May 17. 2021. 5:44

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How Europe’s non-financial reporting framework can help achieve international sustainability goals

Just over five years ago in Paris, in a historic display of multilateralism, delegates from around the world came together around a shared commitment to achieving something that no one nation could achieve alone.

As we enter 2021 and momentum builds towards the UN Climate Change Conference (COP26) in Glasgow in November, it is not only an opportunity for individual countries to ratchet up their climate ambitions.

It is also an opportunity to enhance international collaboration on climate change and other global sustainability goals. That must include establishing the infrastructure necessary to translate ambition into action.

Just as the European Union was instrumental in brokering the Paris Agreement, Europe’s leadership has catalysed sustainable finance at regional, national and international levels. The imminent publication of the EU’s renewed sustainable finance strategy will demonstrate how Europe intends to build on this leadership and ambition.

A central piece of this agenda relates to sustainability-related data, increasingly seen as the engine that can drive sustainability progress by giving corporations and financial institutions the tools they need to integrate sustainability into corporate governance, strategy, and risk management—and meet the scale of the challenges at hand.

The importance of data

A global economy that is fit for purpose in the 21st century will require disruptive innovation, transformative adaptation, and urgent mitigation efforts, all of which will need extraordinary financing.

To mobilise capital markets as key contributors, companies and investors must first understand the important interrelationships between their investments and their broader economic, environmental, and social implications.

To that end, a variety of reporting initiatives have emerged that call for enhanced transparency, which can enable better Informed investments, facilitate more efficient markets, and help smooth the transition to a more sustainable, low-carbon economy.

But those initiatives have been largely voluntary and loosely coordinated, leading to a fragmented reporting landscape. The lack of a coherent, internationally accepted system for non-financial reporting has therefore been a major stumbling block for progress on global challenges, including the Paris Agreement and the Sustainable Development Goals (SDGs).

Europe has taken significant steps in driving non-financial reporting forward, moving nimbly where market forces have lagged behind policy ambitions. The upcoming review of the Non-Financial Reporting Directive (NFRD) is an opportunity to build on this framework and marshal the power of global capital markets towards a more sustainable and just future—for Europe and beyond.

Different perspectives on ‘materiality’

In certain key ways, standardised sustainability disclosure presents a more complex challenge than did the standardised financial information that companies have long disclosed. Non-financial information must meet the needs of a range of different users—not only those making economic decisions—each of whom digests and processes information in unique ways and in accordance with their own objectives.

This includes a company’s employees, customers, and suppliers, as well as its local communities, policymakers, regulators, civil society, and others.

In this context, for a system of disclosure to be globally accepted, it must incorporate both an inside-out perspective—capturing a company’s impacts on the environment, society, and economy—as well as an outside-in perspective—measuring the impacts of environmental, social, and macroeconomic trends on the company. The European Commission has referred to this concept as “double materiality.”

Today, there is no single disclosure framework that was designed to be all things to all people. Counterintuitively, however, this may help rather than hinder global progress. The leading sustainability standard setters and framework providers have recently demonstrated how their existing work can collectively form the basis for a coherent, comprehensive corporate reporting system.

(This “group of five” includes CDP, the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council, and the Sustainability Accounting Standards Board.)

And, indeed, by adopting such a system­—which would be comprised of separate but interlocking “building blocks”—Europe has an opportunity to establish a solution for NFRD disclosure that is distinctly European, while still retaining enough flexibility to be adapted for use around the world.

A global solution with regional specificities

Sustainability issues transcend international borders, and in an ideal world non-financial disclosure standards would, too. However, different jurisdictions have unique regulatory mandates within which they must operate, varying capacities to effect change, and different starting points from which to build.

They also have differing ambitions and unique priorities. Many of these distinctions are codified in the nationally determined contributions (NDCs) to the Paris Agreement.

For these and other reasons, a globally accepted system of non-financial disclosure will always need to be supplemented by region-specific reporting requirements. A “building blocks” approach to non-financial disclosure would help strike a delicate balance between providing the global consistency that markets need and the regional specificities that are essential to policymakers and regulators.

Leading international ambition through European frameworks

Today we are on a path that can bring together the existing standards and frameworks that collectively guide the majority of quantitative and qualitative sustainability disclosure. Along with our colleagues in the “group of five,” this is our vision—a future in which a coherent, comprehensive system of corporate reporting helps bring the interests of businesses, investors, and broader society into close alignment.

Europe is at a turning point with its sustainability agenda. The speed at which the EU is leading the charge to achieve international sustainability goals can help catalyse essential headway at an international level by raising the bar for others and encouraging them to follow.

By building the foundation for a globally accepted system of sustainability disclosure, we can not only ratchet up our individual ambitions, but also our collective progress.