Kerstin Lopatta through some mutual friends. Our shared interest in sustainability reporting was the reason for the introduction. More particularly, at the time Professor Lopatta was the Acting Chair for the European Financial Reporting Advisory Group (EFRAG). I had been following its work and even wrote a not-all-that flattering article titled “The Credibility Of EFRAG’s Sustainability Reporting Standards Is At Risk.” Our friend thought it would be useful for me to better understand EFRAG’s work and hence the introduction.
Despite my temerity as an American commenting on an important European initiative, Professor Lopatta was gracious enough to be willing to talk to me. We kept in touch a bit. Once EFRAG issued its standards I asked her if she’d be willing to do an interview with me. Since she is better bred and has better manners than me, she kindly agreed.
Professor Kerstin Lopatta
Eccles: Kerstin, thanks for taking the time to talk to me while you are still in the middle of the term. Out of interest, what are you teaching right now?
Lopatta: Thank you Bob for having this interview with me. I really appreciate the opportunity to talk about sustainability issues. I am teaching two classes, corporate accounting and sustainability reporting, and I also teach a seminar that is called sustainable island.
Eccles: We have a lot to talk about, but before getting into sustainability reporting, can you tell me something about your childhood and your education?
Lopatta: Sure, I am happy to do so. I grew up in the countryside in the north of Germany. My sustainability awareness started early in my childhood. My parents and I lived on a kind of self-sustaining, small organically operated farm which means we produced plenty of our own food. We also had quite a few farm animals that were part of my daily life. I participated in sports such as horseback riding and gymnastics almost every day. My mom was a chef, and my dad was a professor of mechanical engineering. I went to public schools in Germany, and I studied economics at the University of Hanover.
Eccles: Why did you pick economics for your studies?
Lopatta: Well after high school, I did not really know what to study. I had an interest in sports, animals, and math. I discussed what to study with my parents; they suggested economics and veterinary medicine. I gave economics a try and I continue to take part in sports and work with animals in my spare time.
Eccles: What did you do after you graduated?
Lopatta: I contemplated applying for a Ph.D., but I wanted to experience how accounting and auditing worked in the real world. So, I went to work for Deloitte as an audit assistant for about four years. After that work experience, I decided to apply for a Ph.D. at the University of Frankfurt/Main and, luckily, I was accepted, and I graduated from that school.
Eccles: Why did you make the same mistake I did and became an academic?
Lopatta: Haha, Bob, you are funny! I think it was one of the best decisions of my life. I always wanted to be an academic because I am curious about complex topics. I believe that I was offered the Acting Chair position on the Sustainability Reporting Board (SRB) at the European Financial Reporting Advisory Group (EFRAG) because of my academic background and my real-world experience. This combined experience is also one of the reasons why I am serving as a non-executive director on two corporate boards, as a financial and sustainability expert.
Eccles: This all makes sense but as an academic, I can’t help myself from asking you this. What was the topic of your dissertation and what was your early research about?
Cover of Professor Kerstin Lopatta’s Doctoral Dissertation
Lopatta: The topic of my dissertation was about goodwill accounting under international accounting standards, and it was about 250 pages long. My early research started me on the path of empirical accounting topics. I focused on insider trading, corporate governance issues and sustainability. For example one topic I investigated was ESG performance and board gender diversity.
Eccles: Goodwill accounting, huh? That’s hard core financial reporting research! And 250 pages, no less. The academic competitive juices in me force me to boast that my doctoral dissertation on the construction industry was longer than that. So was my first book, “The Transfer Pricing Problem: A Theory for Practice,” which was 372 pages long. As you can see, even though I’m not a trained accountant I’ve been interested in your subject for many years. Anyway, what did you do after getting your Ph.D.?
Lopatta: Before I answer your question, a 372 page book suggests to me that you never really nailed the answer! But to answer your question, in order to have the opportunity to do more research, I thought I might need to connect with people who are internationally experienced and knowledgeable. I talked with Professor Christian Leuz, who is now at Chicago Booth. He explained to me how research is conducted internationally, and he suggested that I gain international experience.
I followed his advice and, while I was an assistant professor at the Free University of Berlin, I went to the University of Iowa where I took Ph.D. classes with Professor Dan Collins. When I returned to Berlin, I met Professor David Yermack. He invited me to New York University Stern School of Business, and I took him up on his offer. At NYU I took Ph.D. classes with Professor Eli Bartov, and we became good friends. I am still in contact with him. He connected me years later with Professor Jeong-Bon Kim from City University of Hong Kong where I have been a visiting professor since 2015.
