Ambition ‘remains high’ on EU corporate sustainability disclosures, says EC’s Spolc 

Speaking at RI Europe, he also commented on recently released measures to regulate ESG ratings, guidance on transition finance and the shelving of the EU Ecolabel.

Audience at RI Europe
RI Europe took place in London on 13-14 June

The EU’s incoming corporate sustainability disclosure rules remain ambitious and are not on track to become a voluntary regime, the European Commission’s Martin Spolc told the audience at RI Europe on Wednesday.

Spolc, who is the sustainable finance head at the EC’s financial services arm, commented on the market response to the proposed standards which will underpin the EU’s forthcoming Corporate Sustainability Reporting Directive (CSRD). 

The draft European Sustainability Reporting Standards (ESRS), the first set of rules, received a mixed reception on its release last week following revisions made by the EC which would make almost all disclosure requirements subject to materiality assessments.  

This is a big departure from the original ESRS proposal by EU standards body EFRAG, which said that all climate-related reporting as well as reporting that stems from other EU legislation – such as the indicators relevant to reporting under the Sustainable Finance Disclosure Regulation (SFDR) – would be mandatory.  

Alignment between the CSRD and other strands of EU financial sector disclosure requirements, such as the SFDR and taxonomy-alignment metrics, is considered critical to ensure that investors and banks can access reliable data when reporting on their portfolio companies and loan books.  

Spolc said: “We have added to the excellent proposals by EFRAG and tried to be a bit more proportionate in view of the fact that not all companies should have to disclose every KPI which may not necessarily be super-relevant for their business.    

“But does it mean that the standards are no longer mandatory? Well, they are mandatory subject to a materiality assessment concluding [that] these aspects are material for the operations of the company in question. I have seen some headlines saying that these standards will be voluntary. That’s not correct.” 

He added: “The ambition remains pretty high still.”  

Spolc made the comments in a virtual keynote interview at RI Europe on Wednesday. 

He acknowledged the reliance of financial institutions on the disclosures made under CSRD but emphasised that the EC was trying to fix problems stemming from usability “rather than create new ones”. 

He also stressed that the ongoing consultation around the draft ESRS is a “genuine one” and that the EC would review all responses despite the short four-week consultation period before its adoption later this year. 

ESG ratings and conflicts of interest 

Spolc also commented on a package of sustainable finance measures released by the EC on Tuesday, which included a new mandate for EU financial markets watchdog ESMA to regulate ESG ratings providers, eligibility criteria for the four non-climate environmental objectives under the taxonomy and guidance on transition finance. 

According to the proposals, new conflict of interest rules will bar ESG ratings providers from offering related services such as benchmark development, credit ratings, and financial, consulting and investment-related services. 

When asked what this means in practice and if an ESG ratings provider would have to sell conflicting activities or could offer these services through a separate business entity, Spolc said the measures mirrored existing conflict-of-interest safeguards that apply to credit rating agencies.  

This is in view of the parallels between the ESG ratings sector and CRAs, which “are providing advice but at the same time also assigning ratings to their clients”, he added.

“Frankly, we did not want to reinvent the wheel and wanted to get some inspiration from the existing measures in our credit rating agency regulation. We also did not want to create a completely new framework which would confuse people.”  

MSCI, ISS, Sustainalytics and Moody’s would not comment directly on how the changes would impact their business, and noted that they would continue to work through the details of the proposals and engage regulators on the issue. S&P and Fitch did not respond in time for publication.  

Daniel Cash, who is the founder of the Credit Rating Research Initiative and ESG ratings and regulations lead at law firm Ben McQuhae & Co, said the proposals gave the impression that they would effect the “the forced and complete separation of ESG rating entities from every other business”.  

“Leading agencies may be required to develop subsidiaries to comply with the registration requirements anyway, so forming stand-alone subsidiaries is not too much of an ask,” he said.

“The impact is that it fundamentally lowers the conflict of interest related to mixing interests between commercial and analytical divisions and the biggest contributor of conflict by far, which is the providing of ancillary and consultancy services.”

The proposals came on the same day data giant Morningstar confirmed that its ESG arm Sustainalytics would be put under the responsibility of CEO Ron Bundy, who also oversees its index business. Separately, data and proxy firm ISS and index firm Qontigo are due to merge under plans revealed by parent Deutsche Börse earlier this year.

Transition, social and Ecolabel 

The European Commission also published this week a non-legislative document on how the existing sustainable finance framework can be used to facilitate transition finance.  

Spolc said he hoped this would help address “criticism in the past that our framework focuses too much on financing what is already green today, but doesn’t pay attention to the efforts that stakeholders are making where alignment with the taxonomy cannot be done immediately”. 

Separately, Spolc acknowledged the lack of updates on the EU Ecolabel for Retail Financial Products, which was a key proposal under the EU’s overarching 2018 sustainable finance action plan. 

“When I look back at our action plan, I see that we have pretty much done everything we have set out to do, with one exception,” he said. “That is the EU Ecolabel, which is currently on hold. We have now decided that we will finalise the taxonomy for all six environmental objectives before we build any label on top of them.  

“I am not saying the project is dead, but we will consider next steps after the other environmental objectives have been adopted.”  

Spolc also confirmed that the commission is not actively considering plans to build out a so-called social taxonomy, which would set out a list of socially sustainable activities in a similar structure to the green taxonomy. 

A broad outline for such a framework has already been proposed by the EU’s taxonomy advisory group and the EC originally promised a report by the end of 2021 on how one would be created, but that deadline has remained unmet. 

According to Spolc, the EC has its hands full completing the green taxonomy and making sure it works in practice. Exploring the social taxonomy at this juncture would be unwise, he said. 

“There is certainly not a draft for the social taxonomy on my desk. As it is, the SFDR and CSRD will already have social-related elements.  

“There is always an expectation that there has to be a regulation coming from commission to move the needle, but we also believe there is room for innovation and invention by the financial sector.”