As a first building block, the European data register should focus on ESG disclosure in line with the Non-Financial Reporting Directive (NFRD), EU taxonomy-based information, starting with climate change adaptation and mitigation objectives, as well as ESG data necessary to financial market participants to comply with the SFDR. As another building block the register should include relevant ESG information already collected by European and national institutions such as governments, central banks, statistical bodies, etc. The EU should open up its databases that collect environmental reporting data and make those re-usable. This data is critical for financing, and to track the economic performance of sustainable activities. Such data should be gathered and made available digitally to users of non-financial information – not only investors, but also lenders, academia, researchers, authorities and others. To facilitate the collection, a certain level of standardisation would be necessary. Finally, data should be provided to users ideally free of charge.

Sustainability regulation must establish uniform and clear standards throughout Europe and prevent greenwashing. For that reason we request the Commission not to adhere to the timetable of the SFRD. A full postponement of the implementation date of the SFDR to 1 January 2022 would facilitate financial market participants’ and financial advisors’ compliance with the new disclosure requirements. This moderate extension would give market participants more time for practical implementation (assuming publication of the draft RTS by end January 2021). It would also help not to impede the distribution of sustainable financial products.

In addition, ESG disclosures under SFDR still need to be complemented by Taxonomy related information which will require further adaptations of the RTS, to be effective as from 1 January 2022. The suggested extension for the application of SFDR would therefore have the additional advantage of allowing the coordinated implementation of all ESG-related disclosure requirements for sustainable products with lower implementation costs in the interest of the end-investors.

ESBG acknowledges the benefits that an improved non-financial reporting can have in order to improve the competitiveness of the company, CEO engagement in ESG matters, accountability; the integration of externalities risk assessments, financial assessments, as well as to mitigate negative impacts on the climate while building trust with stakeholders. While supportive of the implementation of the recommendations of the TCFD, savings and retail banks nonetheless draw attention to the issue of data availability in relation to the proposed indicators. For these reasons, non-financial reporting should remain reliable and as flexible as possible, and companies should be able to choose the reporting strategy and guidelines that fits better their strategies and position, considering information related to the four main topics and the principle of materiality.

Identified Concerns

The recent regulatory developments in the context of the EU Sustainable Finance agenda create an urgent need for publicly available ESG data as well as how to enhance their sourcing. Compliance with the new disclosure obligations introduced by the SFDR requires financial market participants to have access to comparable robust and reliable ESG data at the level of companies. From the perspective of the EU Taxonomy Regulation, companies subject to the NFRD will have to disclose how and to what extent their activities qualify as environmentally sustainable as defined in the Regulation. Unfortunately, the availability of comparable, reliable and public ESG data of good quality is currently insufficient to comply with the increasing expectations and new regulatory requirements due to apply shortly. When available, data is often difficult to compare and raises reliability questions. Moreover, ESG data by third party providers is often expensive in particular for small-size financial market players, researchers or academia. With an increasing demand for ESG information, the fragmentation in ESG third party data providers risks leading to insufficient availability of comparable and reliable ESG data as well as to unnecessary costs and competition concerns.​

Corporate reporting has to change – it is not broken; but it will be unless it changes. It has gotten better at showing what is valuable for companies. There is a confusion between what should be and how to change. Reporting is important for better business, better society, better information, better transparency and better capital markets.

Also, financial market participants and financial advisors face huge challenges in ensuring compliance with SFDR by 10 March 2021:

They must include templates for sustainability information in their distribution documents by the time the regulation comes into force on March 10, 2021. The requirements will be developed by the ESAs and will not be available before the end of January 2021. This leaves just five weeks to adapt the investor information.

We therefore echo the concerns highlighted by the ESAs in this regard that financial market participants need more time to properly implement the provisions in the RTS. This situation poses operational challenges in order to be able to update systems and documentation in time.

Furthermore, the timetables and regulatory content between the SFDR and the various sustainable finance work-streams have also been misaligned. These include the Taxonomy Regulation, NFRD, and also the MiFID II RTS on ESG factors and preferences, the latter of which has also been published for feedback quite late Previously discussed issues still persist such as the lack of an ESG data register, and the legal risk for ESG products arising from unclear and inconsistent data indicators, methodologies, definitions etc. ​​

Why Policymakers Should Act

While ESG products are becoming more popular in Europe, justifying common harmonised product disclosure rules, the area of principal adverse impact reporting is relatively new. Data constraint is one of the biggest challenges when it comes to sustainability-related information to end-investors, especially in the case of principal adverse impacts of investment decisions.

Harmonised EU rules on sustainability-related disclosures to end-investors is fundamental to achieve the objectives of the SFDR, i.e. to enhance data availability and comparability and foster sustainable investments while avoiding the risk of greenwashing. Otherwise, in the absence of harmonised EU rules on sustainability-related disclosures to end-investors, it is likely that diverging measures in some EU member states will have the effect that investors are provided with information only in a piecemeal fashion. Such divergent approaches would continue to cause significant distortions of competition resulting from significant differences in disclosure standards. Divergent disclosure standards make it very difficult to compare between different financial products and create an uneven playing field between these products and between distribution channels, and erect additional barriers to the internal market. Such divergences can also be confusing for end-investors and can distort their investment decisions.

Apart from that, the availability of raw harmonized ESG data would allow for better comparability, increase transparency, lower barriers and costs, generate efficiency, reduce complexity and attract new players. Robust, comparable and reliable ESG data is key to identify and assess sustainability risks in lending activities. In addition, availability of ESG data is also necessary to enable financial institutions and investors to steer their portfolios towards the objectives of the Paris Agreement and of the European Green Deal much more efficiently and on a much broader scale.

EU institutions have identified the need to become active. In particular, it is being assessed to which extent the non-financial reporting framework is still fit for purpose and for new challenges (sustainability, assurance and digitalisation).

The principle of proportionality is crucial in this respect. Policy-makers need to bear it in mind when designing legislation and reporting and disclosure requirements for both financial institutions and corporates, including SMEs.​

Background

Following the adoption of the 2015 Paris Agreement on climate change and the United Nations 2030 Agenda for Sustainable Development, the Commission has expressed in the 2018 Action Plan “Financing Sustainable Growth” its intention to increase transparency in the field of sustainability risks and sustainable investment opportunities.​

Given the challenging situation in terms of global warming, urgent action is needed and financial market participants and financial advisers are expected to disclose specific information on their approaches to the integration of sustainability risks and the consideration of adverse sustainability impacts.

In December 2019, the EU Disclosure Regulation entered into force and will be applicable as of 10 March 2021. The Regulation will apply to financial market participants and financial advisers (e.g. insurance intermediaries; credit institutions, investment firms, AIFMs and UCITS management companies which provide investment advice as defined in MiFID II Directive). Also, the Regulation introduces a range of other new definitions, including for concepts such as sustainable investments, sustainability risks and adverse impacts on sustainability factors.

EBA, EIOPA and ESMA (Joint Committee) are tasked with drafting Regulatory Technical Standards (RTS) on:

pre-contractual disclosures to specify the details of the presentation and content of the information disclosed;
the content, methodologies and presentation of information published in financial markets participants’ websites;
the content and presentation of information disclosed in periodical reports; ​

and Implementing Technical Standards (ITS) to determine the standard presentation of information on the promotion of environmental or social characteristics and sustainable investments.