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EU + ESG: set for a great leap forwards?

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NFRD. SFDR. GRI. SASB. EFRAG. ESG itself. The initialisms keep coming – and are increasingly front of mind in the banking industry – as the lexicon surrounding environmental, social and governance (ESG) reporting evolves apace in the European Union (EU). ESG data is increasingly used in investment decision-making.

But it remains a cloudy area, blighted by data reporting inconsistency from company to company and country to country. Tony Hilton, the UK-based veteran business journalist, has lamented how index providers and rating agencies have different ways of tracking and measuring what effectively amounts to the same thing. ‘Do we actually know what ESG is?’ he asked. It’s an important question – and actually, partly, what is driving a whirlwind of ESG-related policy formulation at EU level.

The European Commission is pushing on numerous fronts as policymakers look to shift ESG to the centre stage in financial services. The lodestar is the ‘European Green Deal’, a political priority unveiled last December, which aims to make the continent carbon-neutral by 2050.

Specific developments that illustrate ESG’s growing significance include (deep breath): the review of the Non-Financial Reporting Directive (NFRD); the development of an EU taxonomy’ for sustainability; a joint-consultation on ESG disclosures by the three European financial system supervisory authorities (the consultation ends on 1 September); a European Central Bank consultation on a guide that explains how it expects banks to manage and disclose climate-related and environmental risks (this one ends on 25 September); and the Sustainable Finance Disclosure Regulation (SFDR – ‘Disclosure Regulation’), which will apply from March 2021. Market watchers have spoken of asset managers facing incoming ‘reporting tsunami’.

But still… ESG: what’s not to like? The EU’s actions and reviews have not entirely been without controversy. The Commission’s engagement of the world’s largest asset manager, BlackRock, to ‘develop tools and mechanisms for the integration of ESG factors into the EU banking prudential framework and into banks’ business strategies and investment policies’ has become subject to an investigation by the European Ombudsman. For many, it’s not a great look:

Nonetheless, the NFRD revision has potential for the EU to show worldwide leadership. Brought in six years ago, the existing directive applies to ‘public interest’ companies (traded companies, credit institutions and insurance undertakings) with more than 500 employees, requiring them to disclose a fuller range of non-financial information as part of their public reporting obligations. The directive straddles a typically European patchwork of different reporting requirements and regulation by market/country – an apparent open goal for further EU involvement.

The Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) are among the organisations watching closely. The Netherlands-headquartered GRI is applauding the NFRD revision, calling for “more reliable, complete and comparable disclosures”. From across the Pond, the San Francisco-headquartered SASB believes the EU could trigger a ‘giant leap forward’ for companies, investors and civil society in respect of global ESG disclosure.

Thijs Reuten, head of policy at the GRI, tells #DisruptionBanking:  “Achieving the Green Deal requires a strengthened NFRD as soon as possible, mandating for reliable and comparable reporting.
The GRI, in its NFRD consultation submission, says it believes its own standards ‘complemented with’ elements from other frameworks and standards, such the SASB and also the London-headquartered International Integrated Reporting Council (IIRC), ‘will go a long way to achieving the aim of the NFRD review’.

ACCA (the Association of Chartered Certified Accountants) also wants the Commission to think boldly – and globally – as it reviews the NFRD. ‘Given the global basis of investment and the nature of many of the companies that will be in scope, the NFR standards, for which the Commission aims to be a global leader, should as far as possible be developed for use and acceptance on a global level, with a transparent due process allowing all parties – including outside of Europe – to contribute, co-operate and collaborate,’ read ACCA’s response to the consultation, which closed last month. 

ACCA’s head of corporate reporting, Richard Martin, tells #DisruptionBanking that it’s now largely a question of waiting to see what the Commission comes up with. “I think the EU is already a global leader on ESG reporting. The NFRD revision is an opportunity to continue to be so, more broadly,” says Martin.

The European Banking Federation (EBF), together with five other financial industry associations, is calling for the Commission to establish a common ESG data register in the EU. “To understand whether activity is sustainable, banks need relevant and reliable data,” the EBF’s senior adviser for sustainable finance, Denisa Avermaete, tells #DisruptionBanking. Banks welcome the NFRD revision and want it to go further, she says: “We [EBF] want it to be applicable to all firms, although much simplified for the SMEs. Banks need reliable data not only to comply with the EU regulations but also for their risk management and portfolios’ alignment. What’s most important is to get consistency across the legislation and regulation.”

It is easy to find sympathy with those (already) struggling with the different ESG-related rules and guidance. “There are many standards and regulations, and there is an understandable desire on the part of investors and other stakeholders to have a single system of reporting that will deliver high-quality reporting of relevant matters on a comparable basis,” says Martin.

A further acronym to note in the EU ESG sphere is EFRAG – the European Financial Reporting Advisory Group – which has been asked by the Commission to make recommendations on potential non-financial reporting standards.

Michèle Lacroix, a member of the Commission’s technical expert group on sustainable finance (and who chaired a European Corporate Reporting Lab @EFRAG taskforce on climate-related disclosures), tells #DisruptionBanking from Paris: “I agree that there are too many standards and this is quite confusing for preparers to navigate. I really hope that the revision of the NFRD will help provide clarity and more alignment.”

Inevitably, coronavirus’s impact is also playing into all these discussions, for example by increasing the focus on ESG’s typically-lower-profile ‘S’ and ‘G’.

Shard Capital’s formerly ESG-sceptical Bill Blain has recently described how he ‘learned to stop worrying and love ESG’, saying that the pandemic has ‘turned ESG from a trendy investment fashion to something that matters’. Just last week, a webinar convened by Brussels-based business network CSR Europe asked how ESG metrics ‘will evolve after COVID-19’.

As the EU rule-setting wheels spin, investors can bet on the profile and significance of ESG expanding further in the coming months.

#ESG #FinancialSupervision #BankingSupervision #Regulator #EUGreenDeal #BlackRock #NFRD #ACCA #EBF #EFRAG

Author: Ian Hall