Corporates: ‘Green is the new black’ says EC’s Vice-President Dombrovskis

EC’s Action Plan outlines next steps on sustainability disclosure and governance

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At the press conference held this morning in Brussels to officially launch the European Commission’s Action Plan to Financing Sustainable Growth in the EU (reported by RI yesterday), Vice-President Valdis Dombrovskis summarised the whole package of measures with one sentence: “Green is the new black.”
Dombrovskis’ play on words could be a bold statement considering that in the corporate reporting and accounting jargon ‘in the black’ means that a company is profitable.
As such, of the 10 actions included in the EC’s Plan, one is focused on “Strengthening sustainability disclosure and accounting rule-making”, and another one on “Fostering sustainable corporate governance and attenuating short-termism in capital markets”.
Under these two banners, the EC has proposed a number of chiefly non-legislative measures.
The EC intends to amend the non-binding guidelines of the Non-Financial Information (NFI) Directive by Q2 of 2019 to further align them with the recommendation of the Task Force on Climate-related Financial Disclosure (TCFD), as well as “other environmental and social factors”. 
The guidelines will also be in line with the climate-related metrics that will be developed as part of the future EU sustainability taxonomy by a new Technical Expert Group on Sustainable Finance. 
This review, including the NFI Directive, is part of a new and broader consultation (dubbed “fitness check”) on the EU legislation on public corporate reporting. The results of the fitness check will be published by Q2 2019 and “will inform any future legislative proposals”. 
A spokesperson for Accountancy Europe told RI that this move is a great opportunity to enhance comparability and consistency of disclosures.
“Companies need time to experiment allowing best practices to evolve on all aspects of non-financial reporting. The EU NFI Directive should be aligned accordingly when the time is right,” Accountancy Europe stated.
When it comes to asset managers and institutional investors, however, disclosure requirements on how they consider ESG factors in their investments will be covered by EU legislative proposals on fiduciary duties to be tabled by Q2 2018.
The fitness check will also evaluate International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). In particular, the EC mentioned in its plan “growing concerns that the current accounting rules are not conductive to sustainable investment decision-making”.
Following the final HLEG recommendations, the EC has tasked the European Financial Reporting Advisory Group (EFRAG) with this work.The role of EFRAG, a private association whose main mission is to advice the EC on the endorsement of IFRS, has been enhanced.
The EC has requested that EFRAG “assess the impact of new or revised IFRS on sustainable investments” and based on EFRAG’s work, the EC will report by Q4 2018 the impact of IFRS 9 (the standard for financial instruments) on long-term investments. The aim is to “explore improvements” to the standard for the treatment of equity portfolios.
Chairman and CEO of EFRAG, Andrew Watchman, told RI the body was “ready to support and contribute to the implementation of the Commission’s Action Plan on Financing Sustainable Growth in all areas within its competence. If the Commission asks us to broaden our investigations then of course we stand ready to do so.” 
In addition, the EC wants to set up a European Corporate Reporting Lab, similar to the UK one run by the Financial Reporting Council, which would be a “forum” for companies and investors to “share best practices on sustainability reporting”.
The idea of the Lab has been in the past proposed by Accountancy Europe to the EC.
“This should involve preparers and users of management reports, auditors, and regulators coming from different jurisdictions to facilitate the efforts of sharing corporate reporting practices,” the federation told RI.
When it comes to governance specifically, the EC announced it will carry out “analytical and consultative work with relevant stakeholders”.
In particular, the EC will assess a requirement for boards “to develop and disclose a sustainability strategy […] including measurable sustainability targets”; as well as to study whether directors’ duties regarding the company’s long-term interest should be clarified. 
George Dallas, Policy Director at the International Corporate Governance Network (ICGN) told RI that the EC’s wording is reminiscent of the section 172 of the UK Companies Act, which requires directors to have regard for key stakeholders’ interest and protect the company’s long-term performance.
“How systematically boards are looking at this is another question. The moment you start to require tactics such as the publishing of a sustainability strategy the risk is if that becomes a compliance exercise,” Dallas said.
In a statement, the European Confederation of Directors’ Associations (ecoDa) said that “‘hard law’ is no longer seen as the main policy mechanism by the European Commission”.
“This should be particularly true for corporate governance. The European Commission has to move from prescriptive regulations towards a more balanced approach between regulation, codes, best practice and other policy initiatives,” stated Irena Prijovic, ecoDa’s Chair.
In addition, the EC has issued an invitation to the European Supervisory Authorities (ESAs) to collect evidence of undue short-term pressure from capital markets on companies.