This is part 4 of a series of educational posts from the IFoA’s Climate Change Disclosures Working Party about climate reporting topics. Here the working party focuses on the EU: current practices and a brief overview of things to come.
The EU accounted for about 7% of 2021 global greenhouse gas emissions, ranking third highest behind the US and China, with Climate Action Tracker giving an overall rating of ‘insufficient’.
The EU’s current framework for climate action, including climate disclosures and the transition to a net zero economy, is driven by the European Green Deal, introduced in 2020. One third of the €1.8 trillion investments from the NextGenerationEU Recovery Plan and the EU’s 7-year budget will finance the European Green Deal.
The EU Sustainable Finance Disclosure Regulation (SFDR) has been in effect since March 2021, with the aim of improving transparency, reducing greenwashing and encouraging investments of more sustainable products and businesses. The latest version was implemented on 1 January 2023. It applies to financial market participants and financial advisors within the EU. This includes asset managers, institutional investors, insurance companies, and pension funds.
At a high level, the SFDR requires:
It applies the approach of ‘double materiality’, that is, firms have to disclose not only the risks faced by external factors (‘outside-in risks’), but also the impacts they may cause to the environment and society (‘inside-out risks’).
The Non-Financial Reporting Directive (NFRD) was introduced in 2014 and aimed at public-interest companies with more than 500 employees. By 2018, all members of the EU adopted NFRD via national law. The rules are due to be superseded by the Corporate Sustainability Reporting Directive (CSRD: see next section). NFRD requires information on process and outcomes related to the environment.
The EU taxonomy sets out criteria to determine which investments are considered to be environmentally sustainable and the first version of the regulations came into force on 12 July 2020. The Article 8 Delegated Act (effective from 1 January 2022) brought in requirements for companies reporting under NFRD to disclose alignment of their activities with the EU taxonomy (effective from 1 January 2023).
From 2023, the European Banking Authority (EBA) Pillar 3 ESG disclosure requirements came into force. They require banks to disclose ESG-related risks, including transition and physical. These are via EBA templates.
One country of note in the EU is France, which leads the way with climate-related disclosures, including Article 29 of the Energy and Climate Law (which replaces the previous Article 173 of the Energy Transition for Green Growth Act). Article 29 requires all financial institutions to disclose climate-related and biodiversity-related risks, using the concept of double materiality (to align with SFDR). France’s regulations may eventually be further aligned with wider EU regulations.
In addition to points raised above, please see our separate post on EIOPA, which covers further disclosure requirements for insurers and pension schemes.
On 5 January 2023, the EU Corporate Sustainability Reporting Directive (CSRD) entered into force. CSRD aims to modernise and strengthen NFRD requirements. The first tranche of companies will have to apply the new rules for the first time in
the 2024 financial year, for reports published in 2025 (with CSRD being applied to other companies in stages). CSRD will also apply the ‘double materiality’ approach.
The EU has, via the European Financial Reporting Advisory Group (EFRAG), issued 12 European Sustainability Reporting Standards (ESRS) for public feedback. The ESRS aim to set out the reporting requirements for CSRD. The deadline for feedback was 7 July 2023, with final regulations expected later in 2023. Based on current discussions, we expect these new standards to be effective for companies to adopt from 1 January 2024.
For details of the current climate-related draft, please see: ESRS E1 - Climate change.
Below is a list of websites which we hope that you find useful.
Corporate sustainability reporting - European Commission (finance.ec.europa.eu)
Sustainability Reporting Standards Interim Draft - EFRAG (efrag.org)
What are your thoughts on the points raised in this article?
We would love to hear your views in the comments on the IFoA's Sustainability Finance Community LinkedIn page.
To find out more, visit: Sustainability: research working parties
The views expressed in this post are those of the individual authors, and not necessarily those of the Institute and Faculty of Actuaries or those of their employers. Information within this post is correct as at the date of writing (i.e. end of July 2023). Hence, there may be subsequent updates which are not reflected. Any reader should still reference the underlying legislation and standard, and should there be any conflict, the underlying information in the relevant standard or legislation supersedes any information presented in this post.