21 April 2021

AFME welcomes EC legislative proposal on sustainability disclosures but emphasises the need for appropriate sequencing of regulatory measure

AFME welcomes the European Commission’s publication of the new Corporate Sustainability Reporting Directive (CSRD) aiming to revise the existing EU Non-Financial Reporting directive (NFRD)^[1].

Jacqueline Mills, Head of Advocacy for AFME, says “We strongly believe that the development of EU sustainability reporting framework, going forward, should ensure consistency and a logical sequence between disclosure requirements imposed on financial institutions and their borrowers and investees. AFME stands ready to support the European Commission and co-legislators in achieving this objective through the revision of the NFRD”.

The proposal marks a significant milestone towards enhancing the availability and reliability of ESG information and introduces a range of crucial provisions. AFME fully supports the following provisions among others:

• Developing mandatory EU sustainability reporting standards following the double-materiality principle.
• Extending the scope of mandatory sustainability reporting requirements to include all companies listed on EU Regulated Markets, except for micro-undertakings, as well as all large, including private, companies^[2].
• Subjecting sustainability information to mandatory third-party assurance – the statutory auditor or audit firm should express an opinion based on a limited assurance engagement about the compliance of the sustainability reporting with the reporting standards.
• Establishing equivalence mechanisms for sustainability reporting standards used by third country issuers. International regulatory convergence in ESG reporting should be a key consideration in the further elaboration of the European reporting framework.

However, AFME also stresses the importance of appropriately sequencing the reporting obligations applying to financial institutions and their clients. Jacqueline Mills said:

“We generally welcome the proportionate approach to be applied to SMEs where listed SMEs will be expected to comply with the new standards three years after the CSRD enters into application and where voluntary simplified reporting standards would be developed for non-listed small and medium entities. However, we are concerned that this could further exacerbate the scope and timing mismatch between certain reporting obligations that financial institutions could be required to comply with and the reporting obligations imposed on financial institutions’ SME borrowers and investee companies. For example, the recent advice^[3] by the European Banking Authority (EBA) to the European Commission proposes that credit institutions and investment firms would report on a range of KPIs, including a Green Asset Ratio (GAR), under the Taxonomy Regulation, that would include, on a mandatory basis, SME portfolios in the calculation. The EBA recommended that banks be allowed to use estimated data for such portfolios until 30 June 2024, followed by the reporting based on the “real data”. According to the new CSRD proposal, listed SMEs will not be expected to report sustainability information until the year of 2027 and the rest might not be sufficiently encouraged to do so at all, considering that the standard is recommended as voluntary.”  

AFME

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