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A major piece of the disclosure jigsaw.

Long-awaited standards: The European Financial Reporting Advisory Group (EFRAG) has launched a consultation on mandatory reporting standards for companies in the EU. This comes a year after the European Commission’s adoption of the Corporate Sustainability Reporting Directive.

Comprehensive and influential: All large and listed companies are expected to report their audited sustainability information in accordance with the proposed standards. We think the potential standards represent one of the most comprehensive disclosure requirements around the world, underpinning the EU’s sustainability goals. In our view, they are likely to influence sustainability disclosure across different jurisdictions.

Delivering EU sustainability goals: With the interconnection between other EU sustainability initiatives like the EU Taxonomy and Emissions Trading System, we think the draft standards would support and complement the EU’s sustainable development plans, particularly its climate and biodiversity strategies, as companies would be required to disclose their transition plans towards a biodiversity-positive and climate-neutral economy, along with a set of concrete metrics and targets.

Enhancing clarity: Under the principle of double materiality, companies would be required to produce forward-looking reports, highlighting the sustainability impacts of their operations and the financial impacts of sustainability issues. We believe these impacts are interrelated and the enhanced disclosures could facilitate the process of integrating environmental, social and governance factors into investment decisions making and analysis.

Issues to watch: Climate-related disclosures are a focus of the draft standards. In addition to the recommendations of the Taskforce of Climate-related Financial Disclosure, EFRAG proposes more rigorous and more finance-related requirements such as locked-in emissions, value chain emissions and potential liability derived from the EU Emissions Trading System. The draft standards also embrace biodiversity disclosure by proposing measurable targets and metrics which would improve the tracking and monitoring of issues related to nature-based solutions. The potential disclosures also touch upon broader issues such as gig workers, value chain management and corporate governance.

While challenges remain around companies accurately reporting on such broad topics, we think the proposed standards represent a big step towards providing better sustainability disclosure for investors and other stakeholders.

First published 12th May 2022.
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