Making Sense of EU Climate Disclosure Regulations

The EU wants to reduce 2030 emissions by at least 55% compared to 1990 levels. It’s an ambitious target, which has led to a flurry of recent changes in climate disclosure recommendations. Here’s a useful guide to help you understand what you need to do if your business operates in the EU.

Last year, European authorities announced their planned expansion of climate reporting requirements after noting that companies aren’t providing the data needed to guide capital toward a carbon-neutral future.

With the recent announcements, you might find it difficult to understand what’s currently required of you when it comes to climate disclosure. That’s why we’ve produced this handy summary of the main regulations that you should be aware of if your business operates in the EU. Note that we have also produced a summary of the UK-specific climate disclosure regulations here.

The EU Green Deal

The EU Green Deal is a set of policy initiatives from the European Commission which was approved in 2020. It sets a roadmap for making EU economies sustainable. There are several key climate initiatives that fall under it:

  • European Climate Law — to enshrine the 2050 climate-neutrality objective into EU law

  • European Climate Pact — to engage citizens and all parts of society in climate action

  • 2030 Climate Target Plan — to further reduce net greenhouse gas emissions by at least 55% by 2030

  • New EU Strategy on Climate Adaptation — to make Europe a climate-resilient society by 2050, fully adapted to the unavoidable impacts of climate change.

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The EU Green Taxonomy

The EU Green Taxonomy is a complex classification system which was set up to determine which investments are truly environmentally sustainable, in the context of the European Green Deal.

Who does the green taxonomy apply to?

The taxonomy applies to all financial product providers operating in the EU, who are expected to disclose what share of each of their funds or underlying investments comply with the rules set out by the taxonomy.

Listed companies and large businesses are also expected to disclose what share of their turnover and capital expenditure complies with these regulations.

What do the regulations cover?

There are six key environmental objectives that compliant investments should support:

  • climate change mitigation

  • climate change adaptation

  • sustainable use and protection of water and marine resources

  • transition to a circular economy

  • pollution prevention and control

  • protection and restoration of biodiversity and ecosystems

Alongside the above environmental objectives, the EU taxonomy has also outline four requirements :

  • makes a substantial contribution to at least one objective

  • does no significant harm to any objective

  • complies with minimum social safeguards

Non-Financial Reporting Directive (NFRD)

The Non-Financial Reporting Directive (NFRD) was first implemented in 2014 and it has applied since 2018. In 2019, it was revised to include TCFD disclosure guidelines, but further revisions have been stopped in favour of the directive being entirely replaced with the CSRD (see below) by the end of 2022.

Who does this apply to?

Public interest companies with more than 500 employees.

What needs to be reported?

The NFRD requires qualifying companies to disclose how they operate and manage social and environmental challenges in their annual report. Their disclosures should broadly cover the following areas:

  • Environmental matters

  • Social and employee aspects

  • Respect for human rights

  • Anti-corruption and bribery issues

  • Diversity on board of directors.

The disclosure requests a description of the company’s business model. It also requires a description of the policies that the company has implemented to address the listed issues, the outcomes of these policies.

How should you submit? The information should be submitted via companies’ annual reports and can be completed in line with many popular approaches, including GRI, OECD, and ILO.

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Corporate Sustainability Reporting Directive (SDRs)

The UK’s Sustainability Disclosure Requirements (SDRs) are designed to broaden UK sustainability reporting to go beyond the recommendations of the TCFD. SDRs aim to focus on other environmental impacts and risks, above and beyond those arising directly from climate change.

When are they likely to be implemented?

2023 to 2024, but companies are expected to start planning early.

Who does this apply to?

Companies with more than 500 employees.

What needs to be reported?

The official reporting requirements have not yet been released, but we know that they will be based around the 11 recommendations of the TCFD.

There will also be a focus on ‘double materiality,’ the idea that a company’s corporate information will be important both for its own financial value and for its broader impact on the society within which it operates.

How should you submit?

