Brussels is introducing new climate reporting requirements to stop companies making misleading environmental claims. While critics argue that the measures don’t go far enough, the EU is ahead of countries such as the US. The requirements also need to be stringent enough to provide investors with the data they need to assess a business, without proving overly burdensome.
EU’s tricky balancing act on climate reporting
Between a rock and a hard place
In October, the European parliament adopted its first sustainability reporting standards. The Corporate Sustainability Reporting Directive will eventually require over 50,000 companies to assess the impact of their operations on the environment in the EU. The rules replace various voluntary private-sector norms.
Around 11,000 listed companies will have to comply with the standards from the beginning of 2024. Large non-listed companies and listed small and medium enterprises will follow in 2025 and 2026.
European MPs pushed back a last-ditch attempt to water down the new rules. The measures had already been weakened compared with a November 2022 proposal by multi-stakeholder experts in the European Financial Reporting Advisory Group (EFRAG). In July, for example, the World Wide Fund for Nature (WWF), which belongs to EFRAG, argued that the European Commission (EC) ‘caved in to pressure from conservative industry groups and has weakened the Standards to the point that loopholes have become motorways for greenwashing’. 1 In June, Reuters reported that the EC had faced ‘pushback’ from some lawmakers worried about the increasing burden of bureaucracy placed on companies by the EU’s green forms. 2
Governments have also sought to pressure the EC to dilute the green reporting rules. In September, the Financial Times reported that Berlin wanted Brussels to expand the definition of small and medium-sized enterprises, raising the threshold from 250 to 500 employees in order to ‘restrict the [bureaucratic] burden on them to what is really necessary’. The newspaper was quoting from a government coalition document. In the event, the rules finally adopted by the EU allow companies with fewer than 750 employees to postpone their reports on biodiversity and social standards and, in part, their reporting on key climate criteria such as Scope 3 emissions (those that are not produced by the company itself and are not the result of activities from assets owned or controlled by the company). 3
The WWF has also criticised the EC for:
• Eliminating an essential measure to reduce risks in the financial system: the requirement for companies to disclose whether they have a transition plan on biodiversity
• Making most of the reporting dependent on self-assessment of whether an issue such as biodiversity has a financial impact on the company, and whether the company has an impact on biodiversity
• Failing to make a clear requirement for companies to disclose all the impacts which are relevant to these pieces of legislation
The EU’s new climate reporting rules should make it easier to identify the worst offenders in terms of carbon emissions
Data demands
Meanwhile, asset managers have argued that the EU’s new rules are too weak. In July, nearly 100 European investment managers and banks, as well as environmental, social and governance (ESG) fund associations and a United Nations-backed network of financial firms pressed the EU to tighten the proposed Corporate Sustainability Reporting Directive. In particular, asset managers argue that leaving it up to companies and their advisers to determine what does, and doesn’t, need to be reported may result in a dramatic reduction in the amount of information that investors receive.
Bloomberg said that the investment industry also believed the current proposal for corporate reporting to be out of step with the stricter demands being made of asset managers to disclose the ESG risks in their portfolios. 4
EU rules
However, it can be argued that the EU is ahead of countries such as the US in requiring companies to report on the impact of climate change and sustainability issues on their business and the environment. California is the only US state to have introduced such legislation. Its new climate disclosure laws, which come into force in 2026, are said to be closer to the EU’s rules than those being proposed by the US Securities and Exchange Commission (SEC). The SEC’s proposed rules apply only to public companies that report to the SEC. By contrast, the EU’s and California’s rules target all companies, including entities based outside the EU or California that meet certain presence and size thresholds. 5
Time will tell whether economies gain a competitive advantage by adapting stricter or looser climate reporting rules. The argument in favour is that these rules make it easier for investors to reward good behaviour, while critics counter by arguing that an increasing regulatory burden will simply deter investment and companies will migrate to territories where the rules are laxer. Given that the EU and the US, with the exception of California, are following different approaches, it should be relatively easy to make a comparison.
2 https://www.reuters.com/sustainability/eu-company-esg-disclosure-rules-set-be-eased-2023-06-02/
3 https://www.ft.com/content/4c533c07-a5ae-402d-8c1d-80c2ea416970
5 https://www.thomsonreuters.com/en-us/posts/esg/california-climate-reporting-law/
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