What You Need to Know: The EU Non-Financial Reporting Directive and what its reopening could mean
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Speakers: Michael Zimonyi, Policy & External Affairs Director and Nontokozo Khumalo, Corporate Engagement Manager at CDSB. The EU Non-Financial Reporting Directive (NFRD) came into effect in 2018 and requires listed companies and other public interest entities to disclose information on the way they operate and how they manage social and environmental challenges. In June 2019 the European Commission published guidelines on reporting climate-related information which included the integration of the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. These guidelines supplement the existing Non-Financial Reporting Guidelines released in 2017. The EU is now set to publish a fitness check of corporate reporting to assess the appropriateness of existing legislation, with a special focus on NFRD, giving way to a possibility of a reopening of the current regulation. In advance of these updates, there is a tremendous opportunity for companies to get ahead of the curve to ensure that they are complying with the EU reporting guidelines and prepared for potential new regulations. During this webinar briefing, you’ll gain insight into: Current requirements of the NFR Directive and Guidelines; The state of corporate climate change reporting; Potential impacts of a reopened NFR Directive and CDSB’s expectations going forward.
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What You Need to Know: The EU Non-Financial Reporting Directive and what its reopening could mean
- 1. December 19 | Tweet @CDSBGlobal What You Need to Know: December 10,2019. The EU Non-Financial Reporting Directive and what its reopening could mean
- 2. December 19 | Tweet @CDSBGlobal Nontokozo Khumalo, Corporate Engagement Manager, CDSB Michael Zimonyi, Policy and External Affairs Director, CDSB Moderated by: Julia Kislitsyna, Communications Manager, CDSB What You Need to Know: The EU Non-Financial Reporting Directive and what its reopening could mean
- 3. December 19 | Tweet @CDSBGlobal Does your company currently report climate change and environmental information in the annual report? Yes No No, but intends to in the next 3 years The EU Non-Financial Reporting Directive and what its reopening could mean
- 4. December 19 | Tweet @CDSBGlobal Board Technical Working Group (examples) To provide decision-useful environmental information to markets via the mainstream corporate report
- 5. December 19 | Tweet @CDSBGlobal CDSB Framework • 7 guiding principles • 12 reporting requirements • Fully aligned with the TCFD recommendations • Complementary to existing reporting provisions (CDP, GRI, SASB) and existing regulations • Referenced in the EU NFRD guidance and stock exchange guidance globally For reporting environmental information, natural capital and associated business impacts cdsb.net/Framework The EU Non-Financial Reporting Directive and what its reopening could mean
- 6. December 19 | Tweet @CDSBGlobal The EU Non-Financial Reporting Directive and what its reopening could mean
- 7. December 19 | Tweet @CDSBGlobal Governance Strategy Risk Management Metrics and Targets Disclose the organization’s governance around climate-related risks and opportunities. Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material. Disclose how the organization identifies, assesses, and manages climate-related risks. Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material. a) Describe the board’s oversight of climate-related risks and opportunities. a) Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term. a) Describe the organization’s processes for identifying and assessing climate-related risks. a) Disclose the metrics used by the organization to assess climate- related risks and opportunities in line with its strategy and risk management process. b) Describe management’s role in assessing and managing risks and opportunities. b) Describe the impact of climate- related risks and opportunities on the organization’s businesses, strategy, and financial planning. b) Describe the organization’s processes for managing climate- related risks. b) Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks. c) Describe the resilience of the organisation’s strategy, taking into consideration different climate- related scenarios, including a 2°C or lower scenario. c) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management. c) Describe the targets used by the organization to manage climate- related risks and opportunities and performance against targets.
- 8. December 19 | Tweet @CDSBGlobal TCFD recommendations 8 Overview 1. Voluntary 2. Report climate-related financial disclosures in the annual financial filings (mainstream report) 3. Financial sector & high risk non-financial sectors 4. Transition risks & physical risks (and opportunities) 5. Scenario analysis & forward-looking information 6. Short-term, medium-term & long-term 7. Qualitative & quantitative disclosures Governance Strategy Risk Management Metrics and Targets The EU Non-Financial Reporting Directive and what its reopening could mean
- 9. December 19 | Tweet @CDSBGlobal France The EU Non-Financial Reporting Directive and what its reopening could mean 9 Article 173 of Energy Transition and Green Growth Law requires financial stakeholders to publish information on how ESG criteria, particularly concerning climate risks, are considered. UK The UK government has set out its expectation for all listed companies and large asset owners to disclose in line with the TCFD recommendations by 2022, in its recently released UK Green Finance Strategy.
