Since the European Commission adopted the EU Green Deal as Europe’s new growth strategy, several sustainable finance regulations have come into effect in order to redirect financial flows towards sustainable investments. The main implications are that companies will need to be more transparent about their activities’ environmental and social impacts.

These initiatives are aligned to reduce complexity and the potential for duplicative reporting requirements. While some of the details on expected disclosures are still to be confirmed, companies should already elevate their sustainability strategy and approach to be prepared for the announced non-financial reporting regulations and requirements. Three steps to prepare alignment with these requirements are summarized at the end of the article, and available in more detail in the freely downloadable checklist.

Implications of the EU Taxonomy for sustainable activities

The EU Taxonomy is a robust, science-based transparency tool to help companies and investors make sustainable investment decisions. It establishes six environmental objectives:

1. Climate change mitigation
2. Climate change adaptation
3. The sustainable use and protection of water and marine resources
4. The transition to a circular economy
5. Pollution prevention and control
6. The protection and restoration of biodiversity and ecosystems

It also sets out four conditions that an economic activity must meet to be recognized as Taxonomy-aligned:

• Making a substantial contribution to at least one environmental objective
• Doing no significant harm to any of the other environmental objectives
• Complying with minimum social safeguards
• Complying with the technical screening criteria

The EU Taxonomy Regulation implies that companies under the scope of the Non-Financial Reporting Directive and future Corporate Sustainability Reporting Directive (CSRD) must make disclosures with reference to the Taxonomy. Mandatory reporting will apply from January 2022 for the two climate change objectives, and from January 2023 for the other four objectives.

Using the TCFD recommendations to better manage climate issues

Given the focus on climate outlined by the EU Taxonomy and related regulation such as the Sustainable Finance Disclosure Regulation which concerns financial entities, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) is worthwhile to consider. The TCFD was created to improve and increase reporting of climate-related financial information, and to enable more effective risk assessment, capital allocation and strategic planning. Its framework is structured around four pillars: Governance, Strategy, Risk Management and Metrics & Targets.

While companies based in the United Kingdom are to be required to report according to TCFD by 2025, following the TCFD framework is not directly mandatory in the EU. However, applying the TCFD recommendations will facilitate companies’ effective management of climate issues and alignment with existing and upcoming regulation.

Extension of the EU’s non-financial reporting requirements

Upgrading the current EU Non-Financial Reporting Directive, the European Commission recently adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD), which amends the existing reporting requirements to:

• Extend the scope to all large companies and all companies listed on regulated markets (except listed micro-enterprises),
• Require the audit (assurance) of reported information,
• Introduce more detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards, and
• Require companies to digitally ‘tag’ the reported information, so it is machine-readable and feeds into the European single access point envisaged in the capital markets union action plan.

The Commission will adopt delegated acts to provide the reporting standards for companies to comply with the CSRD. The first set of standards would be adopted by October 2022, likely requiring companies to report by 2024, covering financial year 2023.

3 ESG Acceleration Tips to be future proof for non-financial reporting requirements

1. Identify ESG risks, and integrate into enterprise risk management

As most of the new regulations are taking a risk perspective, special attention should be dedicated to this aspect. If your company is acutely aware of its exposure to current and emerging risks, their impacts and how these risks can be mitigated, there is a strong basis to build the reporting from.

Identify your company’s environmental, social and governance risks. Make sure that the (potential) impacts of these identified risks are well understood, implement additional mitigating actions if needed, and integrate these risks into the company’s enterprise risk management approach.

2. Understand and manage your company’s impacts

To effectively meet the upcoming regulation and reporting requirements (especially the EU Taxonomy), companies should obtain a deep understanding of the societal impact of their activities. Understanding the company’s current status quo is an enabler to manage risks, optimize costs and seize opportunities for improvement.

Tools like Impact Measurement & Valuation and Portfolio Sustainability Assessment can help to quantify the company’s environmental and social impact on society, and classify products as (more) sustainable.

3. Deep dive on climate-related risks & opportunities

Climate is the main area that the regulations are tackling as a starting point given the universality and urgency of the topic. Applying the TCFD recommendations will facilitate companies’ effective management of climate issues that has a cascading effect towards other reporting requirements.

This calls for ensuring effective governance, identifying and addressing climate-related risks and opportunities (including scenario analysis), integrating those risks into the company’s overall enterprise risk management approach, and defining and implementing metrics and (science-based) targets.

Want to know more?

If you are looking to elevate your company’s sustainability approach and be future-proof for upcoming regulation, get in touch with Johana Schlotte, at johana@finchandbeak.com or call +31 6 28 02 18 80 to discuss how Finch & Beak can support you.

^{Photo by Ashim D’Silva on Unsplash}