The appetite for sustainable assets is growing rapidly, and financial institutions are increasing the amount of green-friendly instruments and assets, realising that their “green legacy” is no longer a maybe, but a must-have. However, in the lack of clear guidelines on what assets and activities can be considered environmentally-friendly, the data reported by financial institutions often appears to be like a bonbon: green on the outside and brown on the inside, with financial institutions flexibly choosing the guidelines used for sustainability reports. Increasingly, this has led to a fear of greenwashing and a lack of trust in sustainability disclosures. In response, global regulators are taking action to build robust frameworks and reporting requirements to boost the transparency and reliability of sustainability data. Progress has been made in standardizing reporting rules, for example, with recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) or the Global Reporting Initiative (GRI), and regional standardisation initiatives are also moving ahead with full speed.
Worldwide Sustainability Initiatives
Global Reporting Initiative (GRI)
The most widely used comprehensive sustainability reporting standard in the world are the GRI Standards. The GRI methods have been designed as a consolidated framework for reporting performance and include references to other widely recognized standards/initiatives, such as:
OECD Guidelines for Multinational Enterprises
UN Guiding Principles on Business and Human Rights
Task Force on Climate-related Financial Disclosures (TCFD)
The TCFD was created in 2015 by the Basel-based Financial Stability Board (FSB) to improve reporting of climate-related financial information. The TCFD’s focus is reporting on the impact an organisation has on the global climate, seeking to make climate-related disclosures more consistent and comparable. The TCFD has developed a reporting framework based on a set of disclosure recommendations for use by companies to provide transparency on their climate-related risk exposures to investors, lenders and insurance underwriters.
The TCFD’s 11 disclosure recommendations span four different areas: governance, strategy, risk management, and metrics and targets:
International Sustainability Standards Board (ISSB)
At COP26, the International Financial Reporting Standards (IFRS) Foundation announced the formation of the International Sustainability Standards Board (ISSB). The ISSB’s task is to develop IFRS Sustainability Disclosure Standards which will become comprehensive baseline global standards for sustainability reporting.
Launch of the International Sustainability Standards Board
Green and greener: sustainability developments in the EU
With so much going on sustainability-wise, companies are already preparing for sustainability reporting to become mandatory within the European Union, kicking off an adaptation period for financial institutions. The objective is to provide policymakers and central banks with data on financial institutions’ approach to directing their activities towards long-term, environmentally sustainable activities.
The EU Taxonomy
The EU Taxonomy was developed by a technical expert group set up by the European Commission, establishing a technical document that provides clarity to financial institutions on how environmentally friendly different activities and to provide guidelines on allocating more capital to fund greener economic activities. The Taxonomy is a glossary that defines Paris agreement-aligned performance criteria over a set of economic activities, and in order to deem an activity as “aligned with the EU Taxonomy” these need to contribute to one of 6 environmental objectives and not significantly harm any other (Do No Significant Harm).
The 6 environmental objectives defined in the Taxonomy are:
- Climate change mitigation
- Climate change adaptation
III. Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
What should you know about the recent developments in the EU Taxonomy?
For each of the objectives, it is necessary to establish Technical Screening Criteria (TSC): how an activity contributes to an environmental objective. In simpler words, TSC’s give information on what elements “go into” each of the objectives. Highlighted in green are the objectives for which TSC’s already exist. For the objectives of climate change mitigation and climate change adaptation, delegated acts for the TSC’s were accepted in June of this year and will likely apply from 1 January 2022. The TSC’s for the remaining four environmental objectives (highlighted in red) are expected to apply from 1 January 2023.
The Platform on Sustainable Finance (PSF) has published a draft report that includes preliminary recommendations on TSC’s for the remaining objectives. The next steps are for the PSF to submit a final report to the European Commission in November 2021. Next, the Commission will adopt the delegated act in the first half of 2022, which will apply from 1 January 2023.