- 10. December 19 | Tweet @CDSBGlobal Canada • CSA Staff Notice 51-358: Reporting of Climate Change Related Risks • Final Report of the Expert Panel on Sustainable Finance – 5.1. Endorse a phased ‘comply-or-explain’ approach to adoption of the TCFD framework in Canada. 10The EU Non-Financial Reporting Directive and what its reopening could mean
- 11. December 19 | Tweet @CDSBGlobal Australia ASIC – climate change is ’systemic risk’ • Regulatory Guide 228 Prospectuses: Effective disclosure for retail investors; • Regulatory Guide 247 Effective disclosure in an operating and financial review AASB Practice Statement on Climate-related and other emerging risks disclosures • Asset impairment; • Changes in the useful life of assets; • Changes in fair valuation of assets due to climate-related and emerging risks; • Change in costs and/or demand for products & services affecting impairment • Provisions and contingent liabilities arising from fines and penalties; and • Changes in expected credit losses for loans and other financial assets. 11The EU Non-Financial Reporting Directive and what its reopening could mean
- 12. December 19 | Tweet @CDSBGlobal TCFD recommendations 12 Overview 1. Voluntary 2. Report climate-related financial disclosures in the annual financial filings (mainstream report) 3. Financial sector & high risk non-financial sectors 4. Transition risks & physical risks (and opportunities) 5. Scenario analysis & forward-looking information 6. Short-term, medium-term & long-term 7. Qualitative & quantitative disclosures Governance Strategy Risk Management Metrics and Targets The EU Non-Financial Reporting Directive and what its reopening could mean
- 13. December 19 | Tweet @CDSBGlobal TCFD implementation Creating consistent, comparable and decision-useful climate-related financial disclosures CDP helps companies generate, report and structure their data. SASB helps companies understand what is material to their organisation. CDSB helps companies integrate the financially material information into their mainstream reports. The EU Non-Financial Reporting Directive and what its reopening could mean
- 14. December 19 | Tweet @CDSBGlobal EU NFR Directive Where should it be disclosed? . What should be disclosed? Annual Report Flexibility to include information in separate report under certain circumstances. How? Guidelines • Guidelines on Non-financial Reporting • Guidelines on Reporting Climate-related Information Who? Public Interest Entities employing > 500 people Comply or Explain • Business Model • Policies • Policy Outcomes • Principal Risks • Non-financial KPIs The EU Non-Financial Reporting Directive and what its reopening could mean
- 15. December 19 | Tweet @CDSBGlobal Materiality Double Materiality TCFD Materiality “description of the specific climate-related issues for each time horizon (short, medium, and long term) that could have a material financial impact on the organization,” filings.” The EU Non-Financial Reporting Directive and what its reopening could mean
- 16. December 19 | Tweet @CDSBGlobal Sustainable Finance Action Plan Action 9: Strengthening corporate disclosure on sustainability 9.1 Fitness Check 9.2 Revision of NFR Directive Guidelines – TCFD The EU Non-Financial Reporting Directive and what its reopening could mean
- 17. December 19 | Tweet @CDSBGlobal A Introduction B Climate-Related Risks, Opportunities,and Financial Impacts C Recommendationsand Guidance D Scenario Analysisand Climate-Related Issues E KeyIssuesConsidered and Areasfor Further Work F Conclusion Appendices Figure 12 Implementation Path (Illustrative) More complete, consistent, and comparable information for market participants, increased transparency, and appropriate pricing of climate- related risks and opportunities Final TCFD Report Released Companies already reporting under other frameworks implement the Task Force’s recommendations. Others consider climate-related issues within their businesses Organizations begin to disclose in financial filings Greater adoption, further development of information provided (e.g., metrics and scenario analysis), and greater maturity in using information Five Year Time Frame AdoptionVolume Climate-related issues viewed as mainstream business and investment considerations by both users and preparers Broad understanding of the concentration of carbon-related assets in the financial system and the financial system’s exposure to climate-related risks
- 18. December 19 | Tweet @CDSBGlobal 2019 Status Report 898 supporters globally, with market capitalisation of more than $9 trillion. The EU Non-Financial Reporting Directive and what its reopening could mean
- 19. December 19 | Tweet @CDSBGlobal Main Findings Disclosure of climate-related financial information has increased since 2016, but is still insufficient for investors. More clarity is needed on the potential financial impact of climate-related issues on companies. Of companies using scenarios, the majority do not disclose information on the resilience of their strategies. Mainstreaming climate- related issues requires the involvement of multiple functions. The EU Non-Financial Reporting Directive and what its reopening could mean
