The missing piece: EU business sustainability standards and how they fit with investor disclosure taxonomy and regulations


This article is a review, editing and adaptation by Sustentia, based on the original written by Frank Bold, in the framework of the Alliance for corporate transparency (ACT), for publication in Spain. It is the third in a series of articles to be published with the aim of spreading the word about the importance of sustainability reporting., and the regulatory changes underway in the European Union in this regard for 2021. First outlined the political developments planned for 2021, included 10 key changes envisaged in the proposed reform of the EU Non-Financial Reporting Directive. The second focused on governance information (G of ESG). The opinions included in this article do not necessarily represent the opinions of other members of the Alliance.. In the next article we will address climate transition plans and science-based targets.

Summary of content:



To mobilize sustainable finance for the transformation of the European economy, The EU strategy is based on two complementary lines of action aimed at cover the deficit additional investments needed to meet EU climate targets (half a billion euros a year). First of all, a review of incentives in financial markets and corporate governance (that are addressed mainly through the Sustainable Finance agenda and the next initiative of Sustainable Corporate Governance). Secondplace, transparency on the positive and negative impacts on sustainability by companies, as well as capital providers.

The strategy for achieving transparency on sustainability and impacts is based on the following three pillars:

● The current Directive on non-financial information (NFRD), as well as the proposed Corporate Sustainability Information Directive (CSRD), they include, to varying degrees, the obligations of companies to report relevant information and sustainability data on risks and impacts related to their business model.

● The Sustainable Finance Disclosure Regulation (SFDR) defines the disclosure obligations for financial market operators to, investors, managers and insurers, show how they take sustainability risks into account in their decisions, and how they inform their strategy, objectives and impacts on final investors purchasing the financial products.

● The Taxonomy Regulation (Taxonomy) classify sustainable activities (and specifies the criteria and information requirements) in order to be able to objectify the economic activities and financial products that can be categorized as financing or sustainable investment.

* Visual timeline: Standards development (SFRD- Sustainable Finance Disclosure Regulation, NFRD- Non-Financial Information Directive) CSRD-Corporate Sustainability Information Directive).


What should report who and what is currently missing?

The SFDR applies to all financial market participants, mainly to institutional investors, including investment activities of banks and insurers. The NFRD applies to publicly traded companies, as well as the activities of banks and insurance companies: They are both preparers and providers, as users of sustainability information (read our First article in this series to learn about the changes we were proposing to the scope of the NFRD this year, as well as the joint response of the Alliance for Corporate Transparency to the draft of the proposed Directive on Corporate Sustainability Information- SCRD). The information requirements outlined in the Taxonomy, and that address sustainable activities will apply to both groups, and will become the norm for sustainable lending and investment, regardless of the size of the recipient entity. So it is expected that, for the need for useful information for sustainable financial investments, exceeds the limits defined on the size of the companies as it is necessary for investment decisions, credit or assurance.

The requirements of the SFDR and the Taxonomy will be based on technical standards, and selection criteria that will enter into force in 2022. Although the European Commission has yet to adopt them into law, draft standards are now available, and the EU institutions have recommended investors and companies to follow them. A report from UNEP FI and EBF already provides a practical understanding of the applicability of the EU Taxonomy to banking products. The UN PRI elaborated case studies in which information was shared about how more than 40 Investment managers and asset owners have worked to apply the Taxonomy on a voluntary basis in anticipation of the upcoming European regulations.

Arturo Fraile, Regulation manager within the Regulation and Internal Control area of ​​BBVA Research, define taxonomy as an official dictionary of the European Union, which will help financial agents to determine which economic activities are considered environmentally sustainable. "It will help us to know if the investments, financial products and financing are aligned with it and to what extent ", Explain.

The draft Taxonomy standards lists the specific indicators of adverse impact that must be disclosed and specifies how to calculate the impact associated with investments.. The draft selection criteria of the Taxonomy specifies the classifications, thresholds and indicators for sustainable activities, namely, activities that contribute substantially to the EU's environmental objectives and that, therefore, are eligible for sustainable financing.

