Dutch investor group calls for ‘hard legislation’ over TCFD in accounting directive

Comments in response to recent report by Technical Expert Group on Sustainable Finance

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There have been calls for the European Union to introduce hard legislation to incorporate the recommendations of the Mark Carney-inspired Task Force on Climate-related Financial Disclosures (TCFD).

They come in response to the latest report by the Technical Expert Group on Sustainable Finance (TEG), the body set up to drive through the EU’s Sustainable Finance Action Plan.

The TEG published a report in January to offer the European Commission guidance to improve corporate disclosure of climate-related information — which is the fourth area of the TEG’s mandate alongside the taxonomy, an EU green bond standard, and low-carbon benchmarks.

The TEG report develops item #9.2 of the Action Plan, which requires the Commission to revise the non-binding guidelines of the Non-Financial Reporting Directive (NFRD), explicitly recommending guidance on how companies can disclose in line with the TCFD and the climate metrics to be developed under the future taxonomy.

The NFRD, which technically is an amendment of the EU Accounting Directive, entered into force in 2014 with a two-year transposition period. But in December 2016 the publication of the guidelines was postponed until June 2017 in order to consider the TCFD work “as much as possible”.

But the implementation of the directive has proved difficult and the guidelines’ flexible approach to comply with its new ESG reporting obligations does not seem to provide the authoritative final say required. [See here for the materiality issues that have been raised by public interest law group Frank Bold.].

Now Eumedion, the Dutch corporate governance and sustainability platform, stated that adopting the TCFD recommendations through an update of the non-binding guidelines is not effective due to its voluntary nature.

“We urge the European Commission to revise the EU Accounting Directive (2013/34/EU) and to incorporate the TCFD recommendations in the Directive itself. Only with ‘hard legislation’ the EC can ensure that all companies ‘should disclose’ certain climate-related information.”Rients Abma, Executive Director of Eumedion, told RI: “We believe that institutional investors can only credibly report on their CO2 footprint and ambitions to reduce this when issuers are required to adhere to the TCFD reporting framework.”

Eumedion suggests an alternative legislative route if the revision of the Accounting Directive takes too long — by incorporating the TCFD requirements via delegated acts of the current EU draft regulations proposed on the back of the Action Plan.

Similarly, the Association of Chartered Certified Accountants (ACCA) noted that there are conceptual differences between the non-financial reporting directive and the TCFD recommendations, which could not be reconciled without revising the Accounting Directive.

An ACCA letter signed by Yen-pei Chen, Manager, Corporate Reporting and Tax, stated: “The TEG report could give rise to the incorrect expectation in the minds of preparers and stakeholders that publishing disclosures in a separate report, in line with the TEG’s guidance, would satisfy implementing the TCFD recommendations.”

ACCA said the Commission should revise the Accounting Directive in the long term, but in the meantime: “An explicit statement in the non-binding guidelines that climate-related financial disclosures should be included in mainstream financial filings, rather than in a separate report.”

The Alliance for Corporate Transparency project, led by Frank Bold, recently looked at the state of corporate sustainability disclosure under the Non-Financial Reporting Directive and found the regulation “does not specify in sufficient detail what information and KPIs must be disclosed, nor the concrete issues to which its requirements relate”.

A spokesperson for Frank Bold and the Alliance for Corporate Transparency told RI: “Legislation should clarify the requirement for the disclosure of companies’ long-term transition plans to a zero-carbon economy and their economic implications, in line with the TCFD Recommendations.”