Briefing discusses links & gaps between the Non-Financial Reporting Directive (NFRD), the Taxonomy & the Sustainable Finance Disclosure Regulation (SFDR)
"The missing piece: corporate sustainability standards in the EU and how they fit with the investors’ disclosure regulation and taxonomy", 13 April 2021
To mobilise sustainable finance for the transformation of the European economy, the EU strategy rests on two complementary lines of action aimed at covering the gap of additional investments needed to meet the EU’s climate objectives (half a trillion EUR every year). First, an overhaul of the incentives in financial markets and corporate governance (these are mainly tackled through the Sustainable Finance agenda and the upcoming Sustainable Corporate Governance initiative). Second, transparency on both positive and negative impacts on sustainability by companies as well as providers of capital.
The strategy to achieve transparency on sustainability impacts relies on the following three pillars:
- The Non-Financial Reporting Directive (NFRD) covers companies obligations to report key sustainability data on risks and impacts.
- The Sustainable Finance Disclosure Regulation (SFDR) defines disclosure obligations for investors to show how they factor sustainability risks in their decisions and how they report their strategy, objectives and impacts to end beneficiaries.
- The Taxonomy Regulation classifies sustainable activities (and specifies criteria and reporting requirements) for the purpose of sustainable finance.
This article addresses three questions: How do these instruments fit together? What needs to be reported and by whom? What are the gaps that the upcoming reform of the NFRD will have to close?...
...The NFR standards are of critical importance to bridge these gaps and thus secure that data is comparable and meaningful, to alleviate companies’ administrative burden, and ensure that smaller businesses are not shut out from access to sustainable finance...
...In this article, we highlight gaps that need to be addressed, in order to improve the quality of company reporting and ensure it is useful for investors, which in turn will enable companies to more easily access sustainable capital and drive capital flows to support climate transition overall.
The key findings are that the picture can be completed by adding:
- a broader scope, covering a wider group of companies
- a clear, simplified set of metrics and indicators
- underlying methodologies for corporate reporting to match those provided for investor disclosure
- details on how to assess whether a company’s targets, timeline and KPIs are in alignment with Paris and SDG goals
- an assessment of minimum social standards in relation to the company’s supply chain
- specification of meaningful disclosures of adverse human rights and environmental impacts