10 November 2020
New data shows some, yet insufficient progress in companies’ climate and environmental disclosures at a turning point for sustainability reporting in Europe
Similar to financial accounting, improving sustainability reporting is essential for better corporate management of pitfalls and opportunities in a fast-changing world. Focusing on relevant and meaningful disclosures is key to produce high quality and decision-useful reporting for companies and investors alike. The information that companies publish on their risks and impacts connected to climate change and broader sustainability matters is the main tool for investors, banks and financial market participants to understand the activities and strategies of the businesses they invest in.
The legislation for sustainability disclosures in Europe will be reformed in 2021, as part of a major overhaul of financial market regulation. Importantly, these reforms include plans to create accompanying reporting standards. This is a turning point for European policymakers, who have a unique opportunity to address the gaps identified in the study and provide much-needed directions and certainty to companies operating in critical sectors.
Key findings of the new research on the climate and environmental disclosures of 300 companies from Central, Eastern and Southern Europe published by Frank Bold (a public interest law organisation coordinating the Alliance for Corporate Transparency) include:
- Climate policies, plans and risks:
- 42% of companies don’t explain principal risks. When it comes to policies, 23% don’t report relevant information and 46% don’t describe outcomes of their implementation
- Relatively few companies report on climate change targets (16%) and specific risks in a way that takes into account the planned transition of the European economy to a low carbon model (for example by using science-based methodologies to determine the decarbonisation target and timeline)
- Task Force on Climate-Related Financial Disclosures (TCFD) and the finance sector:
- The number of companies disclosing information corresponding to the TCFD-based criteria for risk reporting, such as time horizons, climate scenarios, strategy to manage risks, etc., remains very low (between 2% and 28% depending on the criteria). Similarly, financial companies surprisingly do not use indicators on their climate risk exposure as recommended by the European Commission.
- Emissions & turnover:
- Reporting on Scope 3 emissions (24%), greenhouse gas intensity (32%) , and turnover from sustainable activities (5%) is not very common, despite being highly material for companies analysed
- Environmental matters:
- The assessment of companies’ disclosures on the use of natural resources, pollution and biodiversity follows a similar pattern, with even lower levels of reporting specific information (10%)
- Positive developments:
- There is timid but promising progress (16% increase of companies providing specific information on their policies), but this improvement is mainly concentrated in Spain, with a 20% increase in climate target reporting
- Regional differences:
- While 25% of South European companies explain alignment with science-based climate targets, only 4% in CEE do so
Clearer obligations and standards are needed to clarify what companies in different sectors are expected to report and how these disclosure requirements are implemented. Similarly, it will level the playing field and ensure businesses in all countries are fit for the future.
Background information: Following the obligations introduced by the EU Non-Financial Reporting Directive in 2018, large companies, banks and insurers are obliged to disclose relevant information on environmental matters, social and employee issues, human rights and anti-corruption. However, as shown by previous research of the Alliance for Corporate Transparency on the disclosures of 1000 European companies, the quality and relevance of information is still critically poor. The European Commission will present a proposal for a reform in early 2021, while the EU Parliament will vote on the issue in Autumn.
The European Union has an ambitious agenda for sustainable finance that focuses on redirecting private and public money to sustainable activities, and works toward covering the €180 billion of additional investments a year needed to achieve the EU's 2030 targets agreed in Paris. The Green Deal and Recovery Package also directly refer to the need for reliable and meaningful sustainability data from companies. Furthermore, investors, accountants, banking associations, consumer groups and leading companies are calling for the standardisation of sustainability reporting at both EU and international level. All these actors, as well as global initiatives such as the Task Force on Climate- related Financial Disclosures are identifying slow but insufficient progress. The process to reform the EU legal framework has the potential to strike the right note in this direction.