Meeting the EU’s Sustainability Disclosure Rules – Implications for the Investment Value Chain

Over the last five years, there has been a range of new ESG regulatory efforts around the world, with the Principles for Responsible Investing (2021)¹ reporting that “there are now more than 750 policy tools and guidance frameworks globally, including 159 new or revised ESG policy instruments”. Market participants, such as ESG Book (2023)², have undertaken an in-depth analysis of the policy landscape changes in ESG. They found that there has been rapid growth in sustainability-linked interventions: “1,255 ESG policy interventions have been introduced worldwide since 2011, according to ESG Book, compared to 493 regulations published between 2001 and 2010”.

In Europe, the regulatory journey started with the launch of the Green Deal on 11 December 2019³, a set of policy initiatives with the overarching aim of making the EU climate neutral in 2050. To help fund the Green Deal, the European Commission released an “EU Action Plan for Financing Sustainable Growth”⁴ which incorporates guidance for actors across the investment value chain:

On the corporate side, it is the EU Corporate Sustainability Reporting Directive (EU CSRD - Directive 2022/2464/EU)⁵ that has received most attention. The EU CSRD requires large companies and public-interest entities operating in the EU to disclose information on their ESG performance annually. Companies are required to disclose their alignment with the EU Taxonomy under the EU CSRD, a classification system that defines what “economic activities” can be considered as “environmentally sustainable”. To comply with the EU CSRD, companies need to apply the European Sustainability Reporting Standards (ESRS) issued by the European Financial Reporting Advisory Group (EFRAG) to prepare their ESG disclosure information.

On the investors’ side, the EU’s Sustainable Finance Disclosures Regulation (EU SFDR, 2019/2088/EU)⁶, is the EU’s core piece of disclosure regulation for investors. The EU SFDR regulation focuses on the transparency of financial market participants, including banks, insurance companies, asset managers and pension funds. It requires these organisations to disclose information about their ESG policies, risks, impacts and performance at both an “entity” (company) and a “product” level.

As outlined, the EU Taxonomy (2020/852/EU)⁷ is a classification system for environmentally sustainable “economic activities” included in “six environmental objectives”. It also applies to investors. And as part of a broader EU Commission initiative on “sustainable development”, the MiFID II Delegated Regulation (Commission Delegated Regulation 2021/1253/EU)⁸ was updated to integrate sustainability factors, risks and preferences into organisational requirements and operating conditions for investment firms.

Since the introduction of the EU’s mandatory disclosure rules for companies and investors, some stakeholders have expressed concerns with respect to the “transparency of ESG rating activities” and regarding the potential risks of “greenwashing” linked to ESG ratings and the role these play in the investment value chain. Hence, ESG rating providers are now also becoming subject to disclosure requirements to ensure transparency towards third parties.

Investing in line with sustainable investment regulations brings some challenges: there is a “complexity jungle” when and where an alignment between many normative and regulatory developments, and labels, at a national and an international level is concerned - too many disclosure, reporting and labelling requirements for companies and investors simply still co-exist, but do not necessarily correlate, hence lack a necessary level of interoperability.

• We point towards a few key actions that might help address the remaining fragmentation challenges:
• “Higher quality” ESG data at source, and across the reporting value chain
• Interoperability of frameworks, with a focus on accounting-based rules and (XBRL) formats
• Transition management alongside quantifiable metrics

Asset allocation shifts towards sustainable investments

With the European Supervisory Authorities (ESAs) aiming to address “greenwashing” and “promoting transparency”, there is hope that ongoing consolidation and alignment efforts combined will ultimately lead to more clarity, comparability and consistency around ESG convictions, narratives and definitions - across the investment value chain, and ideally, across jurisdictions.

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Excerpt taken from an upcoming book chapter in the “Research Handbook on Sustainability Reporting”, Elgar Publishing, 2024.

_{[1] PRI, Regulation Database, Online Database, link: https://www.unpri.org/policy/regulation-database}

_{[2] ESGBook, Global ESG Regulation Increases by 155% Over The Past Decade, 19 June 2023, in Yahoo Finance, Online Blog, link: https://finance.yahoo.com/news/global-esg-regulation-increases-155-094000127.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAADUqFu0I2baodU8THey8BMK2nW8HIk2tlxM5h29Aqa7DYGFpwmZgizgQMUgBWt82F86Kjf-UibZ8NN6mngKPucZFU8q-pZRrcrAm0O_xqN2r4DASaSFN3-lbwg4diWoMaaZVJlmCja1uKQ3SMVBCMA4aIIAAYcx_eJTPrbjYDgdd}

_{[3] EU Commission, Communication on The European Green Deal, Announcement, 11 Dec. 2019, link : https://commission.europa.eu/document/daef3e5c-a456-4fbb-a067-8f1cbe8d9c78_en}

_{[4] EUR-Lex, EU Commission, Action Plan: Financing Sustainable Growth, Communication from the Commission, 7 March 2018, Document 52018DC0097, link: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52018DC0097; for further details, see also EU Commission, Commission Action Plan on Financing Sustainable Growth, March 2018 (including additional updates from 2018 ff.), link: https://finance.ec.europa.eu/publications/renewed-sustainable-finance-strategy-and-implementation-action-plan-financing-sustainable-growth_en}

_{[5] EUR-Lex, EU Commission, Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards Corporate Sustainability Reporting, Document 32022L2464, link: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32022L2464}

_{[6] EUR-Lex, European Commission, Regulation (EU) 2019/2088 of the European Parliament and the European Council, of 27 November 2019, on Sustainability‐Related Disclosures in the Financial Services Sector, Document 32019R2088, link: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32019R2088}

_{[7] EUR-Lex, EU Commission, Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the Establishment of a Framework to Facilitate Sustainable Investment, and amending Regulation (EU) 2019/2088, Document 32020R0852, 22 June 2022, link: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32020R0852}

_{[8] EUR-Lex, EU Commission, Commission Delegated Regulation (EU) 2021/1253 of 21 April 2021 amending Delegated Regulation (EU) 2017/565 as regards the Integration of Sustainability Factors, Risks and Preferences into Certain Organisational Requirements and Operating Conditions for Investment Firms, Document 32021R1253, 2 Aug. 2021, link: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32021R1253}