“Trust is everything in markets and investments” and to reinforce it it is necessary to have truthful information, has pointed out the Vice President of the National Securities Market Commission (Cnmv), Montserrat Martínez Parera, also vindicated the need for “homogeneous reporting standards, something essential for companies to use the same references and we can compare. Currently given heterogeneity of existing frameworks, it is very difficult for investors to perform a genuine analysis of the information”. The problem is that the regulatory framework “it is not complete and we do not have standards that allow us to compare the information”, added.

Some of the companies with sustainability strategies, especially those most sensitive to trends in financial markets and listed companies, are making public commitments to sustainable investment targets and related to the taxonomy. ACCIONA has made public that "Assumes the commitment that the 90% of their annual investments are included within the taxonomy of the European Commission, which identifies the activities that contribute significantly to the decarbonization of the economy ".

What is missing are the sustainability standards of the EU NFR / CSRD, that clarify what companies must report, so much about the risks, as about the impacts, of their activities, and their supply chains. These technical standards are essential to ensure that companies disclose significant information associated with their business model., and comparable with other companies and with their behavior over time, needed by investors and banks under the SFDR. These standards are essential to solve methodological gaps in the collection and presentation of information., reduce the administrative burden on companies, as well as to generate reliability, security and confidence in themselves, as well as investors, civil society and supervisors.

Rients Abma, CEO of Eumedion (Dutch organization representing the interests of institutional investors), insist on this idea, and underlines that “a harmonized set of sustainability reporting standards, ideally global, would significantly improve consistency, comparability and reliability of sustainability data for us, as institutional investors, and other users. The revised NFRD should provide the basis for establishing such a harmonized set of standards.”.

The adoption of these EU standards is one of the key objectives of the legislative review of the NFRD / CSRD, what will take place this year (read our first article to find out what changes are planned). Another objective of the reform is to ensure that all large companies, and ideally all high risk, are included and are not left out of the capital flows that are being mobilized to finance sustainable transformation and innovation. Undoubtedly, one of the improvements that should be considered in the revision of the proposal for the Information Directive on Corporate Sustainability- CSRD is to see the most effective way to include in the scope to medium and small companies that their activity has a serious risk or impact on the planet or human rights.

The National Securities Market Commission (Cnmv) is awaiting this information. "The future review of the non-financial information directive and the development of the taxonomy, inter alia, confirm the need to have a clear and homogeneous framework that facilitates the comparability of non-financial information for investors and that avoids possible green washing practices by establishing verification mechanisms ", points out in your Activity Plan for the current fiscal year 2021.

* Diagram: Information flows (SFDR, NFRD/ CSRD, Taxonomy).

The SFDR and Taxonomy are based on the NFR / CSR standards, therefore the key indicators should be clarified (KPI), quality criteria and methodologies in four critical areas:

AREA 1. Minimum criteria for the disclosure of the decarbonisation objectives of companies, and financial risks related to climate change in relation to the objectives of the Paris Agreement.

The SFDR requires investors to take them into account, but it does not specify the quality criteria for the disclosure that allow such evaluation, for example, temporary goals, long-term and intermediate, the various scenarios, and alignment with science-based methodology and evidence. “Among the key indicators for the dissemination of climate alignment should include prospective climate scenarios (forward looking), as recommended by the Task Force on Climate-related Financial Disclosure (TCFD), considering between them a reference temperature scenario of 1.5 ° C. There is growing support for this type of approach from central banks, regulators and governments; as well as an increasing number of tools and methodologies developed. " Lennys Rivera, Climate and Energy Program technician, WWF Spain.

Santander and other Spanish banks, like BBVA, Caixabank or Ibercaja, they became a few days ago in founding members of the Net-Zero Banking Alliance, promoted by the Financial Initiative of the United Nations Environment Program (UNEPFI). Joining this group commits the entities to adopt measures, and to give an account of how they are progressing towards the decarbonization of all their operations (also the hints) for decarbonization in 2050.