Logo of City University of Hong Kong
Eccles: Kerstin, I know you are currently the Vice Chair of the Sustainability Reporting Board at EFRAG, and I want to talk about that, but first tell me what is going on in Europe in terms of sustainability reporting.
Lopatta: A lot, but I will only highlight three important sets of regulations over here. First, the Sustainable Finance Disclosure Regulation (SFDR) is a European regulation introduced to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants. For example, ESG funds must be classified based on defined criteria as either light green (Article 8) or dark green (Article 9). All others are Article 6. Second, based on the EU Taxonomy, companies have to report their CapEx, OpEx, and revenues for their green activities. The EU Taxonomy is also linked to the SFDR as financial market participants have to disclose their so-called taxonomy-aligned investments. Third, the Corporate Sustainability Reporting Directive (CSRD) requires that EFRAG develop mandatory sustainability reporting standards for all European companies with more than 250 employees. This applies to approximately 50,000 companies in Europe.
Eccles: Okay that is helpful, but how did EFRAG get into sustainability reporting? EFRAG exists to review International Financial Reporting Standards (IFRS) and to fit them into the European context. Now they are responsible for developing sustainability reporting standards. Tell me how the SRB works.
Lopatta: The EFRAG Sustainability Reporting Board (SRB) is responsible for sustainability reporting standards including technical advice to the European Commission on draft EU Sustainability Reporting Standards. The SRB is a group of maximum 22 stakeholders with different backgrounds. The work of the SRB is supported by a Technical Expert Group (TEG) which is also composed of different stakeholder groups. The work of both bodies is supported by the secretariat of EFRAG. The board members of the SRB are not paid for their participation. Same holds for the TEG. The chair positions on the EFRAG SRB and EFRAG TEG are paid.
Eccles: How did you get into EFRAG?
Lopatta: I was delighted to be recommended by the national organization’s chapter in Germany (ASCG) because I am a member of their Sustainability Reporting Technical Committee, and I am the chairperson of their working group “Climate Reporting”. I have also investigated sustainability topics at the interface of accounting and finance in my research for over 10 years and I publish my research in high ranked journals like The Accounting Review, Strategic Management Journal and European Accounting Review.
Eccles: When did you become Acting Chair and how?
Lopatta: That was in June 2022. The process of electing the SRB chair took longer than expected. The EFRAG president, Jean-Paul Gauzès, asked me to serve as the acting chair. While I was Chair, we finalized set 1 of the ESRS which we delivered on November 22, 2022, to the EU commission.
Eccles: What happened during the time when you have been Acting Chair? What did you accomplish?
Lopatta: Well again a lot happened but let me mention the three main areas of improvement of the November 22 draft ESRS compared to the Exposure Drafts. First, we enhanced comparability with the work of the International Sustainablity Standards Board (ISSB) and other international standards to the maximum extent possible to avoid double reporting. Second, we gave the materiality assessment process a more central role in selecting the material items that have to be reported in the management discussion and analysis report (MD&A). Third, we significantly reduced the number of reporting items to lower the reporting burden for the companies.
University of Hamburg Logo
Eccles: When was the formal SRB chair installed?
Lopatta: Right after the delivery of Set 1 in November 2022. The SRB Chair is now Patrick de Cambourg.
Eccles: What comes after Set 1? Is this a draft number or will there need to be drafts issued for other sustainability reporting topics?
Lopatta: The EFRAG SRB started right after the delivery of Set 1. Set 2 consists of sector-specific standards and standards for listed SMEs.
Eccles: What is the process to finalize the proposed EU ESRS reporting requirements and when might it be completed?
Lopatta: The EU Commission is on its way to finalizing the standards, translate them into all EU languages, and they plan to publish the ESRS in mid-2023. The standards have to be applied in 2024.
Eccles: You are now the Vice Chair and Special Liaison to the International Sustainability Standard Board (ISSB). What does that entail?
Lopatta: While we were developing Set 1, I was in close contact with Chair Emmanuel Faber and Vice Chair Sue Lloyd from the ISSB to align the ISSB and EFRAG standards as much as possible. This will also be my objective for the future ESRS. Therefore, we will meet as often as we need to in order to achieve this goal. For example, we will discuss interoperability for cross-cutting, topical, and sector-specific standards.