- 20. December 19 | Tweet @CDSBGlobal Non-Financial Reporting Directive updates Materiality • Double materiality • Interpretation by Member States Immaterial disclosures • Presenting concise information • Other supporting documentation? Information requirements The EU Non-Financial Reporting Directive and what its reopening could mean
- 21. December 19 | Tweet @CDSBGlobal Non-Financial Reporting Directive updates Reliability of information & assurance “Statutory auditors and audit firms should only check that the non-financial statement or the separate report has been provided. In addition, it should be possible for Member States to require that the information included in the non-financial statement or in the separate report be verified by an independent assurance services provider.” – (6) of preamble to Non-Financial Reporting Directive Comparability of information • Metrics used • Sector-specific alignment Quality considerations The EU Non-Financial Reporting Directive and what its reopening could mean
- 22. December 19 | Tweet @CDSBGlobal Non-Financial Reporting Directive updates • Scope of companies that should be covered – Size of company – Proportionality of requirements • Location of disclosures – Annual report vs separate report – Length of reports – What is most useful to the reader? • Coherence with other policy – Taxonomy, investor disclosure, etc Other considerations Source: Accountancy Europe, Core & More The EU Non-Financial Reporting Directive and what its reopening could mean
- 23. December 19 | Tweet @CDSBGlobal Non-Financial Reporting Directive updates TCFD incorporation • De-facto standard for climate-related financial reporting • Non-binding guidelines are a good start, but more alignment is needed • Significant alignment behind TCFD within standard setters • Financial market focus TCFD for natural capital • Climate change is only one pillar of environmental risks • IPBES: nature is in sharp decline • Off track on SDGs, Aichi Biodiversity Targets Other considerations contd. The EU Non-Financial Reporting Directive and what its reopening could mean
- 24. December 19 | Tweet @CDSBGlobal
- 25. December 19 | Tweet @CDSBGlobal Q&A Nontokozo Khumalo Corporate Engagement Manager nontokozo.khumalo@cdsb.net Michael Zimonyi Policy and External Affairs Director michael.zimonyi@cdsb.net
- 26. December 19 | Tweet @CDSBGlobal Questions? With the contribution of the LIFE Programme of the European Union. Hosted by CDP Europe. @CDSBGlobal on Twitter Climate Disclosure Standards Board on LinkedIn: www.linkedin.com/company/cdsb/ info@cdsb.net
- 27. December 19 | Tweet @CDSBGlobal Thank you! The full-length video recording of the webinar is available on our YouTube Channel: https://youtu.be/tpkDHay-ZkE
Notas del editor
- Mike: The Climate Disclosure Standards Board is a consortium of 9 environmental and business NGOs. We were set up in Davos in 2007 with a mission to create the enabling conditions for material climate change and natural capital information to be integrated into the mainstream report. We achieve our mission by offering a framework for reporting environmental and climate information.
- Nonto The TCFD was set up in 2015 to develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders. They specifically considered the physical, liability and transition risks associated with climate change and what constitutes effective financial disclosures across industries. In 2017 the Task Force released their final report which set out principles and 11 recommendations for effective disclosure.
- Nonto Just to remind you of the 4 core elements and the 11 recommended disclosures.
- What makes the TCFD different?
- Previous environmental reporting Staff Notice unsuccessful Final Report of the Expert Panel on Sustainable Finance 5.1. Endorse a phased ‘comply-or-explain’ approach to adoption of the TCFD framework in Canada. 5.2. Provide clarity to issuers on the recommended scope and pace of TCFD implementation. 5.3. Work with federal, provincial and industry partners to clarify the materiality of climate-related financial disclosures. Canadian Business Corporation Act, Part XIV Financial Disclosure is updated with requirements for financial statements to include environmental disclosures; and/or Updates to National Instrument 51-102 Continuous Disclosure Obligationsii and National Instrument 58-101 Disclosure of Corporate Governance Practices. Updates to CSA Staff Notice 51-333 Environmental Reporting Guidanceiv to incorporate TCFD recommendations
- AASB Practice Statement on Climate-related and other emerging risks disclosures asset impairment; changes in the useful life of assets; changes in the fair valuation of assets due to climate-related and emerging risks; increased costs and/or reduced demand for products and services affecting impairment calculations and/or requiring recognition of provisions for onerous contracts; potential provisions and contingent liabilities arising from fines and penalties; and changes in expected credit losses for loans and other financial assets.
