A new wave of sustainability reporting from January 1st

There really is no place to hide for companies anymore when it comes to sustainability reporting. A veritable alphabet soup in the form of the SFDR (sustainable financial reporting directive), the CSRD (corporate sustainability reporting directive) also known as the NFRD (non-financial reporting directive), and the TCFD (taskforce on climate related financial disclosures) will combine to ensure that investors and consumers are able to assess and compare companies’ sustainability and climate credentials.

And that's not all, according to Elizabeth Gillam, head of EU government relations and public policy at Invesco. "Up until recently, a lot of the action has been in the financial services space, with the introduction of the sustainable finance disclosures regulation, the sustainable taxonomy and climate benchmarks regulation," he notes. "A key challenge underpinning these rules was the lack of reliable and comparable data and therefore attention is increasingly turning to companies in order to ensure that they disclose appropriate information to their investors."

The scope has widened of late. “More recently, we have seen policymakers increasingly turn their attention to climate and environmental policies targeting the real economy,” Gillam adds. “In the EU, the EU Green Deal sets out the overall goals to achieve net zero carbon and zero pollution, as well as halting biodiversity loss. To achieve this, the EU has recently proposed a range of policies, such as reforming the emissions trading scheme and introducing a carbon border adjustment mechanism.”

The main regulatory changes centre on the EU taxonomy document that comes into force on January 1st, 2022. "This is a considerable document that helps to create a common language and to clearly define what may be considered a green activity within the EU," says Mary Whitelaw, director of corporate affairs, strategy and sustainability at AIB. "It also calls out additional environmental, social and governance [ESG] reporting requirements for companies. Overall, the taxonomy is a very comprehensive guide as to what can be categorised as a green activity in the EU however there are still some outstanding areas such as whether or not nuclear power should be categorised as environmentally sustainable."

It's all about enhancing investor protection and creating a fair playing field

Companies will need to use the EU taxonomy definitions to guide their decision-making in terms of assessing the green credentials of new projects, she advises. “AIB is committed to supporting our customers in transitioning to a lower carbon economy and is well prepared for the changes ahead having already issued a sustainable lending framework to help categorise new lending activity,” Whitelaw points out. “AIB has also issued independently verified green and social bond frameworks that enable the bank to tap the rapidly expanding investor appetite for bonds issued by organisations with strong ESG credentials.”

More regulation

Sandra Rockett, director of wealth and corporate distribution with Irish Life Investment Managers, believes we can look forward to even more regulation. "We already know that there will be regulatory changes to ensure that sustainability preferences are included in the customer advice processes and that there is a consistent approach to identify environmentally sustainable activities and investment products which will support customers and investors making investment decisions," she says.

“Going forward I think we can expect governments to raise their climate ambitions and implement policies in the areas of mandatory climate risk disclosures, commitments to structured roadmaps to reduce emissions to net zero and using policy action to shift economic activity and capital flows towards more sustainable business activities,” she adds.

“There is no question that the new regulatory environment is having an effect on asset managers and the products they offer,” says Waystone executive director Vanora Madigan. “And this is a good thing. It’s all about enhancing investor protection and creating a fair playing field. Firms will need to be agile to stay ahead of the changes. The wave of new regulations will have an impact on smaller firms in particular.”

It will provide investors with more reliable and comparable information

The next big change will come in the form of the corporate sustainability reporting directive which comes into effect on January 1st, 2023, and will mean that companies preparing annual reports in 2024 will have to comply with new rules. “It will extend the scope of SFDR reporting to all large companies and listed companies on regulated exchanges in Europe,” Madigan adds. “It builds on that directive and increases the transparency of corporate reporting on sustainability performance. It will apply to all large private companies including family owned businesses.”

It removes the previous 500 employee threshold and replaces it with a requirement for companies with 250 employees and a €40 million turnover or €20 million in assets to comply. “It also applies to some SMEs on regulated exchanges but will not come into force until 2026 for them,” Madigan adds.

Double materiality

It also introduces reporting requirements on double materiality, the concept that risks and opportunities can be material from both a financial and non-financial perspective. It is now widely accepted within financial markets that climate-related impacts on a company can be material and therefore require disclosure. The concept of double materiality takes it one step further and it is not just climate-related impacts on the company that must be reported but also the impacts of a company on climate or any other dimension of sustainability.

“It will provide investors with more reliable and comparable information,” she says. “It will lead to increased costs, but it will also assist companies in meeting increased demand for sustainability information from stakeholders and investors. They will probably have to do that anyway. The overall aim is to ensure that companies report the information required by investors. Investors can be sure that it is what it says on the tin. And the taxonomy provides a common language for that. It’s similar to food labelling regulations. It will help us all. It will help fund managers allocate to more sustainable investments.”