The European Commission on 18 June 2019 published new guidelines intended to help companies report on climate-related information. The guidelines are for the approximately 6,000 EU listed companies, banks and insurance firms that are required to disclose non-financial information under the non-financial reporting directive. By improving the quality and quantity of climate-related information that companies report, the guidelines should reinforce the Commission's sustainable finance action plan.

Changing situation

Not so long ago, a typical European company’s corporate social responsibility report was more of a marketing tool than a means of communicating key information to investors. Company boards were not overly concerned about the content. Most investors took little notice. And regulators tried not to get too involved. Indeed, a recent analysis of Swedish companies concluded that ‘only around one-third of [the] firms clearly describe their routines for identifying and managing sustainability-related risks as part of their regular risk management’ – and the situation is similar across most of the EU.

However, as it becomes increasingly clear that climate change and other sustainability issues present a serious financial risk to the global economy, this situation is changing rapidly.  Investors need to be clear about which long-term strategy a company is pursuing. Companies, therefore, need to be more transparent about their impact on the climate and on the business risks and opportunities that climate change creates. Furthermore, the EU’s sustainable finance action plan includes proposals – for example on the taxonomy of sustainable economic activities and on carbon benchmarks – that depend on companies providing better sustainability data.

Greater disclosure

The new guidelines are based on proposals published in January 2019 by the Technical Expert Group on Sustainable Finance. They also integrate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which was set up in 2015 by the G20’s Financial Stability Board. In a recent report, the TCFD concluded that while disclosure of climate-related financial information has increased since 2016, it is still insufficient for investors and more clarity is needed.

Although there are costs for businesses related to corporate reporting, there are also benefits. Given the systemic and pervasive impacts of climate change, most companies will need to collect better climate information for their own management purposes, regardless of any reporting requirements. Better disclosure can also lead to a more diverse investor base and a potentially lower cost of capital, resulting for example from inclusion in actively managed investment portfolios and in sustainability-focused indices.

The new guidelines are a supplement to the general guidelines on non-financial reporting published in 2017. They are not legally binding, and companies may chose alternative ways of reporting climate-related information, as long as they meet legal requirements.

The Commission will soon publish a ‘fitness check’, or evaluation, of the overall EU framework for corporate reporting.  This will be a first opportunity to review the non-financial reporting directive and decide if any changes might be necessary under the next Commission. In the meantime, a new laboratory established by the European Financial Reporting Advisory Group (EFRAG) is exploring practical innovations in climate reporting.

Read more on the guidelines