EU regulation requires many companies to disclose information on the way they operate and manage environmental challenges already. Objective of the EU is to help stakeholders – such as investors – to evaluate the non-financial performance of large companies and encourage these companies to develop a responsible approach to business. Further, additional reporting requirements will be added in the next years. But not only the regulator, but other stakeholders like suppliers and end-users, are increasingly asking for environmental performance data.

ESG reporting in the EU

Many EU companies are already required to disclose non-financial information, eg., environmental data, by the Non-Financial Reporting Directive (NFRD – 2014/95/EU). These requirements apply to large public-interest companies with more than 500 employees, listed companies, banks, and insurance companies.
Reporting requirements include

• environmental matters
• social matters and treatment of employees
• respect for human rights
• anti-corruption and bribery
• diversity on company boards (in terms of age, gender, educational and professional background)

Current frameworks for GHG reporting

The current sustainability reporting was developed in the 90s and 00 years. In 2000, the Global Reporting Initiative (GRI) published its first sustainability-reporting guidelines. The following year, the World Business Council for Sustainable Development released the Greenhouse Gas (GHG) Protocol. At the same time, voluntary initiatives such as the UN Global Compact and the Carbon Disclosure Project were founded, encouraging players to disclose information on sustainability. Since the financial crisis 2007/08, additional ESG frameworks and standards have emerged. Today, the GHG Protocols and the ISO 1406x standards on Greenhouse Gases are among the most relevant frameworks.

Future reporting standards in the EU

The EU provided some guidance on the disclosure of environmental and other information as well. Additional EU standards may be underway: In April 2021, the EU Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD), which would amend the existing reporting requirements – as well as potentially the reporting frameworks itself. The proposal extends the scope to all large companies and all companies listed on regulated markets (except listed micro-enterprises) and requires the audit (assurance) of reported information. It also introduces more detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards. It also requires companies to digitally tag the reported information to make data machine-readable. It will be interesting to see if the EU will create a proprietary EU reporting framework that will differ materially from existing reporting standards like the GHG protocol.

Outlook on reporting standards

We believe that an overhaul of GHG reporting standards could make a lot of sense. Stakeholders are increasingly questioning current reporting practices—and calling for changes. Managers and investors alike recognize that sustainability reporting could improve in many ways, like the variability of frameworks for sustainability reporting as well as standardization of sustainability reports. Asset owners and asset managers are making material investment and engagement decisions with sustainability in mind so that any GHG reporting should – in our opinion – meet at least these minimum criteria:

• Standardization: GHG reporting should follow only one set of rules, consistently applied across regions, countries, industries, and different players to improve comparability of GHG calculations. Options and exceptions should be limited or disclosed in a way that still allows comparability across different players.
• Consistency: GHG reporting should be applied in a consistent way over time and across different players per industry, to improve comparability of GHG reports over time and with competition.
• Reliability: To be the basis for sound financial decisions of investors and other stakeholders, GHG reporting must be accurate and conform to shared standards in a similar way that financial disclosures must. Mandatory audits can be a way to improve reliability, although regulators should be very careful to not throw out the proverbial baby out with the bathwater.

In theory, GHG accounting and reporting should already be based on relevance, completeness, consistency and accuracy, among others. However, in practice reporting vary greatly and comparison between players. Insofar, an overhaul of existing standards seems worthwhile. On the other hand, an “EU solo run” for a worldwide problem may create more problems than it solves, depending on the number of differences between different frameworks. It remains to be seen if – and how big – material differences between EU frameworks and existing GHG regulation will arise.