EU experts propose ways to align non-financial reporting directive with TCFD

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An EU expert group on sustainable finance has suggested how the Non-Financial Reporting Directive should be aligned with the Taskforce on Climate-related Financial Disclosures (TCFD), the high-level initiative spearheaded by Bank of England Governor Mark Carney.

The European Commission’s Technical Expert Group on Sustainable Finance (TEG) is asking for feedback on its latest report, which will serve as guidance to the EU on how to update the directive to include the TCFD, which was formed as a ‘market solution’ to climate disclosure and not a regulatory one.

The report includes a suggested mapping of the TCFD’s 11 recommended disclosures to the five elements of the NFRD.

The Commission pledged last spring to update the NFRD’s Non-Binding Guidelines in relation to ESG, as part of its commitments under the Acton Plan on Financing Sustainable Growth. Specifically, it said it sought to “provide further guidance to companies on how to disclose climate-related information, in line with the TCFD and the climate-related metrics developed under the new classification system [i.e. the EU taxonomy currently being developed]”.

The new TEG report looks set to form the basis of this climate-related aspect of the updates, which are slated for June. It is not clear whether other ESG topics will be considered.

The report – the first and last from TEG on climate-related disclosure for companies – explores the potential benefits of good climate disclosure, suggesting that ultimately it should lead to a lower cost of capital for companies.

It recommends three tiers of disclosure for firms: information that all firms should disclose; information that firms with significant risk exposure should disclose; and information that firms may consider disclosing if they want to provide enhanced disclosure.

Forward-looking climate risk reporting – including scenario analysis – is recommended, in accordance with the TCFD.This “should take into consideration the evidence provided by the October 2018 IPCC Special Report on the fast pace of climate change as a result of global warming, which can result in accelerated regulatory action and, therefore, greater transition risks, as well as in accelerated escalation of physical risks”, says the report.

Other recommendations include the “disclosures of KPIs [key performance indicators] that are linked to national and international climate-related policies”, like the Paris Accord, the EU Emissions Trading System and the Renewable Energy Directive; and reporting on the opportunities side of the coin, which TEG describes as being a potential “risk mitigation measures”.

The NFRD applies to listed companies, banks and insurers with over 500 employees (although some member states have reduced the threshold to 250, and others have widened the sectors eligible), meaning some 7,400 companies are currently subject to the rules. The upcoming amendments on ESG are part of the guidance component of the directive, not the mandatory part.

The TEG is now calling for feedback on its report, which it launched yesterday. Views will be passed on to the Commission, but will not result in a revision of the report, it said. The consultation is open until February 1. Another stakeholder consultation will take place, this time launched by the Commission itself, ahead of the changes to the Non-Binding Guidelines.

For the full report, see here.

The report comes just days after the launch of a new sustainability unit within the Commission, to accommodate for the slew of legislative and policy amendments now being pursued. The unit for Financial Technology and Sustainable Finance sits alongside the Capital Markets Union Unit (which previously housed the sustainability work), within the DG for Financial Stability, Financial Services and Capital Markets Union (FISMA). It will be headed up by Martin Spolc, who had already been leading the ESG efforts in his former role as head of the Capital Markets Union unit. A deputy is yet to be named for the new department, which launched officially on January 1.