ESG features in financial instruments: A challenge for the accounting treatment

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The volume of financial instruments including environmental, social, and governance (ESG) features is rapidly increasing with a result that the scale of the issue continues to increase in the lack of a specific accounting rule. This situation creates a deep debate referring to the possibility of financial instruments with an ESG factor to pass the solely payments of principal and interest (SPPI) test according to the current requirements in International Financial Reporting Standards (IFRS) 9. The debate is not only present in Europe but also in the US. The current accounting standards are not able to define a unique accounting solution for instruments that incorporate ESG factors and when these factors are material for the market, it is not clear which may be the proper solution to present them in the financial statements. The main issue is if it needs to separate ESG features from the basic financial instruments. Existing different positions on this issue, European Financial Reporting Advisory Group (EFRAG) proposed to International Accounting Standards Board (IASB) the introduction of more guidance and examples to apply in a consistent way the current provisions set forth by IFRS 9. In a dynamic market characterized by strong growth and the introduction of new complex instruments, the solution proposed by the EFRAG appears minimal. The introduction of a specific section of IFRS 9 addressed to this issue may be more appropriate in the light of the existing attention on the ESG features disclosure and the possibility to provide specific metric that permits measurement of the ESG features separately from the basic lending instrument.

Keywords: Financial Reporting, Financial Instrument, Impairment, ESG

JEL Classification: M14, M41, M48

Received: 03.05.2022
Accepted: 09.05.2022

How to cite: Pucci, S., Venuti, M., & Lupatelli, U. (2022). ESG features in financial instruments: A challenge for the accounting treatment. In G. M. Mantovani, A. Kostyuk, & D. Govorun (Eds.), Corporate governance: Theory and practice (pp. 52–56). https://doi.org/10.22495/cgtapp8