To generate high quality environmental, social and governance (ESG) investment data, elements of disclosure reporting by companies need to be connected and also interlinked with other regulation, a panel has said.
Michele Lacroix, head of group investment risk & sustainability at Scor, emphasised that “the missing piece in current reporting is the link between all sections of the Non-Financial Reporting Directive (NFRD)”.
Lacroix, who is also member of the EU’s Technical Expert Group on Sustainable Finance (Teg) and chair of the project task force on climate-related reporting at the European Financial Reporting Advisory Group (Efrag), pointed specifically to interlinkages between the governance of companies, their strategies, risk management, and metrics and targets.
The panel was organised by Frank Bold, a public interest law organisation which is the project coordinator for the Alliance for Corporate Transparency; and the World Benchmarking Alliance, an initiative which works to incentivise and accelerate companies’ efforts to achieving the UN Sustainable Development Goals.
The discussion explored the changes needed to increase the impact of the NFRD, which is currently under public consultation.
ESG data by corporates has been lacking in quality and comparability, making it difficult to use for investments.
Marie Lyager, policy officer, corporate finance at the European Securities and Markets Authority (Esma), explained about the upcoming revision: “Companies are left much freedom to decide how to implement the requirements for their reporting.
“Establishing binding and detailed disclosure requirements to underpin the general rules in the NFRD is a necessary step to ensure more relevant, reliable and comparable non-financial disclosure.”
Guidance from the top
Meanwhile, the disclosure needs to be directed from company boards, the panellists said.
Helena Viñes Fiestas, global head of stewardship and policy at BNP Paribas Asset Management, and member of the Teg, highlighted that sustainability needs to be integrated in corporate governance.
This, she said, means that the boards should disclose the sustainability of the company strategy, link it to the business model and governance of the company and set up measurable targets.
The revision of the NFRD will also include the definition of materiality, ie which ESG information is material to a business and requires disclosure.
Viñes Fiestas said that, in order to correct market failures, such as a non-effective carbon price, “we need information that is material to the company, that is material to its shareholders, that is material to policymakers and then to society and the environment”.
The EU has already established a so-called ‘double materiality’ concept, which addresses this point (see below chart).
But Lacroix said that it “needs absolutely to be clarified”, as it is currently a weak part of the directive.
Meanwhile, she emphasised that companies are no longer their own points of reference – they have been superseded by the Paris Agreement.
Transparency strengthens ESG
To improve connectivity, the investor regulation and company disclosure regulation need to be directly linked, said Viñes Fiestas.
In this regard, she also pointed to the importance that the definition of ‘adverse impacts’ needs to be addressed.
In sustainability disclosure regulation, it says that principal adverse impacts should be understood as investment decisions and advice that result in negative effects on sustainability factors.
A member of the European Commission explained that the existing reporting frameworks don’t consider investor disclosure regulation and “none of them are directly fit for purpose”.
“This is why we are currently assessing the option of having a European reporting standard,” she said, adding that it would build on existing standards.
Going forward, Viñes Fiestas said that investors need the tools to fulfil their role as stewards.
“This is why I advocate a revision of the Shareholder Rights Directive to include not only issues around facilitating the tabling of resolutions [but also] facilitating proxy access and voting.
“But we should also make it compulsory for investors to vote on issues and the sustainability strategies of companies,” she said.
The public consultation is open until 11 June. The proposal for the revision is planned to be published at the end of the year.
