So much is happening in the ESG/sustainability space right now. Sure, everyone is focused on climate risk and net zero (and rightly so). And the EU is rolling out its sustainable strategy plans. But even more the reporting landscape is changing significantly.
A few things require rather urgent attention in my view that are not on everyone's radar. I address three below - and then one more about looming legal liabilities from climate objectives. Surely there are more developments to take into account, but let's keep it simple.
1. The EU Taxonomy requires a majority of companies to act
The EU has released details of the first two EU Taxonomy categories, climate mitigation and climate adaptation. The other four follow by the end of 2021.
Financial market participants (banks, asset managers, etc.) will have to report to what extent their portfolio is in line with the taxonomy. That information has to come from their investees, which in principle seem to comprise large listed companies (currently 500 employees or more) in priority sectors – so that's a limited part of the full economy.
But is that true? I argue that the taxonomy applies to many more companies:
- The taxonomy focuses on economic activities, products and services. For these activities Revenues, CapEx and OpEx need to be disclosed. The focus on activities means that any sale, production or investment falls under the requirements. That is quite understandable: an investment in clean energy by any company would and should count as relating to climate mitigation. Obviously companies in the (8) priority sectors would need to report their revenues and OpEx too. This means that every company mandated to disclose under the NFRD (see below …) should track its investments ánd – depending on its business – its revenues and OpEx from eligible activities.
- More categories are to follow shortly: pollution prevention & control, transition to a circular economy, sustainable use and protection of water and marine resources and protection and restoration of biodiversity and ecosystems, covering a much wider array of sectors than currently seems the case.
- Due to expected regulatory changes (see the next development) and the interest of the financial industry to disclose high portions of EU Taxonomy-aligned investments in their portfolio, many more companies than just the ones eligible under the NFRD can expected to be requested to report their Revenues, CapEx and OpEx on basis of the EU Taxonomy to secure access to appropriate financing.
2. The NFRD will significantly raise the number of reporters
The current Non-Financial Reporting Directive (NFRD) requires in essence large (500+ employees) listed companies to report on their key impacts and risks from ESG along certain dimensions. The new proposal is promised by the end of March. A key change will be the scope of reporters: most expectedly the new requirements will regard all companies with more than 250 employees. That implies that much smaller (but still large) companies that are privately-owned need to report in near future.
It is also expected that the new NFRD will mandate assurance on (parts of) the information, which will create additional requirements for the quality of reported data.
3. The WEF metrics can become an interim step towards a global solution
The World Economic Forum's International Business Council (IBC) have released the paper with 21 core (and 34 expanded) metrics that some of its members have committed to start disclosing from 2020 onwards. The Council consists of large, multinational companies primarily.
However, in the absence of a global standard, the metrics appear to be simple and accessible and particularly for new joining companies an easy way to start implementing ESG reporting. There is a good chance that the WEF metrics will gain further momentum and become a common baseline for reporting much beyond the IBC.
A looming legal liability – by the time that the climate issue has to be resolved
The notion of climate risk and the actions from governments (such as the UK, the EU and now even the US again) as well as peers and customers has driven many companies to set ambitious climate targets. Our 2020 Towards Net Zero report uncovered that 46% of the 250 largest companies have set net zero or science-based targets. But as these can (and in my view will) become relevant targets for investors, the question rises what it means from a legal perspective if these targets are not met.
I spoke to a former member of the Dutch Supreme Court who make the case with a number of international peers on that companies are yet already liable for not addressing climate change and reaching climate-related targets based on legal principles.