Message from the CEO, Nina Schindler
"The long-awaited review of the Non-Financial Reporting Directive that came out rebranded as the “Corporate Sustainability Reporting Directive“ (CSRD) late last month, is a key building block of the Sustainable Finance Framework in line with the objectives of the Paris Agreement and of the EU Green Deal. It will considerably enhance the availability of sustainability data of companies, which is crucial for our banks to steer their loan portfolios to comply with the new regulatory requirements both for investments and credit risk management. As SMEs, as the main client group for most European co-operative banks, remain outside the perimeter of the CSRD, the important question thus is how to provide adequate solutions. Although the proposal envisages a voluntary approach for SMEs, it is vital to take SMEs’ needs fully into account with a simplified regime, awareness raising and specific support. SMEs need realistic and hands-on solutions that can be applied in a balanced and proportionate manner. We must avoid overburden while ensuring that they can be onboarded in the green transition path. This is the spirit of our project with Accountancy Europe for a simplified ESG checklist for SMEs that is published today. We look forward to bringing in our expertise, and to engage with the co-legislators, as well as, with EFRAG that will design the new European sustainability reporting standards.
3 Questions to Alain Deckers, European Commission, DG FISMA, Head of Unit - Corporate reporting, audit & credit rating agencies
Alain Deckers has over 20 years of experience in public service at the European Commission. He has been responsible for policy reviews and policy development in areas including trade in goods, environmental policy, public procurement and financial services regulation.
He currently heads a team of responsible for corporate reporting, including both financial and non-financial reporting; audit; and credit rating agencies as part of DG Financial Stability, Financial Services and Capital Markets Union. He is also the Vice-Chairman of the European Lab@EFRAG Steering Group. Alain graduated in physics and holds a masters in the economics of technical change, both from the University of Manchester (UK).
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- The European Commission has recently released the legislative proposal to review the Non-Financial Reporting Directive, regarded as a key pillar of the EU sustainable finance framework. Could you tell us about the main novelties introduced?
The Commission’s proposal introduces three main novelties.
First, the proposal extends the requirement to report sustainability information to all large companies, whether they are listed or not, and to all listed companies, with the exception of listed micro-enterprises. This would mean that approximately 49.000 companies would be under the scope (representing 75% of the turnover of all limited liability companies), compared to 11.600 companies (47% of turnover of all limited liability companies) today. The reporting requirement for listed SMEs will apply from 1 January 2026.
Second, the centrepiece of the proposal is the introduction of the requirement for companies to report according to the European sustainability standards. It is a prerequisite for the success of a number of other elements of the proposal, including audit, digitalisation and better enforcement. The proposal empowers the Commission to adopt such standards through delegated acts, provided that they meet criteria set-out in the proposal. SMEs will be able to report using standards that are proportionate to their capacities and characteristics.
Third, the proposal for the first time introduces an EU-wide audit (assurance) requirement for sustainability reporting. This should go a long way towards addressing the concerns of investors and other stakeholders about the accuracy and reliability of the sustainability information that companies report today. The Commission proposes to start with limited assurance. Our ultimate aim is that sustainability information should be subject to reasonable assurance, as for financial information, but we need to carefully consider the specific characteristics of sustainability information before taking that step. For example, sustainability information is often forward-looking – whereas financial information is generally retrospective. This has implications for audit and assurance. We will work with European regulators and international standard-setters on this topic.
- Co-operative banks are main financing partners of SMEs in Europe. Supervisors require banks to increasingly assess the ESG-risks of their portfolios, including SMEs. There are good reasons for that because SMEs represent the backbone of the EU economy, without which the net-zero transition will not be possible. At the same time, it is important to have a balanced and proportionate approach to avoid overburdening smaller companies in particular in the post-pandemic recovery. How do you look at this issue and how can it be tackled in you view?
The proposal was subject to a rigorous impact assessment. The Commission carefully considered whether to modify the scope of the current provisions, and if so to which companies. We decided to include SMEs with securities listed on regulated markets in the scope of the proposal as there is a strong demand for this from asset managers and other investors. The requirements for listed SMEs would apply three years after they apply to other companies. This also mitigates the economic difficulties faced by smaller companies because of the COVID-19 pandemic. In addition, to limit the burden on listed SMEs, they will be allowed to report according to standards that are simpler than the standards that will apply for large companies. The Commission has not proposed to extend mandatory reporting requirements to SMEs with transferable securities listed on SME growth markets or multilateral trading facilities (MTFs).
