If your company is publicly traded, you need to know about the new regulations in Europe that affect companies in the U.S. and around the world.
Recently the European Union (EU) established rules to regulate sustainable finance. Now in effect, the rules cover fund managers that apply environmental, social and governance (ESG) criteria. The regulation applies to all funds raised in the EU, no matter where they are managed or based.
The new rules, known as the Sustainable Finance Disclosure Regulation (SFDR), aim to provide more transparency on sustainability within the financial markets. The goal: to prevent greenwashing and ensure comparability. SRDR also covers the possible adverse sustainability impacts of investments.
The SFDR requires all EU-based fund managers that apply ESG criteria to report how they integrate sustainability risks into investment decision-making and investment advice. Furthermore, the SFDR requires disclosure by fund managers on any ESG issue that could impact the value of their investments.
For example, companies may find reporting only on climate change insufficient because investors want to understand performance across a broad range of ESG issues. Depending on the company and industry, investors might ask about issues such as biodiversity and land use change, breaches of ethical behavior, and diversity, equity and inclusion (DEI).
The SFDR requirements impact the lion’s share of new ESG funds. EU investments in ESG funds consistently outpace investments from other regions.
For example, EU investors put an estimated $142 billion into investments marketed as ESG in the fourth quarter of 2020. That compares to $49 billion from investors in the U.S. and other parts of the world combined.
Why this matters to your company
EU investors that fall under the SFDR requirements will need to know about the sustainability performance and risks for all the companies they invest in. Investors tend to collect sustainability-related information from published reports and surveys.
Is your company ready to provide the information investors need?
Responding to surveys is time-consuming. Most companies try to avoid this by publishing the information in stand-alone sustainability or integrated annual reports.
SFDR will prompt more companies to publish sustainable impact data to satisfy the needs of their investors. More than 20% of publicly traded companies don’t yet publish information about their carbon emissions, waste, or other types of impacts.
Over 80% of S&P companies and 76% of NASDAQ companies report at least one ESG metric. But not all of these companies report the information that European-based investors now need.
The best course of action is to ensure your company reports on material issues. Following reporting frameworks and standards ensures that investors can easily locate pertinent information about your company. These standards and frameworks include:
- the Taskforce on Climate related financial disclosure (TCFD) framework
- the CDP (previously known as the Carbon Disclosure Project) standards
- the Global Reporting Initiative (GRI) standards or the Sustainability Accounting Standards Board (SASB) standards.
However, carbon emissions data alone may not suffice, since investors need to track impacts for social and governance issues as well as environment.
Depending on your company’s industry and material issues, investors may look for DEI performance data, labor and human rights information, supply chain risks related to sustainability. For this reason, reporting only TCFD or CDP may be necessary but not sufficient to meet your investors’ needs.
If you have questions about sustainability performance and what investors need, contact Diane Osgood at diane@osgood.com
