To date, green labels have overwhelmingly played a marketing and publicity role. With limited scrutiny or accountability, companies have been at liberty to loosely position activities as ESG-friendly. However, it is becoming increasingly evident that if firms are to achieve sustainability targets, regulatory oversight is key. With the introduction of their green taxonomy, the European Union (EU) strives to enforce the consistent and accurate green classifications for sustainable economic activities that have been otherwise lacking.
EU Taxonomy reporting applies to both financial firms and non-financial corporations, with the former at the mercy of the latter to meet compliance demands. That is to say, EU Taxonomy disclosures by non-financial companies are required by financial firms for the successful enforcement of the regulation. It therefore goes without saying that the quality of corporate reporting as defined under the Disclosures Delegated Act (DA) is foundational to the EU Taxonomy’s effective implementation.
Reporting is already underway with certain EU Taxonomy eligibility disclosures mandatory as of last January. A reporting template offered in the aforementioned Disclosures DA acts as a guide for more consistent and accurate corporate disclosure. However, the reporting volume is minimal and only a handful leverage the standardized reporting template with most firms leaning towards a more qualitative approach
Bloomberg recently reviewed EU Taxonomy disclosures for over 4,000 corporate companies. Of those reviewed, less than 10 percent reported eligibility data and of that group, only 0.5 percent reported using the Annex II Template. While using the Annex II Template is not mandatory until next January, it is considered best practice given the value of comparable and reliable company reported data to achieve green investment goals. It is clear, though, that we have a way to go.
Beyond the EU Taxonomy, corporate disclosure takes center stage
The emphasis on robust corporate ESG disclosure as a paramount mechanism to clamp down on greenwashing is not limited to the EU Taxonomy.
During Bloomberg’s event, Sustainable Finance in 2022: Putting Europe’s Ambition into Practice, the European Commission’s head of sustainable finance, Martin Spolc, said, "On the Corporate Sustainability Reporting Disclosure, CSRD, we are trying to address one of the biggest challenges that the financial sector has, which is lack of data. This piece of law will bring the needed transparency and greater disclosures by the corporates."
CSRD is a draft EU legislation which lays the foundation for sustainability disclosures based on a consistent reporting structure for all large EU companies and all listed companies on an EU regulated market. This need for standardization is compounded by the European Financial Reporting Advisory Group’s (EFRAG) recent publication of their first set of draft standards which sets out the European Sustainability Reporting Standards (ESRS).
The SEC proposal would require domestic and foreign registrants to include certain climate-related information in statements and periodic reports including data around climate-related risks.
Beyond the EU, in the U.S., the Securities and Exchange Commission (SEC) has also chosen to hone in on corporate disclosures as priority with its climate-related disclosure rule proposal, which heavily leans on the Task Force on Climate-Related Financial Disclosures (TCFD) framework. The proposal would require domestic and foreign registrants to include certain climate-related information in statements and periodic reports including data around climate-related risks. All in all, the message from regulators is loud and clear: corporates need to up their game to enable the "greening" of our economy.
We all have a part to play to help corporates find their feet
On the ground, market participants have a responsibility to bolster regulatory ambitions. Financial firms have the influence and leverage to encourage companies to better the breadth and depth of their ESG data reporting. And this responsibility is clearly being taken seriously with the continued capital allocation to ESG funds even despite recent market volatility.
As we embark on this disclosure journey, the onus cannot be on companies to act alone; the entire industry should all be engaged in this process, encouraging accurate corporate disclosure and ensuring that we are comparing green to green.