Arturo Fraile, by BBVA Research, points out that "The Taxonomy will contribute to increasing transparency and will help to verify to what extent it is contributing to the achievement of the objectives of the Paris Agreement".

Jose Antonio Alvarez, CEO of Banco Santander, It has been recognized that “to travel this path, standardization is very important”, and has indicated it as a very relevant point for the bank to advance in decarbonization.

AREA 2. Methodologies for calculating the impacts by the companies in which it is invested, for example with respect to Scope GHG emissions 3 (namely, indirect), from which investors must calculate their own investment-related indicators, as established in the SFDR standards.

The SFDR standards only specify the formula to link the impact indicators to the value of your investments, for example regarding the carbon footprint of your investments, but not for the calculation of the impact indicators of the companies. Today, many companies claiming to report on Scope GHG emissions 3 they only do it in a way “limited”, namely, excluding the vast majority of emissions from the total reported in the reports.

AREA 3. What should be reported about company due diligence, as this is the minimum safeguard which ensures that sustainable activities, and sustainable financial products, they are not related to serious adverse impacts on human rights or the planet in their value chain, a condition demanded by both the SFDR, as per Taxonomy. On the other hand, the draft of the Corporate Governance Regulation is expected to establish requirements on Due Diligence., so it would be necessary to better specify the information that should be reported on this key tool.

The SFDR and the Taxonomy are limited to specifying that due diligence processes must be in line with international standards, such as the OECD Guidelines, but they do not clarify what must be disclosed at a minimum to give an indication of the quality of a company's due diligence.

David Schilling (Investor Alliance for Human Rights/ICCR) he pointed in a recent webinar on the quality of information collected by companies, that “the data is intended to enable investors and companies to carry out their due diligence, and should focus not only on policies and practices, but also in the results and the impact on people”.

In this sense, Juanjo Cordero, partner of Sustentia points out that “In the studies that we have carried out in recent years, we show that a very high percentage of companies still limit themselves to providing generic information on sector or global risks., but not relating them to the business model, nor with identified findings from the due diligence exercise of the company. This makes it difficult for companies to relate concrete actions associated with risks identified in human rights, and therefore whether these have been effective in preventing or mitigating their materialization or effects ".

AREA 4. Basic set of social indicators, and quality criteria, that address relevance, reliability and measurability, that both standardized and entity-specific indicators should meet. The SFDR regulations outline several additional indicators of adverse impact on human rights for companies to affirm that they do not violate any of these basic criteria.. It is obvious that a blind application of filling in these indicators would lead to a nonsensical scenario, where improbable disclosures of confession of violation of any right would be expected, or a possible unnecessary administrative burden that is limited to a self-declaration of non-materialization of risks in this area.

Among these key indicators (KPI), that SFDR standards should contextualize, are included if a company has a policy against human trafficking, the number of incidents with serious impacts on human rights and the % of operations and suppliers at risk of child and forced labor. Clearly there is room for improvement to provide meaningful information on these risks, without falling into ineffective bureaucratic formalities for the purpose of regulation.


What risks and opportunities are there for companies in the reform?

NFRD reform and development of NFR / CSR standards (EU corporate sustainability report) are required to complete the system for various reasons:

1. Sustainable financing needs: Investors, banks and insurers need company data to meet their own disclosure requirements, but also - and this is more important- in order to consider the impacts on sustainability, as well as the financial risks and opportunities linked to your investment decisions. In the absence of a legislative mandate, and a clarification of the methodologies, data available to financial traders will remain patchy, and unreliable (see the results of the research we did on 1,000 companies here).

This is especially important to meet the objective of the EU's sustainable financing strategy to incentivize investment in activities that make a substantial contribution to climate mitigation., do not significantly harm the environment, and contribute to the violation of human rights throughout the value chain.

