More transparency about companies’ impact on the environment, and the risks they face, is the foundation for driving the urgent action science dictates must happen.
Policymakers, who must create an enabling environment for achieving the Paris Agreement, can wield considerable power by setting the right rules to help give markets universal access to this information.
The EU’s updated guidelines on non-financial reporting, which CDP helped to draft, are an important step towards this level of corporate transparency in Europe.
Like the current guidelines, which they supplement, they sit within the EU’s corporate reporting legislation, the Non-Financial Reporting Directive (NFRD), but are currently non-binding. The NFRD sets out the minimum level of climate and environmental information that over 6000 European companies must include in their annual reports.
The new guidelines have integrated the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Not least because of this, the update brings us closer to our goal of meaningful minimum mandatory reporting by all major European companies. And closer to a much-needed level playing-field for the companies ahead of the pack.
But, to achieve this level playing field, they must be given legal force.
Understanding emissions throughout the value chain
The new guidelines bring two major steps forward for climate reporting. One is that they say companies should disclose emissions data inclusive of their Scope 3 emissions – emissions that result from the end-use of their products or services.
For example, the new guidelines explicitly highlight that banks and insurers should focus on disclosing the impact and risks related to their core business of lending, underwriting and investing (Scope 3), rather than their operational emissions.
This important change has big potential in encouraging companies to tackle the challenge of understanding their true impact and report their emissions more accurately to investors and other stakeholders.
Another gamechanger is the guidance that companies should disclose an absolute greenhouse gas emissions reduction target for 2025 or 2030 – and say how these targets align with national or international targets like then Paris Agreement.
Beyond emissions reporting, there is now a stronger emphasis on companies reporting their impact and risks along value chains. And, crucially, there is a broader perspective of natural capital to include land, water and biodiversity, which will help to build a fuller disclosure standard covering climate change and the environment more comprehensively.
What will be the impact?
The alignment of the new guidelines with the TCFD was the next logical step in ensuring the financial risk of climate change is accurately reflected in firms’ balance sheets. This update is crucial for developing reporting rules that are fit for purpose and delivering financially material information for investors.
Better disclosure of emissions – and targets – will allow policymakers and other stakeholders to perform impact measurement and to steer private sector action towards the achievement of EU goals and the Paris Agreement.
Investors should welcome more consistency and comparability in information.
A large majority of EU member states now want to ensure a transition to a climate-neutral EU in line with the Paris Agreement by 2050. Requesting that companies disclose their Scope 3 emissions in their annual reports and set an absolute target is a big development for the way we can measure progress and towards investors holding companies accountable.
But the big – and urgently needed - impact of these new guidelines should be to build on the successful global uptake of company reporting on governance, strategy, risks and opportunities related to climate change, and ask that companies also do so for natural capital more broadly, especially water, forests and land use.
Because of the guidelines’ emphasis on value chains, forward-looking data and information on forests and water, companies’ existing yearly disclosures to CDP mean that they are setup to report this information already.
CDP disclosures, which go beyond these new minimum standards, are already a business norm among global corporates. And CDP’s reporting system gives a home to the TCFD, where 7000 companies (1800 in Europe) disclose data which is TCFD-aligned, comparable and available on one platform.
Of course, one factor limiting the guidelines’ impact is that they are not yet legally binding. As a report last year by CDP and CDSB found, the current guidelines have not yet found widespread adoption.
The European Commission will publish their report on the fitness-check of the EU corporate reporting framework this summer. For European companies and investors, this year presents a major opportunity to ensure these elements from the updated guidelines will be reflected in regulation.
Doing so will address the shortcomings of the current reporting framework by acknowledging that investor disclosure duties and corporate reporting are two sides of the same coin.
The direction of travel on reporting regulation is clear, and companies that already report information on climate change, water security and forests through CDP know that they are ahead of the curve and prepared for a possible review of the EU corporate reporting framework, especially of the Non-Financial Reporting Directive.