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Sustainable Finance and Reporting: An introduction to what lies ahead

By Saskia Lodders, Sustainable Finance Expert, The Netherlands

Digital Strategy Transformation Roadmap 2019: Bank, Asset Management, Insurance Company Approaches

Many companies nowadays want to be classified as ‘green’ or ‘sustainable’, prompting the question: How will companies disclose their sustainable information?

Currently, climate-related risks are not well incorporated into risk and reporting frameworks within the financial services industry. Subsequently, there is a lack of information for investors and stakeholders. The ECB mentioned this in their guide on climate-related and environmental risks1 as well, by saying, ‘the assessment of significant institutions public shows sparse and heterogeneous disclosure practices’. However, the momentum is there. Regulatory developments and the pull from society have an impact on the reporting side of companies.

We share our thoughts on reporting and disclosure both at the EU level and globally.

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Sustainable Finance reporting and disclosure on the EU level

The EU taxonomy2, the guide for climate related disclosure requirements, serves as a basis for two reporting/disclosure initiatives: The Non-Financial Reporting Directive (NFRD) – already in place – and the Sustainable Finance Disclosure Regulation (SFDR). The taxonomy is a tool to help large firms (including financial market participants and financial advisors) measure the environmental sustainability of economic activity in the context of a low carbon, resilient and resource-efficient economy.

We make a distinction between the company and product level.

On the company level…

Investors will increasingly require information around risks and opportunities that arise for the company business model due to the transition to a sustainable economy. They will invest with firms that are in control of the impacts they make and those that disclose reliable information.

For large companies, the existing NFRD regulation will play a major role – requiring companies to disclose different elements related to ESG: Environmental, Social and Governance.

At the product level…

Investment products that claim to be directed towards sustainable or green activities will need to refer to the EU taxonomy as soon as it is officially in use. The SFDR will be important in this case (first disclosure requirements effective from March 2021) and the EU is also considering the use of the EU ecolabel for products that are offered to investors. An example of such a classification is the EU Green Bond Standard3. Green bonds are important in financing projects that stimulate a greener economy. However, without a proper standard it’s hard to compare the different green bonds that are currently in place.

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Reporting and disclosure on the global level

On a global level, we zoom in on the Task Force on Climate-related Financial Disclosures (TCFD), an example of a global task force related to Reporting Frameworks.

The TCFD is set up by the Financial Stability Board (FSB). TCFD has developed consistent guidelines for companies on how to report/disclose climate-related risks. It gives guidance on how to disclose, but implicitly also shows best practices in the areas of Governance, Strategy, Risk Management and Metrics & Targets, as depicted below4:

Digital Strategy Transformation Roadmap 2019: Bank, Asset Management, Insurance Company Approaches

Of important note, the European Commission explicitly encourages companies to use this framework for their reporting.

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Looking at the developments in the market and the upcoming legislation coming into force, momentum to start with preparing for disclosure on sustainability matters is critical. While most of the market participants have started to slowly embrace the concept of sustainability-related disclosures, there is still a lot of work to be done in order to standardize the practices across industries. Exciting road ahead. We will keep you posted on new developments in this area.

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More information and details on the EU Regulatory Developments will follow in our next Synechron “Knowledge Bytes” blog post.

Until then, if you would like to know more, please contact our Sustainable Finance expert team:

Rajul Mittal, Head of Sustainable Finance, Amsterdam