Environmental, social and governance (ESG) reporting requirements for companies and mandatory disclosures by financial services firms are expanding rapidly.
Firms need to prepare to make more disclosures and to use the information disclosed by others. They must also be able to substantiate their sustainability claims, at entity- and product-level, to regulators, investors and consumers. Independent assurance requirements are being introduced in some areas.
The 2021 status report of the Task Force on Climate-Related Financial Disclosures (TCFD) indicates that the TCFD’s recommendations are being adopted in an increasing number of jurisdictions and by more companies, with Europe leading the way. But significant progress is still needed, with a worldwide average of only one in three companies reviewed making TCFD-aligned disclosures.
The proposed EU Corporate Sustainability Reporting Directive (CSRD) heralds a significant expansion in the range of entities required to report and what those disclosures must cover. It adds to the new requirement under the Non-Financial Reporting Directive (NFRD), which was introduced via Article 8 of the Taxonomy Regulation and requires around 11,000 large companies to disclose proportions of turnover and expenses relating to environmentally sustainable activities. CSRD will:
- Extend the scope of NFRD to all large companies and all companies listed on regulated markets (except listed micro-enterprises), with future capture of non-listed entities
- Require the audit (assurance) of reported information
- Introduce more detailed reporting requirements and a requirement to report according to mandatory EU sustainability reporting standards
- Require companies to add a digital tag to the reported information, to feed into the European “single access point” envisaged in the Capital Markets Union action plan
The proposed Green Bond Standard is also being debated, but work on criteria for an EU Ecolabel for retail investment products has been put on hold until the Level 2 rules on climate change mitigation and adaptation under the Taxonomy Regulation are completed.
There are more rules to come on product disclosures. The ESAs have submitted to the Commission draft rules for SFDR Article 8 and 9 products to underpin the additional requirements introduced into SFDR via the Taxonomy Regulation. Precontractual and periodic disclosures must identify the environmental objectives to which the product contributes and show how and to what extent the product’s investments are Taxonomy-aligned. These will take the form of graphs and changes to the existing SFDR mandatory templates. In addition, independent assurance will be required.
The UK government has issued “A roadmap to sustainable investing”, which covers phase 1 of the government’s three-phase plan for greening the financial system: informing investors and consumers, acting on the information, and shifting financial flows. In addition to work on a UK taxonomy (see ESG taxonomies article), rules to be developed will require financial services firms and real economy corporates to report consistent information on sustainability.
The new regime will streamline existing disclosure requirements (e.g. TCFD-aligned) with new requirements, including on reporting environmental impact. Investment products will need to make consumer-focused disclosures showing the impact, risks and opportunities of the activities they finance. This will be accompanied by a consumer-facing label, to be developed by the FCA. Moreover, asset managers, asset owners and investment products will be required to substantiate their sustainability claims.