Businesses required to fill out a non-financial and sustainability information statement (NFSI; formerly NFI) will be asked to add their SDR disclosures there. Companies with no NFSI requirement can insert their disclosures in their SECR report (as outlined above) or their annual strategic report.

Corporate Responsibility Reporting Directive (CSRD)

In June 2022, the Council and the European Parliament reached a provisional political agreement on the corporate sustainability reporting directive (CSRD), which will take over from the NFRD as the EU’s master disclosures program.

Who does this apply to?

All non-microcap public companies; all private companies that meet at least two of these criteria:

  • More than 40 million Euros revenue

  • More than 20 million Euros balance sheet

  • More than 250 employees

The CSRD application will be rolled out in three stages:

  • 1 January 2024 for companies already subject to the non-financial reporting directive

  • 1 January 2025 for large companies that are not presently subject to the non-financial reporting directive

  • 1 January 2026 for listed SMEs, small and non-complex credit institutions and captive insurance undertakings

What needs to be reported?

The exact disclosure regulations are still being finalised, but the directive is expected to ask for the following information:

  • Responses to the 11 TCFD disclosures

  • Detailed data on energy consumption and scope 1–3 greenhouse gas emissions.

  • The double materiality concept — i.e. showing an understanding of how sustainability risks affect the company and at the same time, what impact the company is having on the external environment.

How should you submit?

The new proposal requires companies to conduct an audit of the required information, and to digitally ‘tag’ it, ensuring that it’s machine readable. Further submission rules have not yet been announced.

Sustainable finance disclosure regulation (SFDR)

The Sustainable Finance Disclosure Regulation (SFDR) is a regulation introduced by the European Commission to bring about greater transparency around sustainability claims made by financial market participants (FMPs) and advisers. It requires FMPs to provide standardised disclosures on how ESG factors are integrated at an entity or product level. The SFDR is closely linked to the EU’s Green Taxonomy, mentioned above.

Who does this apply to?

Financial Market Participants (FMPs) with more than 500 employees. This includes investment firms, pension funds, asset managers, insurance companies, banks, venture capital funds and financial advisors.

What needs to be reported?

The SFDR contains two levels of disclosures:

Level 1 disclosures are entity level disclosures. The FMPs covered by the legislation are required to outline their policies on the identification and prioritisation of principal adverse sustainability impacts (PAIs). They will also be required to provide a description of the PAIs and of any actions that they’ve taken to address these. There are 50 PAI sustainability indicators which cover many ESG issues including greenhouse gas emissions, waste management and human rights. Level 1 disclosures have been in place since 10 March 2021.

Level 2 disclosures are product level disclosures. FMPs are expected to explicitly show the degree to which each of their products addresses the PAIs that are relevant to their company.

How should you submit?

This depends on the type of company that you are and the products that you supply. The three SFDR reporting categories are:

  1. Public — in the form of mandatory online disclosures.

  2. Pre-contractual — in the form of briefs provided to current and prospective clients

  3. Annual Reports

The Financial Conduct Authority (FCA)

Similarly to the BEIS, the FCA has issued its own guidelines on how companies should respond to the TCFD recommendations.

Who does this apply to?

Issuers of standard listed shares, or equity shares represented by certificates and FCA-listed asset managers and asset owners.

What needs to be reported?

Companies to whom this applies should provide their responses to the 11 TCFD recommendations or alternatively include a statement of why they haven’t done so.

How should you submit?

Issuers of standard listed shares should submit their responses in their annual financial reports from 1 January, 2022.

FCA-regulated asset managers are obliged to publish two annual TCFD reports on their websites: one entity-level report covering the firm’s operations, and one covering their products and portfolios.

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Every journey begins with effective carbon footprint measurement

Whatever regulations you need to comply with, find a trusted climate partner, who will give you peace of mind that you’re accurately measuring your carbon footprint and understanding your top emitters. Armed with this knowledge, you’ll be able to take effective climate action, meet regulatory demands and share the impact of your activity with stakeholders.