Eccles: Sounds good, but there is this tension between double vs. single materiality.
Lopatta: The ISSB relies on financial materiality, EFRAG on double materiality. However, this tension exists and has engendered an intensive and very emotional discussion in academia and in practice. But if you compare the climate standards of the ISSB and EFRAG, the differences regarding materiality are not significant. In addition, ISSB’s cooperation with the Global Reporting Initiative (GRI) indicates that the ISSB is very aware of closing a potential gap caused by the different materiality approaches.
Eccles: ISSB is coming up with two IFRS Sustainability Standards while EFRAG developed 12 ESRS in a very short time frame. How can that be?
Lopatta: Yes, and that was really hard work. But it underpins that sustainability is not only climate change. We developed additional standards for such topics as biodiversity, pollution, and human rights. Depending on the industry the company is in, human rights and bribery might be even more important than climate change mitigation and adaptation. And the need for transformation in corporations is high and societal pressure is calling for that change. That’s why the EC decided to mandate EFRAG to develop a full set of ESRS.
Eccles: There is a lot of criticism around the ESRS in general coming from the corporate world. How did you deal with that?
Lopatta: We strengthened the concept of materiality. Companies can decide, based on a materiality assessment, what they believe is material and therefore relevant for their stakeholders. The ESRS provide a framework for that. Only some climate and social data points are mandatory by definition. By aligning the EFRAG ESRS with other EU regulations like the SFDR, we are reducing the burden of corporate sustainability reporting.
Eccles: What needs to be done to get the full value of the ESRS?
Lopatta: We need the implementation of the ESRS as soon as possible so that we can have an accurate assessment of sustainability matters in companies. When we have comparable and audited information, stakeholders can make educated and ethical decisions about their investments.
Eccles: As you know, Kerstin, I’ve been writing about the ESG Culture Wars going on here in the U.S. One of the battle fronts is sustainability reporting and I find myself fighting with the Sustainability Taliban on my flank (“Only double materiality until I die”) and the Sustainability Flat-Earthers (“I’d rather die than do any kind of sustainability reporting.” So mind if I got local and ask you two questions about EFRAG and the U.S.?
University of Hamburg Main Building
Lopatta: Sure, go ahead Bob, and good luck in your fight!
Eccles: Thanks, I’ll need it! First question. At a very high level, how do the existing European ESG reporting regulations (NFRD) compare with the new CSRD?
Lopatta: The CSRD has a different scope: Companies with more than 250 employees, 40 million in sales and 20 million total assets and all capital-market oriented companies are required to apply the ESRS starting in 2024. If a company falls under the CSRD, external limited assurance and disclosure of the sustainability statement in the MD&A is mandatory. Furthermore, sustainability information is to be published in European Single Electronic Format (ESEF) together with financial information. And the CSRD mandates EFRAG to develop Sustainability Reporting Standards.
Eccles: Interesting. For all of the complaining out there, I guess these companies should be glad they aren’t in Europe. But this makes me wonder. How will the European ESG reporting regulations impact US companies who operate in the EU?
Lopatta: Starting in 2028, non-EU companies that have a net turnover of more than 150 million Euro in the EU and have a subsidiary or a branch in the EU must apply the ESRS. In addition, they might also be indirectly affected by the CSRD if they are a supplier to an EU company that is within the scope of the CSRD.
Eccles: Well, that is also interesting. Unilever’s Lysanne Gray made the same point in an interview I did with her. Will be interesting to see how this plays out. I heard that the ISSB is working on a global baseline. Sounds like a great idea but what exactly is that?
Lopatta: A global baseline should provide information that is material to investors internationally. The idea is that national jurisdictions can add further disclosure requirements beyond the global baseline that is then called a building block. This is the reason why we at EFRAG SRB are working closely with the ISSB on a so called interoperability table which brings together the global baseline of the ISSB with the ESRS.
Eccles: Thanks for your time; any final thoughts?
Lopatta: Thank you so much for inviting me to participate in this discussion. It is great to have an opportunity to spread this awareness of the necessity for progress in sustainable business practices.
Eccles: I’d love to continue this conversation in person sometime. I’ll bring you an autographed copy of my book on transfer pricing. Please read it. I think less than 100 people have in the 37 years since it’s been published.
Lopatta: Although I look forward to meeting in person, don’t get your hopes up that you’ll reach 100 people by giving your book to me!


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