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Launched at the end of 2019, the European Green Deal is one of the European Commission’s top priorities for the 2019-2024 term. It promotes a new growth strategy to make Europe a climate-neutral continent, primarily through the reduction of greenhouse gas emissions, the development of green technologies, and the redirecting of capital toward sustainable activities. The goal is to transform the European Union into a modern, resource-efficient, and competitive economy, with no greenhouse gas emissions by 2050. To this end, all new legislation must be aligned with the European Union’s climate ambitions.
The ambition of this strategic plan requires a standardized framework, much more structured and demanding when it comes to ESG (Environmental, Social, and Governance) reporting, to ensure clear, reliable, and comparable information. The ultimate aim is also to elevate sustainability information to the same level as financial information. Here are the key developments and contributions.
Challenges and Objectives of the Green Deal
Several reasons drive the Commission to evolve regulations:
- Promoting transparency of information to all company stakeholders (investors, NGOs, social partners, etc.): reliability, clarity, and comparability of data, relevance to risks, opportunities, and the sustainability impacts of companies.
- Strengthening the legal framework to ensure companies consider the impact of their activities on people and the environment and to promote greater consideration of non-financial risks in investment decisions.
- Responding to the growing demand for information on intangible assets (human capital, brand, intellectual property, etc.) and the companies’ contributions to sustainable development (for example, on worker vulnerability and the resilience of supply chains in pandemic situations).
- Standardizing the information required to facilitate data collection and standardize the analysis of non-financial data (currently, over a hundred frameworks coexist!).
Towards the Standardization of Non-Financial Information
Among the body of texts, three are key and serve to restructure and standardize the requirements for sustainability reporting:
- The Taxonomy Regulation, which classifies sustainability-contributing activities using financial ratios.
- The SFDR Regulation ("Sustainable Finance Disclosure Regulation"), which mandates ESG reporting by investors and transparency on the ESG aspects of products they offer to their clients.
- The CSRD Directive ("Corporate Sustainability Reporting Directive"), which strengthens the requirements of the NFRD Directive (Directive 2014/95/EU) on non-financial reporting obligations through the Non-Financial Performance Statement (NFPS).
Just like the European Union, the International Accounting Standards Board (IASB) is also working to harmonize international ESG reporting standards, with the aim of creating a future international sustainability standards committee. The IASB’s goal is to provide a global benchmark for ESG reporting. Only time will tell whether the European Commission, with the technical support of the European Financial Reporting Advisory Group (EFRAG), or the IASB will "prevail" among the 50,000 European companies affected by this ESG standardization.
Do you have questions about the Green Deal, CSRD, or the taxonomy? Feel free to reach out to us.
