The Regulations and Directives Driving ESG Disclosures: What You Need to Know

Lily   12 May, 2022

There are a wave of new regulations and directives driving ESG disclosures and helping to increase transparency around corporate sustainability performance. In this article, we take a look at some of the key requirements that your organisation should be aware of and how they will impact your work.

Non-Financial Reporting Directive (NFRD)

What is it?

The Non-Financial Reporting Directive (NFRD), which went into effect in 2018, requires firms to publish reports on the policies they implement in relation to the environment; social responsibility and treatment of employees; respect for human rights; anti-corruption and bribery; and board diversity. The aim of the NFRD is to help investors, consumers and other stakeholders evaluate the non-financial performance of companies (source: European Parliament).

Who does it apply to?

The directive applies to large public-interest entities in EU member states. This is defined as companies that have an average of more than 500 employees during the financial year and a balance sheet total that exceeds €20 million or a turnover that exceeds €40 million.

Latest updates

In April 2021, the European Commission launched their proposal for a Corporate Sustainability Reporting Directive (CSRD) which will amend the existing reporting requirements included in the NFRD.

 Corporate Sustainability Reporting Directive (CSRD)

What is it?

On 21 April 2021, the European Commission presented its proposal for a Corporate Sustainability Reporting Directive (CSRD), which aims to amend the existing rules introduced by the Non-Financial Reporting Directive (NFRD), and to bring sustainability reporting on a par with financial reporting. Companies will have to report on how sustainability issues affect their business and the impact of their activities on people and the environment (source: European Parliament). 

The proposal includes the development of standards for large companies and separate, proportionate standards for SMEs, which non-listed SMEs can use voluntarily. It aims to simplify the reporting process, providing companies with a single solution which meets the needs of investors and other stakeholders (source: European Parliament).

Who does it apply to?

The proposal extends the EU's sustainability reporting requirements to all large companies and all listed companies. This means that approximately 49,000 companies in the EU would be asked to follow detailed EU sustainability reporting standards, an increase from the 11,000 companies that are subject to the existing NFRD requirements.

Under the current proposal, companies will have to publish their first reports in alignment with the CSRD on 1st January 2024 for the financial year 2023.

Latest updates

The European Financial Reporting Advisory Group (EFRAG) has announced the release of its initial draft of the rules and requirements for companies to report on impacts, opportunities and risks under the CSRD (source: Environment Analyst).

This first release of the European Sustainability Reporting Standards (ESRS) comprises a series of exposure drafts (EDs) covering ESG topics including climate change, pollution, resource use and circular economy, biodiversity and ecosystems, water and marine resources and workers in the value chain (source: Environment Analyst). 

The draft is available for public consultation with a deadline for comments of 8 August 2022.

EU Taxonomy Regulation

What is it?

The EU’s Taxonomy Regulation, which came into force in July 2020 aims to help companies define which of their economic activities can be classified as ‘environmentally sustainable’; bringing clarity to a term which has so far been inconsistently defined and applied within business.

The six environmental objectives of the Taxonomy are: (1) climate change mitigation, (2) climate change adaptation, (3) sustainable use and protection of water and marine resources, (4) transition to a circular economy, (5) pollution prevention and control, and (6) protection and restoration of biodiversity and ecosystems.

To be classified as a sustainable activity, a company must not only contribute to at least one environmental objective but also must not violate the remaining ones (source: EU Taxonomy).

It is likely to become a key point of reference for investors seeking to measure the ESG performance of listed companies.

Who does it apply to?

The EU Taxonomy Regulation requires ‘large public interest entities’ (i.e. companies with more than 500 employees and turnover of more than €40 million) to report the extent to which their turnover, capital and operating expenditure relate to ‘environmentally sustainable’ activities.

The Taxonomy Regulation is available to all market participants interested in classifying their economic activities as sustainable, however reporting under the Taxonomy Regulation is a mandatory requirement for two groups:

  • Financial market participants offering financial products within the EU and UK
  • Large public interest companies (those required to publish a non-financial statement under the Accounting Directive) (source: White & Case)

Sustainable Finance Disclosure Regulation (SFDR)

What is it?

SFDR Level 1, which went live in March 2021, requires asset managers to sort their funds into different sustainability categories based on the products characteristics. Funds are categorised as articles 6, 8, or 9.

  • Article 6 funds: consider ESG risks as part of the investment process, or have no sustainable objectives at all
  • Article 8 funds: applied to funds that promote environmental or social characteristics as part of a broad investment strategy
  • Article 9 funds: designated as having a sustainable investing objective

The SFDR is designed to improve and standardise investment firms’ ESG reporting and allow investors to assess and compare the ESG approaches of different investment funds – essentially, to provide greater transparency for investors and avoid ‘greenwashing’.

Who does it apply to?
  • asset managers and asset owners
  • pension funds
  • fund managers
  • financial advisors

SFDR is expected to have some impact on asset managers based outside the EU and their local representatives.

Latest updates

Level 2 of the SFDR, which comes in effect in January 2023, will require investment firms to classify their funds through a series of environmental and social principal adverse impact disclosures. This will require investment firms to provide extensive disclosures on sustainability factors, including GHG emissions.

How to prepare

These regulations and directives will call for detailed disclosures and require firms to invest considerable time and resources in collecting relevant, actionable ESG information. Third-party ESG data providers can play a crucial role in facilitating and streamlining the process of data collection, helping your organisation keep up with regulatory demands and stay compliant.

 

 

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