- What makes the TCFD different?
- Nonto What the outcome of the TCFD is – improve decision-making (by investors, lenders and insurers in allocating capital and underwriting risk), enhance market resilience and more sustainable economic growth. Also to ensure more stable, resilient markets over the medium and long term by facilitating a smoother transition—with less abrupt price adjustments—to a lower-carbon and climate-resilient economy. Companies can use their CDP responses to help generate and structure the data and information they collect. CDSB’s Framework helps integrate the information in the annual report, and this leads to better TCFD reporting.
- Nonto What the outcome of the TCFD is – improve decision-making (by investors, lenders and insurers in allocating capital and underwriting risk), enhance market resilience and more sustainable economic growth. Also to ensure more stable, resilient markets over the medium and long term by facilitating a smoother transition—with less abrupt price adjustments—to a lower-carbon and climate-resilient economy. Companies can use their CDP responses to help generate and structure the data and information they collect. CDSB’s Framework helps integrate the information in the annual report, and this leads to better TCFD reporting.
- Nonto What the outcome of the TCFD is – improve decision-making (by investors, lenders and insurers in allocating capital and underwriting risk), enhance market resilience and more sustainable economic growth. Also to ensure more stable, resilient markets over the medium and long term by facilitating a smoother transition—with less abrupt price adjustments—to a lower-carbon and climate-resilient economy. Companies can use their CDP responses to help generate and structure the data and information they collect. CDSB’s Framework helps integrate the information in the annual report, and this leads to better TCFD reporting.
- Nonto What the outcome of the TCFD is – improve decision-making (by investors, lenders and insurers in allocating capital and underwriting risk), enhance market resilience and more sustainable economic growth. Also to ensure more stable, resilient markets over the medium and long term by facilitating a smoother transition—with less abrupt price adjustments—to a lower-carbon and climate-resilient economy. Companies can use their CDP responses to help generate and structure the data and information they collect. CDSB’s Framework helps integrate the information in the annual report, and this leads to better TCFD reporting.
- With the release of the second status report, the TCFD had over 800 supporters globally with a market capitalisation of over $9.3 trillion. In the list of supporters, the financial sector leads the way with 392 supporters, followed by the “non-financial” sector at 297 and finally “other”, such as governments and business associations, at 114. The map shows the geographic distribution of survey respondents with Europe leading the way at 45%. Despite this, it is interesting to note that the United States ranks number 1 in terms of country respondents following by the UK and then Japan.
- Now before we dive into the details, let’s take a look at the four key themes and findings that emerged from the report. The 2019 Status report tells us that, despite support for the TCFD rising by more than half since last September, companies are still finding it a challenge to implement the recommendations resulting in insufficient disclosure for investors. More clarity is needed on the potential financial impact of climate-related issues, the majority of companies do not disclose information on resilience and, finally, mainstreaming climate-related issues requires the involvement of multiple functions. Given the urgency of the situation and the scale of the challenge, these findings are concerning. The financial risks that climate change presents to the global economy are enormous. In fact, the United Nations states that delays in tackling this issue could cost companies nearly $1.2 trillion over the next 15 years. In the upcoming slides, we’ll explore these key themes in more detail, discuss some of the most significant statistics from the report and action needed moving forward.
- Materiality (taking into account double materiality and especially Germany’s interpretation of this) Replicability of information & assurance Comparability of information Immaterial disclosures Scope of companies that should be covered (and which requirements should apply to which size of companies) Location of disclosure Coherence with other policy (e.g.: taxonomy, investor disclosure)
- By providing environmental information in mainstream reports, organisations are expected to apply the same rigour and management responsibility as is appropriate to all statements and disclosures presented in the mainstream report, whether audited or not. Generally, the financial statements auditor is required to read the information presented in addition to the audited financial statements and to identify any significant inconsistencies between it and the audited financial statements and to consider any observed significant misstatements of fact in those disclosures and that it conforms with local regulations.
- Materiality (taking into account double materiality and especially Germany’s interpretation of this) Replicability of information & assurance Comparability of information Immaterial disclosures Scope of companies that should be covered (and which requirements should apply to which size of companies) Location of disclosure Coherence with other policy (e.g.: taxonomy, investor disclosure)
- Q Mike: Since materiality is only included in the guidelines, how important are they to complying with the requirements of the Directive? Q Nonto: What is the key thing companies can do to prepare themselves? Q Mike: Do we expect a change with regards to the flexibility allowed to companies in some jurisdictions?