ESG | June 21, 2021

Europe paves path to standardized ESG disclosure with Sustainability Reporting Directive

Tim Mohin
Guest Author

Tim Mohin

ImpactAlpha, June 21 – What a difference a year makes. U.S. President Joe Biden’s decision to rejoin the Paris Agreement on the first day of his term, and bring 40 heads of state together for two days of virtual climate talks, reestablished climate change at the top of the global agenda (notwithstanding Boris Johnson’s descriptions of “Bunny Hugging”).

But it was Europe’s unwavering focus on sustainability during the Trump years that positioned the global sustainability agenda for major changes in 2021. 

Among the potential changes: universal disclosures for environmental, social and governance-based investing, or ESG.

The notion of “universal disclosures” for ESG gained a big boost last year at the annual meeting of the World Economic Forum in Davos when their International Business Coalition put forth a list of about 20 topics to be included in all company reports. Now, Europe is adopting the concept in the hopes that the comparisons will drive a virtuous cycle of improvement in these issues. 

The European Union has already had a “non-financial reporting directive” (NFRD) in place for more than five years. But studies have shown that the current NFRD policy fell short of driving real change in corporate behavior, and the bloc recently announced a major revision, called the “sustainability reporting directive,” or SRD. The new directive would expand mandatory reporting four-times as many companies as NFRD. 

The reason NFRD didn’t work was because companies could disclose whatever issues they chose. Given that the scope of ESG covers more than 30 disparate topics, companies reported on the ones that made them look good. This resulted in a jumble of data that could not be compared between companies and industries and was not reliable for investors. The new SRD policy would fix this issue by requiring all companies to report on the same topics. 

The SRD will also be aligned with the “EU Taxonomy Regulation,” which establishes a list of environmentally-sustainable activities based on their contribution to six objectives, including mitigating climate change, protecting water resources, and transitioning to a circular economy.

Companies would do well to shore up their climate programs now, as the new rules in Europe will have global impact: they will affect companies doing business in Europe. 

In addition to the universal disclosures, the E.U. has indicated it will develop sector-specific ESG standards. While there is yet little information on what topics will be covered, sector-specific standards make sense. Sustainability priorities for the mining industry, for instance, are necessarily most relevant for sustainability in the retail sector. 

Progress in the U.S.

In the U.S., several new policies being floated. The Securities and Exchange Commission is moving quickly under its existing authority to require ESG information be included with financial filings and to scrutinize the claims of ESG asset managers. There are several bills making their way through Congress and the states – notably, SB 260 in California and The Climate Risk Disclosure Act introduced in the U.S. Senate, both of which focus on mandatory greenhouse-gas reporting.

With the political momentum to address the climate crisis building toward the big COP 26 meeting in Glasgow later this year, all parties agree that disclosures on greenhouse gas emissions are the top priority. 

As these new policies take shape, a central question is what disclosure standards could be used. The IFRS (International Financial Reporting Standards) Foundation has announced it will dive into ESG and is working toward a September deadline for details. The E.U. proposal is nonspecific on how it would work with the IFRS. 

Simultaneously, SASB, GRI, CDP and other organizations currently offering ESG standards are collaborating toward a converged approach.      

The concern for the E.U. proposal, while it is a progressive development, is that it could establish yet another ESG framework. This would complicate efforts toward a global standard. Reporting standards are dry and boring topics, but progress hinges on getting every company to report the same issues in the same way – like financials.

It’s unclear how all this will pan out, but globally, we have an historic opportunity to create a truly global ESG standard that can make meaningful progress on climate change and other issues. With policymakers, the business community, and the finance sector all in agreement on the need for a global ESG standard, the time has come to drive forward and demand a common language from leaders in Europe, the U.S., Asia and beyond. 

Tim Mohin, the chief sustainability officer for Persefoni AI, previously served as chief executive of the Global Reporting Initiative and held sustainability leadership roles with Intel, Apple and AMD. He worked on environmental policy in the U.S. Senate and Environmental Protection Agency and is the author of Changing Business From the Inside Out: A Treehugger’s Guide to Working in Corporations.