A new EU law from 2025 will require companies in Europe to accept a future in which their reporting data on sustainability and their ESG impact will be just as important as data on their financial performance. Non-EU companies also will be subject to these requirements. "The landscape is going to change because preparers are going to offer reliable data," said Patrick de Cambourg, chair of the EU taskforce on sustainability reporting standards.
The EU on 22 June took a major new step towards implementation of the Corporate Sustainability Reporting Directive, or CSRD, when co-legislators - with representatives of the European Commission, parliament and the Council - agreed to establish a mandatory regime for sustainability reporting
The new regime will apply to all entities in the EU that employ more than 250 people, which means some 55.000 companies in the EU that collectively represent more than 50 percent of the EU’s economy.
Taskforce preparing reporting standards
Discussions on the new regime closely involve accounting experts and industry representatives through a group known as Efrag, the European Financial Reporting Advisory Group, a public-private body that recommends technical standards for the European Commission that then can be put into law through a “delegated act” that is directly applicable in all EU member states.
Efrag has created a dedicated taskforce on sustainability reporting standards, known as EU-SRS. Patrick de Cambourg, former chair of French investment bank Mazars, chairs this task force. The standards proposal they recently adopted is open for consultation.
“The purpose is to create sustainability reporting as a second leg of standardised coverage reporting alongside financial reporting,” De Cambourg explained. “So in fact, corporate reporting would walk on two legs, which is better by the way - to walk on two legs, under the control of the governance and under the scrutiny of stakeholders.”
Seeking to establish quality, public data
The new EU requirements are designed to end the discussions - once and for all - on the quality of sustainability data. The financial sector, including asset managers looking to create sustainable investment funds, so far have been frustrated by the lack of transparency and reliable data from the companies in which they could invest. As long as this status quo continues, the industry is at risk of greenwashing.
But with the CSRD, the EU wants to put sustainability data at the core of its initiatives.
“It all comes from the diagnosis that sustainability reporting data is poor. In general insurance, poor quality, lack of comparability, lack of relevance, a lot of cherry picking from a very big number of initiatives rarely audited.” De Cambourg said. “It is difficult sometimes to make the difference between pure communication or advertising and serious reporting.”
‘Moving out of the alphabet soup’
“It's a major step forward, because we are going to move out of the alphabet soup situation that we know now,” he said.
The new rules also introduce the concept of double materiality, De Cambourg told pension funds at the World Pensions Council in Paris last week. This means that companies will have to report on their impact on ESG, and also on risks and opportunities that they face.
De Cambourg said that there still is a discussion to be had during the coming months and years with the International Accounting Standards Board, or IASB, on financial materiality. “We do not want to have multiple reports. We want to create a level playing field as much as we can.”
Addressing pension funds from across the globe, De Cambourg underlined that the EU is becoming the first jurisdiction to create a mandatory ESG reporting regime that will be “on a part with financial reporting”, and that will “be available digitally from day one and under a pretty short timeframe”.
Concerns over timing
Multinational companies will be required to produce their first ESG reports in 2025 covering 2024. Mid-cap companies will follow a year later, and small-cap companies and SMEs in 2027.
“I can tell you that many preparers are very, very concerned by this timing. They’re saying it is a big step, and we have only a couple of years to do that,” De Cambourg said. “I have taken account of these concerns.”
The largest companies also will be required to collect information from companies in their supply chains. “For sustainable finance, banks, insurance companies, pension funds, need information from all players in the economy. So we have to strike the right balance not to overburden SMEs, but also allow them on a voluntary basis to offer the right level of information to their stakeholders.”
‘They will catch you’
Asked if companies would not be able to game the system by moving outside the EU, De Cambourg said that he could not exclude some arbitration with countries such as Liechtenstein and Switzerland. “My recommendation to those entities would be: don't play that game. Because one day, you know, NGOs, financial institutions, will catch you.”
Addressing the role of data providers, De Cambourg underlined that the sustainability data that companies will report will be publicly available.
“What CSRD is bringing is standardised comparable data audited quality prepared at business level by the preparer themselves, put in a system that is available for everyone,” he said. “I hope the data providers and data aggregators understand this willingness to create systemic data as a public good, available to everyone.”
‘Landscape is going to change’
Asked about complaints from fund managers that proper data is not available yet at a time that sustainability funds are required to report on their impact, De Cambourg said funds have to be “very careful”.
“The biggest challenge for asset managers is to avoid being accused of greenwashing or ESG washing,” he said. “Sometimes the border between a fair, neutral explanation of what you do and marketing yourself as a green product or a socially responsible product is seen.”
“The landscape is going to change because preparers are going to offer reliable data on which you can work from but also, in the meantime, please be careful with what you're saying.”
Related articles on Investment Officer Luxembourg:
- European investors most concerned over greenwashing
- APG says EU regime for impact funds creates greenwashing risk
- In Flux: New landscape emerges for fund data
