Last year, the European Commission tasked EFRAG – Europe’s financial reporting body – to start preparatory work on the world’s first public standards for sustainability reporting.
These standards will be vital for delivering the EU’s ambitious environmental and sustainable finance agenda. They will power the EU’s under-revision Non-Financial Reporting Directive, and improve the relevance, completeness, and decision-usefulness of the data companies report by law. The first disclosures using the standards shall be filed in 2023.
Better data can drive and track progress against the European Green Deal
Better corporate data is urgently needed to transition the European economy from its current 2.7 °C path onto a Paris-aligned pathway, and to achieve the European Green Deal.
CDP Europe’s latest report, for example, found just 35% of the most impactful European companies report their most important Scope 3 emissions, like use of products. More accurate emissions data - and information on companies’ trajectories – is needed to hit the EU’s 2030 and 2050 goals.
But without better standards, this data will not be available quickly enough for the urgent transformation we need to take place.
The much-anticipated publication of the EFRAG task force’s final report – a roadmap of recommendations for the standards’ ‘scope and structure’– is therefore crucial and shows a promising direction of travel.
Importantly, with the International Financial Reporting Standards (IFRS) having announced its own approach – covering climate-related financial disclosures – the EU’s progress will be instrumental not only for corporates with EU operations, but for raising the bar on global moves to converge sustainability standards, too. A co-construction approach to align EU and global standards will help deliver a level playing field for companies and financial institutions.
A welcome approach
Some report recommendations, though by no means exclusive, are particularly welcome and worth highlighting from our perspective.
We strongly welcome the report’s emphasis on forward-looking data. In particular, that the standard-setter should ensure what companies report can produce clear transition trajectories.
This can be done through guidelines on targets and action plans that are science-based. 50% of European market value is now engaged with the Science Based Targets initiative (SBTi), and work for other earth systems such as fresh water, oceans, land and biodiversity is being developed by the Science Based Targets network. This approach therefore has significant market momentum and is proven to over-deliver emissions reductions in line with 1.5 °C.
Likewise, we strongly agree with the overarching double materiality approach suggested for the standards. This means that non-financial reporting should produce data about the material impacts a company has on its stakeholders – including the environment – as well as the risks and opportunities the company sees to its value resulting from sustainability issues. The 9,600 companies already disclosing environmental data to CDP are already familiar with disclosing data in line with this perspective and such an approach is vital for any global standard.
Another key recommendation is for the standards to treat sustainability information equally to financial data, as per the Task Force on Climate-related Financial Disclosures (TCFD). Putting financial and non-financial data on equal footing helps companies embed sustainability into strategy, makes boards accountable, and crystallizes the fact that long-term, sustainable business success relies on environmental sustainability.
We also agree that, for small and medium-sized enterprises (SMEs), a proportionate approach is needed. SMEs are a major part of our economy, and EU environmental goals will not be achieved without them moving in sync with financial institutions and listed companies. That is why CDP offers the thousands of SMEs reporting each year the ability to report to their customers through a simplified questionnaire.
Writing the new standards with such an approach for SMEs will both help these companies see the tangible business benefits from reporting, and provide their stakeholders with the critical data they need to make decisions.
A new era in data
The EFRAG task force report also suggests that the standard-setter should promote the structured digitization of sustainability data. We agree. The European Commission’s vision is for a single European data space – a single market for data – where live sustainability data sits alongside financial data and can be more easily employed to achieve EU objectives. This will help financial institutions of all sizes access vital data and use it to make decisions that can shift the trillions. The European Single Access Point, in particular, offers a pathway to achieve this.
CDP’s disclosure system has and will continue to be a driving force for scaling such progress. Now with the world’s most comprehensive single comparable source of environmental data, including nearly 80% of Europe’s real economy value, CDP can drive structured data disclosure in line with the standards.
We have long contributed to the EU sustainable finance agenda, and will continue to support the work of the European Commission and EFRAG, including in task forces like that on non-financial risks and opportunities reporting, on which I sit as a member.
By recognizing that the new standards should both learn from existing best practices and coordinate with global developments to harmonize standards, the EU is shifting global ambition and action upwards. It is welcome that, as the pace quickens, the task force recognizes that a globally coordinated approach must be pursued.
As the next stage of this exciting process gets underway, we look forward to continuing to provide our insights and expertise to the Commission and the new standard-setter on other key elements in the standards, like sector- specificity, and with our disclosure system, data, and insights.