That said, many SMEs are facing growing requests for sustainability information – typically from banks that lend them money and large companies that they supply. The transition to a sustainable economy will mean that collecting and sharing sustainability information becomes common business practice for companies of all sizes. Therefore, in parallel to the new rules for large companies, the Commission is also proposing the development of separate, proportionate standards for SMEs. SMEs listed on regulated markets could use these simpler standards to meet their legal reporting obligations, while non-listed SMEs could choose to use them on a voluntary basis. These standards would be carefully adapted to the capacity of SMEs. They would make it easier for SMEs to report information to banks, large-company clients and other stakeholders. They should also set a reference for information that companies that are within the scope of the CSRD could reasonably request from SME suppliers and clients in their value chains. We hope that these standards can help SMEs play a full role in the transition to a sustainable economy.
- In parallel with the level I, the Commission aims at elaborating the level II measures, referred as EU Sustainability Standards. Could you elaborate on their developments, process and timing? Which shall be the key elements of such future EU standards? How about their alignment with current international initiatives?
The next step is for the European Parliament, and the Member States in the Council, to negotiate a final legislative text based on the Commission's proposal. In parallel, the European Financial Reporting Advisory Group (EFRAG) will start work on a first set of draft sustainability reporting standards. These draft standards could then be ready for consideration by the Commission once the Parliament and Council have agreed a legislative text. EFRAG aims to have the first set of draft standards ready by mid-2022. The final timetable will depend on how the Parliament and Council progress in their negotiations. If they reach agreement in the first half of 2022, then the Commission should be able to adopt the first set of reporting standards under the new legislation by the end of 2022. That would mean that companies would apply the standards for the first time to reports published in 2024, covering financial year 2023.
EFRAG will be responsible for developing draft sustainability reporting standards. At the request of the Commission, EFRAG recently published technical recommendations and a roadmap for the development of EU sustainability reporting standards. In parallel, the Commission asked the President of EFRAG to make recommendations for possible changes to EFRAG's governance to enable it to take on the role of developing such draft standards. According to these recommendations, EFRAG will develop draft standards with the necessary due process and with expert input from stakeholders.
Both reports stress that standard setting should build upon and contribute to international initiatives that have similar goals. This cooperation should be carried out in a spirit of partnership and ‘co-construction’. The EFRAG Task Force report proposes a structured dialogue between EU and global standard-setting initiatives, and raises the idea of joint projects to develop new standards where that might be appropriate.
Second Opinion from Kristiina Vares-Wartiovaara, ESG specialist, OP Financial Group
Kristiina has over 20 years' experience in the finance industry. After heading the sustainability work at OP Asset Management for a year, she is currently focusing on the thematic ESG investment funds' management, fulfilling also a role of senior ESG specialist. In 2020-2021 Kristiina was part of the EFRAG Project Task Force on developing the EU sustainability reporting standards. In 2019-2020 Kristiina worked on the advancement of the ESG data availability & standardization in the EU: the initiative, which was started in Finland in 2019 and which in June 2020 due to EACB support and cooperation resulted in the joint European finance industry letter "Call for EU action: a centralized register for environmental, social and governance (ESG) data in the EU". Previously Kristiina worked as portfolio manager at Danske Bank and as an economist and analyst at Nordea. Kristiina is also a PhD student at Hanken Business School in the field of sustainable finance.
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- You have represented the EACB in the EFRAG Project Task Force on the preparatory work for possible EU Non-Financial (or Sustainability) Reporting Standards. What are the main proposals and how do you assess them from the co-operative banks perspective?
The EFRAG Project Task Force (PTF) worked on top-level guidelines for what the future European sustainability reporting standard should include. The PTF did not make specific recommendations, for example relating to which metrics need to be included. Specific metrics will be defined by the future European Standard Setter (ESS) – the work for which EFRAG will assume the responsibility after its governance renewal process is finalized, which will allow oversight of sustainability reporting in a parallel and similar manner to the oversight of financial reporting.
To my opinion the PTF managed to work out very advanced recommendations, which are clearly leading in global perspective and are, thus, very positive from the EACB interests’ point of view. Some of the main recommendations are the following:
- Ensuring the “co-construction” approach to creating reporting standards in parallel with and contributing to the work done by other leading global standard setters like GRI, SASB, TCFD, IFRS, IIRC and many others. Certain principles were worked out relating to how the selection of global best practices to be integrated in the EU needs to be done: for example, suitability with the EU Sustainable Finance Strategy and global popularity of the standards were outlined. Co-operative work will ensure the speed of future EU standards’ development, which is very important from the EU green policies implementation point of view.
- Scope of reporting was increased to include SMEs in proportionate manner. Also enabling SMEs to report was an important and distinct priority.
