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Is the EU Non-Financial Reporting Directive falling short of its intended goals?

CDSB's Policy Manager, Axelle Blanchard shares key takeaways and useful resources from the launch of CDSB’s latest analysis of environmental and climate-related disclosure by Europe’s major companies.

On May 19, the Climate Disclosure Standards Board (CDSB) hosted a two-session online event to launch the Falling Short Report. Our analysis is based on the 2019 environmental and climate-related disclosures of Europe’s top 50 largest listed companies, with a combined market capitalisation of US$4.3 trillion. The review was based on company environmental and climate-related reporting in line with the EU’s Non-Financial Reporting Directive (NFRD) and we have also assessed progress on implementing the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). 

For those who did or did not have the chance to attend the first session on the role of regulation as a driver for reliable corporate reporting, I am happy to highlight some of the key discussions happening on that day before listing a few useful resources.

The session was introduced by Morgan Desprès who shared very timely remarks based on his experience as both the Deputy Head of Financial Stability at Banque de France, as well as Head of the Network for Greening the Financial System Secretariat.

He highlighted that there is a relationship between the fight against COVID-19 and the fight against climate change. He emphasized the link one can make between the rise of pandemics and the loss of biodiversity. Beyond questions around the exact origin of the COVID-19 virus, the assumption of common features, both in terms of impacts and correlated policy responses public authorities can bring to both challenges, have been brought forward in many forums. This reminded me of an interesting piece by McKinsey & Company on the need to address climate change in a post-pandemic world.

Based on that statement, he noted that those asking to slow down the pace of the climate action as a result of the COVID-19 crisis could not be taken as the only credible option when designing recovery packages. Such recovery packages could be taken as the opportunity to take on board climate risks in the design of economic policies.

This call for action seems to have been heard by the Spanish government, which has recently announced a new ambitious climate law targeting net zero emissions "no later than" 2050 to help the national economy recover. At the European Union level, a green recovery plan is expected on May 27.  On the contrary,  the use of public money to bail out industries with a current bad track record when it comes to deal with sustainability issues, may damage financial stability and lead to another economic crisis, if the value of their assets was to decrease other time because of the impact of climate change and biodiversity loss.

Mr Despres made a strong point saying that both crisis may have been predicted if we had access to the “right models to give a very accurate price or to develop the right metrics to be able to measure and mitigate risks beforehand”. To breach the gap, he highlighted some key resources the NGFS has and will produce in the upcoming weeks. Based on the NGFS recommendation on disclosure, he concluded by asking a key question: “Do we need to go one step further and move to a regulatory approach?” Once again, this question was very timely after the announcement by Canada as made reporting under the TCFD a requirement as part of Government loans to support businesses affected by the financial impacts of the pandemic we are experiencing. The main results of the CDSB’s Falling Short report were then presented to showcase evidence and support some key policy recommendations to make the NFRD fit for purpose in the context of its upcoming review within an EU renewed sustainable finance strategy:

Such key policy recommendations include:
  • Remove the exemption allowing the non-financial statement to be reported outside the mainstream report, as this will support accessibility, consistency and comparability of disclosures and our review demonstrates that, for most, this is already the norm;
  • Embed the TCFD recommendations into the Directive to drive stronger linkage of non-financial and financial reporting, and a more unified, harmonised and convergent approach; 
  • Incorporate “climate” into the wording of the Directive to ensure companies consider climate-related matters explicitly in their disclosures, including the associated financial impacts; and
  • Review the principal risk requirements of the Directive to ensure emphasis is placed on risks and impacts ‘to’ the business (not simply ‘by’ the business).
  • Define key terms used in the Directive, such as ‘policies’ and ‘due diligence’ to ensure a common understanding and application of the Directive’s content categories; and
  • Ensure that supervision of non-financial information is at the same level as for financial information, in order to provide authoritative feedback to corporate report preparers. 

The session was then closed by Alain Deckers, Head of Unit in charge of corporate reporting at DG FISMA, European Commission. After recalling the state of play and some next steps around the NFRD review, with the ongoing public consultation, the impact assessment and some further studies required by the European Commission on the scope of the NFRD as well as associated costs for companies, Mr Deckers said he was pleased to see a convergence in thinking between the European Commission’s work and CDSB’s analysis on the implementation of the NFRD. Commenting on the findings and the recommendations of the study, he stated that despite some sign of improvements one could expect, the top 50 EU companies could perform better and should be at the end of the “learning curve”.

He listed a number of shortcomings the European Commission is currently analysing and that are reflected in CDSB’s Falling Short report, including around:
  • The location of the information,
  • The clarification of some key terms within the directive;
  • The principal risks requirement;
  • The need to clarify climate-related disclosures among other environmental matters (also related to the connection between the NFRD requirements and the technical criteria used under the EU Taxonomy Regulation); and
  • The need for effective supervision of non-financial information.

He raised the question about the need to move to the use of a standard beyond high level requirements in the NFRD to ensure the quality and the comparability of the non-financial information. He also said such a standard could help clarify many of the directive shortcomings, including the materiality definition. Mr Deckers emphasized the need “not to reinvent the wheel” and “build to the largest possible extend on existing international standards”, including TCFD recommendations, when designing such standard to avoid market fragmentation. He nonetheless said the standard should take into account some EU specificities, including the 2050 climate neutrality objective the EU is expected to enshrine in law, as well as other already adopted pieces of legislations (e.g.: EU Taxonomy regulation and new disclosure requirements for investors).

At CDSB, we are convinced that regulation, but also stakeholder engagement has a key role to play to enable reliable corporate reporting from companies. The discussion was therefore a good example of the dialogue existing between civil society organisations, policymakers and supervisors. It was a good stocktaking exercise on past, present and future actions all stakeholders aim to take to make sure these issues stay at the top of policy priorities.

Useful links and resources:

To follow up on the conversation happening that day, I have put together a list below of the various resources which could be interest:

By Axelle Blanchard, Policy Manager at CDSB.
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