Corporate Sustainability Reporting Directive (CSRD)
The EFRAG (European Financial Reporting Advisory Group) sustainability taskforce (PT-ESRS- Project Task Force on European Sustainability Reporting Standards) has entered into cooperation with the Global Reporting Initiative (GRI). Currently, the GRI standards are the most commonly used sustainability standards among EU companies. How is this connected to CSRD? Companies that will fall under the scope of CSRD will be required to comply with the sustainability reporting standards currently “under construction” by the PT-ESRS and later adopted as delegated acts by the European Commission. EFRAG has also indicated that it is also planning to engage with the IFRS Foundation in setting the sustainability reporting standards.
Useful Links
The sustainable finance package
EU Taxonomy Climate Delegated Act
How does the EU Taxonomy fit into the sustainable finance framework?
Proposal of the Corporate Sustainability Reporting Directive
Plans for sustainability disclosure requirements in the UK
The UK government announced plans to introduce new Sustainability Disclosure Requirements (SDR’s), which will be another addition to the sustainability framework, next to TCFD requirements. According to John Glen, the UK will shape the new requirements drawing heavily from the EU’s sustainability approach and the Global Reporting Initiative (GRI).
Currently, shaping EU sustainability reporting standards is underway at EFRAG, which has entered into a cooperation agreement with GRI.
Key points on UK Sustainability Disclosure Requirements
- The SDR’s will apply to financial services firms, companies and pension funds.
- The SDR’s will require these companies to report the impact of their organisation and financial products on climate change and the environment.
- The SDR’s will be more comprehensive than the TCFD framework and require more comprehensive disclosures.
- They will apply the “double materiality” concept.
The double materiality concept, already present in the GRI standards, requires that companies report the impacts of climate change on their organisations as well as how their own business activities can contribute to climate change.
- The scope of SDR reporting will be more detailed than TCFD.
- The double materiality concept, already present in the GRI standards, requires that companies report the impacts of climate change on their organisations as well as how their own business activities can contribute to climate change.
- The SDR roll-out will be phased across a five-year timeframe.
What does this mean for companies?
Although the announcement of introducing SDR’s may come as a surprise, peeling through the “onion” of sustainability initiatives reveals that it is an integral part of shaping a sustainability framework that will to some extent mirror legal requirements of the EU, particularly the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD), as well as the classifications reflected in the EU Taxonomy (the UK has established a Green Technical Advisory Group to create a UK Taxonomy).
Useful Links
Recommendations of the Task Force on Climate-related Financial Disclosures
Greening Finance: A Roadmap to Sustainable Investing (UK Government Report)
FCA Climate Change Adaptation Report
PRA (Prudential Regulation Authority) Climate Change Adaptation Report
The Pensions Regulator Climate Change Adaptation Report
Sustainability developments in Asia
China
In July 2020, the EU and China initiated a Working Group on taxonomies with the objectives to undertake an assessment of the existing taxonomies for environmentally sustainable investments, including identifying the commonalities and differences in the approaches presented in the EU Taxonomy and the China Taxonomy. Following this development, on 21 March 2021, the People’s Bank of China (PBC) announced that China is working with the European Union to adopt a common green taxonomy across these two markets at the end of 2021. The Common Ground Taxonomy (CGT) is a result of comparing the China Taxonomy and the EU Taxonomy, identifying the common points and differences in each.
International Platform on Sustainable Finance Common Ground Taxonomy – Climate Change Mitigation
Hong Kong (Hong Kong Monetary Authority)
In December 2020, the Green and Sustainable Finance Cross-Agency Steering Group launched its green and sustainable finance strategy for Hong Kong:
- Making climate-related disclosures aligned with the Task Force on Climate-Related Disclosures (TCFD) mandatory across sectors (banks, asset managers, insurance companies and pensions trustees) no later than 2025
- Aiming to adopt the Common Ground Taxonomy developed by the International Platform on Sustainable Finance (IPSF) Working Group.
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