- Special role of financial institutions (FIs) was integrated as both preparers of sustainability reports (direct/own ESG impacts) and users of sustainability information (indirect ESG impacts of FIs). The three main types of FIs (banks, asset managers & owners and insurers) and their business segments’ specifications will need to be considered. The priorities of FIs reporting were also outlined with respect of the first version of the standards, which will be published in mid-2022: inclusion of the full range of ESG metrics (not only climate), inclusion of quantitative and future-looking metrics to cater for climate scenario construction as well as the 12-month lag requirement for the indirect impacts’ reporting by FIs – after the reporting period of the companies, which are being financed by FIs. It was also recommended that in the final version of the standards it is important to consider how monetary valuation of ESG externalities could be performed by FIs.
- Reporting architecture will be very elaborate - based on the “rule of three”: 3 reporting levels (sector-agnostics, sector-specific and entity-specific), 3 reporting areas (strategy, implementation and performance measurement) and 3 reporting topics (environment, social and governance+). This architecture will strongly support integration of sustainability work with company strategy: PTF recommended that sustainability report needs to be part of the management report. This structure will also include as part of governance+ topic the best practices of integrated reporting, namely the link to intangible assets’ evaluation and innovativeness management assessment. European “double materiality” principle will be of course also integrated.
- One of the key issues for co-operative banks in non-financial reporting is the indirect ESG impact, i.e. the sustainability reporting of our banks depends on the availability of our clients' ESG data. Currently those data are scarcely available. While the NFRD’s revision may trigger greater data availability, the issue of accessibility remains. The EACB has put forward a proposal in June 2020 for the creation of a EU ESG data register as a possible solution. How do you see this evolving and how is it taken into account in the recommendations of EFRAG?
Creating digital taxonomy and on-boarding data tagging technique was included in the PTF recommendations as part of the future reporting structure and prioritized to be implemented from the very beginning. This reflects the decisions taken on 24th September 2020 on the EU level – when as part of the new action plan of the Capital Markets Union the creation of the single access point for the financial and non-financial data was outlined as action point number one. While the PTF reporting recommendations did not elaborate how the single access point for data needs to be structured, financed and organized, all of the recommendations made by the PTF assumed that the data would be digitalized and prepared with high quality and consistency, including clear and stable classification of disclosures, which would allow it to be audited shared in the joint data register.
The PTF recommendation outlined that the digital reporting structure should reflect the whole proposed reporting architecture. And granular segmentation of disclosures needs to be ensured - allowing for their inclusion into the digital taxonomy. The related taxonomy should allow for different levels of reading, from the most granular level to the executive summary level. Entity-specific extensions should be allowed.
An important feature of the single access point and of the future reporting structure would also be the interconnectedness of financial and sustainability data. One of the PTF workstreams focused on this topic and issued a separate report (all workstreams’ reports can be found here) on how the future European standard should interconnect the two main pillars of reporting: financial and sustainability. Connecting these two would ensure a holistic and coherent view on and understanding of corporate reporting by the end-users of the information.
- Another key topic for co-operative banks is the non-financial reporting for SMEs. They represent the economic fabric at local level and need therefore a specific approach when considering SMEs reporting. Do you think that the current EFRAG’s proposals can be a viable way forward?
EFRAG recommendations provided an advanced and good solution for inclusion of SMEs into the scope of reporting – suggesting that all companies listed on regulated markets would need to be included. The reporting solution for SMEs was created with focus in mind for enabling SMEs to fulfill the reporting requirements.
SMEs comprise a very important component of the EU reporting standard. SME reporting would enable fulfillment of one of the two overarching principles of the standard: namely ensuring “an inclusive range of sustainability reporting stakeholders to maximize value creation by businesses in a balanced manner between stakeholders”. The interpretation of this principle is that SMEs are often part of value chains and act as stakeholders of larger companies. Thus, reporting by SMEs of sustainability information is crucial in ensuring that also larger companies can report on their value chains more transparently. And eventually such reporting would better cater to a broader range of various stakeholders.
The reporting standard for SMEs would not be a merely “simplified version of the main standard”, which is applied for larger companies, but a distinct sector-specific standard for SMEs. Particularly for SMEs it was recommended that the proportionate standard-setting approach tailored for EU SMEs would integrate their size, risk profile and governance structure variety. Thus, the PTF challenged the conventional approach of differentiating SME only based on size. The broader definition of SMEs would cater better for their sustainability footprint and reporting ability. This proportionate solution is expected to enable SMEs to report better.
It was also suggested to implement a sector-specific approach for SMEs, which would include sector-agnostic disclosures applicable to all SMEs and sector-specific disclosures for a subset of SMEs operating in most high impact sectors. While it was not the PTF’s role to determine whether SMEs should be subject to mandatory sustainability reporting, it was nevertheless the PTF’s opinion that SMEs will most likely not be able to produce sustainability information at a reasonable cost for them. Thus, PTF believed that they should only be expected to report if they operate in a high impact sector.