The Association for Financial Markets in Europe (AFME) has launched today (14^th) a report highlighting the need for financial institutions to have access to consistent non-financial reporting from corporates to be able to support the transition to a low-carbon economy.

The European ESG Disclosure Landscape for Banks and Capital Markets report, written in partnership with Latham & Watkins, maps the complex ESG reporting landscape for financial institutions. It calls on policymakers and regulators to build a coherent framework to support sustainable finance by:

• prioritising the availability of high-quality data from non-financial corporates;
• providing clarity, avoiding inconsistencies and duplication between reporting requirements for financial institutions, and;
• taking into account the global nature of financial institutions.

Jacqueline Mills, AFME’s Head of Advocacy, said: “Europe is playing a leading role in sustainable finance and is developing an ambitious and comprehensive ESG reporting framework. Ensuring the availability of high-quality ESG data from corporates should be prioritised as this will be key to facilitating the allocation of capital to companies in a way that supports transition objectives. Moreover, the current disclosure landscape for the financial services sector is already tremendously complex, with financial institutions required to report over 70 indicators.. The European Commission, co-legislators, and the European Supervisory Authorities should continue to work together with the financial industry to introduce a coherent ESG disclosure framework while also considering the increasingly global dimension of ESG reporting developments”.

“We are delighted to have partnered with AFME on this report to help financial institutions develop effective ESG disclosure strategies,” said Nicola Higgs, a financial regulatory partner in Latham & Watkins’ London office. “Europe is at the forefront of driving the development of disclosure standards, and this comprehensive new resource should provide a blueprint to advance the current regulatory landscape.”

The report identifies the various components of ESG reporting requirements across the many different EU regulations, including the EU Taxonomy, the Non-Financial Reporting Directive (which applies to listed and public interest companies), the Sustainable Finance Disclosure Regulation (which applies to fund managers and other market participants), disclosure requirements specific to banks and investment firms (arising from the CRD/CRR or IFD/IFR), the Low Carbon Benchmark Regulation (methodologies for such benchmarks), as well as the TCFD framework (disclosure standard from the Task Force on Climate-Related Financial Disclosures). It also flags the overlaps and interdependencies between these.

In addition, the report provides recommendations for policymakers to appropriately sequence the development of regulatory measures to encourage their simplification. These include:

1. The scope of the Non-financial Reporting Directive (NFRD) should be appropriately and proportionally expanded to include non-listed companies and SMEs; otherwise, financial institutions will not have sufficient data to comply with their reporting obligations.
2. The forthcoming revision of the NFRD and elaboration of the European non-financial reporting standard should reflect a continued assessment of the Task Force on Climate-related Financial Disclosures (TCFD) reporting framework as a benchmark for the disclosure of climate risk.
3. Disclosure requirements under the EU Taxonomy Regulation should be appropriately sequenced, with non-financial corporate clients of financial institutions reporting 12 months in advance of financial institutions.
4. DNSH (do no significant harm) reporting requirements for the purposes of Taxonomy Regulation disclosure requirements should be introduced in a staggered way, with further guidance on simplified reporting released by the European Commission and the EU Platform on Sustainable Finance.
5. The Green Asset Ratio variables should be restricted to banking book EU exposures, in the first instance.
6. Reporting requirements linked to the forthcoming sustainable corporate governance proposal should be aligned with those expected under the revised NFRD. In addition, the European Commission and EU Platform on Sustainable Finance should consider the extent to which adherence with the minimum social safeguards of the Taxonomy can be aligned with reporting requirements under the NFRD.
7. International regulatory convergence in ESG reporting should be a key consideration in the further elaboration of the European reporting framework. The European Commission should duly consider how to best ensure cooperation and ongoing dialogue with international standard-setters, including through the work of the International Platform on Sustainable Finance, to facilitate the development of an aligned and harmonized system of reporting requirements.

Download the report (pdf)