News

Sustainable Finance, EU keeps the lead: New guidelines on yearly disclosures, ESG taxonomy and expert reports published

20 June 2019

Regulatory News Alert

Context and objectives

EU law requires large companies (listed companies, banks, and insurance companies) to disclose certain information on the way they operate and manage social and environmental challenges. Furthermore, companies are required to include non-financial statements in their annual reports from 2018 onwards.

Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014, with regards to disclosure of non-financial and diversity information by certain large undertakings and groups (the “Directive”), lays down the rules on disclosure of such non-financial information.

As required by the Directive, in 2017, the Commission published non-binding Guidelines on non-financial reporting (the “Guidelines”) to help companies disclose relevant non-financial information in a more consistent and comparable manner.

As part of the Commission’s Sustainable Finance Action Plan presented in March 2018, the Commission has now published a supplement to the existing Guidelines, this time to specifically address reporting of climate-related information.

Furthermore, this supplement provides guidance to companies that is consistent with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations published in 2017, which the Commission fully supports and therefore integrates within this document.

Materiality principle

The Guidelines suggest for companies to consider using the proposed disclosures if they decide that climate is a material issue for an understanding of the company’s development, performance, position and impact of its activities.

Given the systemic and pervasive impacts of climate change, most companies under the scope of the Directive are likely to conclude that climate change is of such importance to be considered as a material issue. Hence, companies that conclude otherwise should be able to demonstrate how that conclusion has been reached.

Proposed disclosures

The Guidelines propose climate-related disclosures for each of the five reporting areas listed in the Directive: (a) business model (b) policies and due diligence (c) outcome of policies (d) principal risks and risk management (e) key performance indicators.

For each reporting area, the Guidelines identify a limited number of recommended disclosures. Further guidance is provided after the recommended disclosures for each reporting area. The further guidance consists of suggestions for more detailed information that companies may consider including as part of the recommended disclosures.

Disclosures on “Business model” should include:

  • The impact of climate-related risks and opportunities on the company's business model, strategy and financial planning
  • The ways in which the company’s business model can impact the climate, both positively and negatively
  • The resilience of the company’s business model and strategy, taking into consideration different climate related scenarios over different time horizons, including at least a 2°C or lower scenario and a greater than 2ºC scenario.

Disclosure on “Policies and due diligence processes” should describe:

  • Company policies related to climate, including any climate change mitigation or adaptation policy
  • Any climate-related targets the company has set as part of its policies, especially any GHG emissions targets, and how company targets relate to national and international targets and to the Paris Agreement in particular
  • The board’s oversight of climate-related risks and opportunities 
  • The management’s role in assessing and managing climate-related risks and opportunities

Disclosure on “Outcomes” should include information on:

  • The outcome of the company's policy on climate change, including the performance of the company against the indicators used and targets set to manage climate related risks and opportunities
  • The development of GHG emissions against the targets set and the related risks over time

Disclosure on “Principal risks and their management” should provide description of:

  • The company’s processes for identifying and assessing climate-related risks over the short, medium, and long-term and disclose how the company defines short, medium, and long-term
  • The principal climate-related risks the company has identified over the short, medium, and long-term throughout the value chain, and any assumptions that have been made when identifying these risks
  • Processes for managing climate-related risks 
  • How these processes are integrated into the company’s overall risk management

Finally, regarding the “Key performance indicators”, the Guidelines provide recommended indicators for the companies to disclose in order to facilitate greater comparability of disclosures, whereas “Climate-related Green Bond” and “Climate-related Green Debt” ratios are recommended to be used by the financial sector actors.

Specific guidance for banks and insurance companies

Above disclosures are recommended for all companies that fall under the scope of the Directive, regardless of their sector of activity, including banks and insurance companies.

Banks and insurance companies should however look at the recommended disclosures from the particular perspective of their business activities, including lending, investing, insurance underwriting, and asset management activities.

Hence, Annex I of the Guidelines provides further disclosure propositions for banks and insurance companies to consider while disclosing respective climate-related information.

What else is new?

On 18 June, the Commission also welcomed three important Technical Expert Group (TEG) on sustainable finance reports:

Classification system for environmentally-sustainable economic activities (Taxonomy) aims to provide practical guidance for policy makers, industry, and investors on how best to support and invest in economic activities that contribute to achieving a climate neutral economy. This expert report is published as the Commission's proposal on taxonomy awaits agreement by the co-legislators.

EU Green Bond Standard recommends clear and comparable criteria for issuing green bonds. In particular, by linking it to taxonomy, it will determine which climate and environmentally friendly activities should be eligible for funding via an EU green bond. The Commission expects this to boost the green bond market allowing investors to scale up sustainable and green investment.

Finally, EU climate benchmarks and benchmarks' ESG disclosures sets out the methodology and minimum technical requirements for indices that will enable investors to orient the choice of investors who wish to adopt a climate-conscious investment strategy, and address the risk of greenwashing. The report also sets out disclosure requirements by benchmark providers in relation to environmental, social and governance (ESG) factors and their alignment with the Paris Agreement. This expert report relates to the Commission's proposal on low-carbon benchmarks, which has recently been agreed by the co-legislators.

Next steps

Companies should be able to use the new Guidelines for reports published in 2020, covering financial year 2019. The Commission is expected to gather feedback on the use of the Guidelines in the second half of 2020.

Furthermore, on 24 June, the Commission will host a stakeholder dialogue on climate-related reporting and the TEG reports, while the TEG will conduct a call for feedback on the EU Taxonomy report and on the interim climate benchmarks report.

How can Deloitte help?

Deloitte’s advisory specialists and dedicated services will help you design and implement your business strategy in light of the future evolution of the regulatory framework and market trends.

Via our Regulatory Watch Kaleidoscope service, Deloitte can also help you stay ahead of the regulatory curve to better manage and plan upcoming regulations.

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Contacts

Pascal Martino
Partner – Banking Leader & 
Digital co-Leader
Tel: +352 45145 2119
pamartino@deloitte.lu

Simon Ramos
Partner – IM Advisory & 
Consulting Leader
Tel : +352 45145 2702
siramos@deloitte.lu

Benoit Sauvage
Director – RegWatch, Strategy & Consulting
Tel : +352 45145 4220
bsauvage@deloitte.lu

Marijana Vuksic
Manager – Strategy, Regulatory & Corporate Finance
Tel : +352 45145 2311
mvuksic@deloitte.lu

 

 

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