2. Access to finance and risks for the competitiveness of companies: the current Directive on non-financial information (NFRD) currently applies only to publicly traded companies with more than 500 employees. This leaves most large European companies out of scope. (nails 35 one thousand), as well as many smaller companies but from high-risk sectors. The revised NFRD (current CSRD) specify critical data that will be a de facto condition for accessing loans and investments for transformation activities, which in turn will drive the evolution of the market. Even a slight delay in the ability of companies to collect and present relevant data that will not be included in the scope of the NFRD, will place them (as well as national economies) at a significant competitive disadvantage. The combination of the pace and scope of the next economic transformation is unmatched in history, and it can leave entire companies and economies totally unprepared.

Like Alois Mika, ČSOB Advisory energy expert (Grupo KBC): “This decade will decide who will be the winners and losers of this century. The winners will be able to implement sustainable business models, apply artificial intelligence and digitize from A to Z. The losers will end up in an unfavorable market position, unable to raise external capital”.

Banks that have already begun to readjust their strategies around the financing of the economic transition, They have also complained about the need for data from SMEs, since they make up the majority of their customers. Without a legislative mandate and clear rules, it will be very difficult for SMEs to communicate this data. And apparently in the information directive proposal on corporate sustainability, presented by the European Commission, this aspect has not been solved.

“The NFRD should help our clients transition. It's not just about big and publicly traded companies: sustainability data should be required of any company, including SMEs. Large companies need to assess their supply chain, and the availability of data is essential for this”, explained Ricardo Laiseca, Director of the BBVA Global Sustainability Office.

3. Chaotic environment and barriers for SMEs: The current framework of voluntary reporting standards, the various requirements of individual investors, sustainability rating agencies and purchasing companies, and the contradictory recommendations of the consultants, create an undue administrative burden for businesses. As the EU Project Working Group on EU Standards, the number of KPIs suggested by existing information initiatives exceeds the 5.000. Listed companies complain that they are bombarded with an endless series of applications and forms, and that its sustainability performance is simultaneously rated among the best and worst by various benchmarks. This context, called “alphabet soup”, makes it difficult for companies to decide which data to focus on. It also discourages company management from taking sustainability data seriously in a business context.. This is an even bigger problem for smaller companies., some of which have to start building their sustainability reports from scratch; Thus, a legislative mandate is needed, and clear standards to guide them toward meaningful and effective reporting.

“Many companies, especially SMEs and those not supported by international parent companies, do not have a clear idea of ​​what is expected of them in relation to sustainability data. The common problem is that the data disclosed is often not standardized and, therefore, they are not comparable. That's why clear rules and guidelines are essential”, concludes Sara Foršek, Head of Sustainability at Raiffeisenbank Austria d.d.



NFR / CSR standards are vitally important to fill these gaps, thus ensuring that the data are comparable and meaningful, alleviate the administrative burden on companies, and ensure that smaller businesses are not excluded from access to sustainable finance.

In the absence of these clarifications and improvements, company strategies and investor decisions will continue to be based on a high degree of uncertainty, both on adverse impacts, as about financial risks.

In this article, We wanted to highlight gaps the most relevant gaps that must be addressed to improve the quality of company information and ensure that it is useful to investors, which in turn will allow companies to more easily access sustainable capital and boost capital flows to support the overall climate transition.

The main conclusions are that the sustainability reporting framework needs to be completed, to be effective in the sustainable financing strategy, adding:

A greater reach, covering a broader group of companies, including those operating in high-risk sectors
A clear and simplified set of metrics and indicators
Underlying methodologies to match company reports with those offered to investors
Details on how to assess whether the objectives, a company's timeline and KPIs are in line with the Paris targets and the SDGs
An assessment of the minimum social standards in your business model and in relation to the company's supply chain
Specification of significant disclosures of adverse impacts on human rights and the environment

Additional information and materials:

? Public reaction of the Alliance for Business Transparency on the proposed Corporate Sustainability Reporting Directive (reform of the NFRD): most promising changes and caveats.

? Public reaction and analysis of the Alliance for Business Transparency on the recommendations included in the report end EFRAG project working group on non-financial reporting standards.