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1.
November 20 | Tweet @CDSBGlobal
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2.
November 20 | Tweet @CDSBGlobal
Risk disclosure under the EU Non-
Financial Reporting Directive
Gemma Clements
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November 20 | Tweet @CDSBGlobal
CDSB published the Falling
Short? Report in May 2020
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This highlighted the further improvements needed in EU
disclosures on climate
Risk disclosure under the EU Non-Financial Reporting Directive
• 2019 reports of Europe’s 50 largest
companies reviewed manually
• Key areas of weakness were closely
linked to core aspects of TCFD
recommended disclosures
• Comparability and coherence of
disclosures were also key challenges
Full report available at cdsb.net/fallingshort
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November 20 | Tweet @CDSBGlobal
Review aims
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Provide in-depth insight on the state of environmental and climate disclosures to:
Inform policymakers of progress made since implementation of the
Directive.
Assess effectiveness of environment and climate disclosures in
meeting Directive purpose.
Support companies in enhancing their disclosures by identifying good
practice case studies and tips.
EU NFRD Review Briefing: Nordea
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November 20 | Tweet @CDSBGlobal
The review considered 50 companies
across 8 jurisdictions and 10 sectors
Falling Short? Key findings and recommendations for corporates 5
Qualitative and
quantitative review
NFRD content
categories and TCFD
Mainstream reports
US$ 4.3 trillion market
capitalisation
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November 20 | Tweet @CDSBGlobal
Principal risks
Falling Short? Key findings and recommendations for corporates 6
• 90% disclose at least one principal environment or
climate risk;
• Lack of clarity between risks that impact the business
and those that impact the environment
• Impact disclosure commonly qualitative;
• Only 6% clarify impacts over short, medium and long-
term; and
• An area of duplication and inconsistency in some
reports.
A key area of weakness, with many not taking a sufficiently long-term or
holistic view
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November 20 | Tweet @CDSBGlobal
Different views on risk
Climate Disclosure Standards Board 7
Impact Impact
Company impact on climate can
create a risk to the company
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November 20 | Tweet @CDSBGlobal
Companies can take three key actions to
improve risk disclosure under the Directive
TCFD disclosure under the EU Non-Financial Reporting Directive
Clearly state the time horizons over which risks have been considered and
ensure risk descriptions state the likely impacts over the short, medium and
long-term
Provide business-specific examples of how identified risks may impact the
organisation’s operations, business model and financial performance as
applicable
Link risks and their management to environmental and climate-related
policies, due diligence and outcomes
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November 20 | Tweet @CDSBGlobal
Policymakers must use the upcoming revision
of the NFRD to strength EU risk disclosure by:
TCFD disclosure under the EU Non-Financial Reporting Directive
Reviewing the principal risk requirements of the Directive to ensure emphasis
is placed on risks and impacts ‘to’ the business (not only ‘by’ the business)
Removing the exemption allowing the non-financial statement to be reported
outside the mainstream report
Incorporating ‘climate’ into the wording of the Directive
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4 Embedding the TCFD recommendations into the Directive
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November 20 | Tweet @CDSBGlobal
CDSB’s review of 2020 disclosures
• Our latest review of reports released in 2020 will be
launched on 7 Dec – register your interest now
• Companies featured in the analysis will have the
opportunity for individual feedback sessions – reach out
to the team for further information
• Our analysis will provide the latest update on TCFD and
risk disclosure in Europe
• Assesses the first year of disclosure since release of the
Directive’s Guidelines on Reporting Climate-related
Information (2019)
10TCFD disclosure under the EU Non-Financial Reporting Directive
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November 20 | Tweet @CDSBGlobal
Briefings
https://www.cdsb.net/publications-resources/discussion-papers
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Environmental and climate-related disclosure under the EU NFRD
• TCFD
• Risk disclosure
• Disclosure in France,
Germany, Poland
Download the briefings:
TCFD disclosure under the EU Non-Financial Reporting Directive
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12.
November 20 | Tweet @CDSBGlobal
Enhanced reporting Europe campaign
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Access regular support from
experts in climate and
environmental mainstream
disclosure.
Access to experts
Improve climate and
environmental disclosure using
CDSB feedback.
Understand the policy context
and improve preparedness for
regulation and application.
Disclosure feedback Policy briefings
Learn from peers and experts
through country and region-
specific workshops.
Obtain resources directly post-
launch and notifications on
upcoming publications.
Resources Internal support
Receive tailored briefings for
reporting teams focused on
sustainability and/or finance
functions.
Workshops
https://www.cdsb.net/what-we-do/enhanced-reporting-europe
Enhanced Reporting Europe
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November 20 | Tweet @CDSBGlobal
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November 20 | Tweet @CDSBGlobal
Thank you!
With the contribution of the
LIFE Programme of the
European Union.
Follow us on social media
Subscribe to our newsletter
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Contact us: info@cdsb.net
In May 2020 CDSB published our falling short report which looked at the state of disclosure in the EU.
We looked at the 2019 reports of Europe’s 50 largest companies and reviewed them against a qualitative and quantitative set of questions, and we looked at the content categories of the NFRD and the core elements of the TCFD.
On the screen you can see the key strengths and weaknesses we observed from the reviews. Most of the key areas of weakness were closely linked to the core elements of the TCFD and in terms of risk disclosure – which is why we have focused in on risk for one of the briefing documents.
We are currently leading up to our next report which will be released in December.
In terms of the purpose of the reviews there are three main aims:
Providing evidence on the state of environmental and climate-related disclosure under the EU NFRD and consider the effectiveness of the Directive, especially in relation to it’s purpose in providing investors and wider stakeholders with relevant, consistent and decision-useful disclosures.
Supporting companies with enhancing their disclosures by identifying good practice and providing tips.
The review considered reports released in 2019 covering 2018 financial year
We reviewed the 50 largest listed companies in Europe, representing 8 jurisdictions as shown on the screen below and a range of sectors from both the financial and real economy.
These companies have combined market cap of $4.3 trillion so represent a sizeable share of the European economy.
Our approach consisted of a qualitative and quantitative question set used by the CDSB review team, who read through each company’s reporting in detail to assess current practices.
Recognizing the NFRD covers other non-financial information, this review focused in on the specific aspects of environmental and climate disclosure under the core content categories of the directive, so that’s business model, policies and due diligence, outcomes, principal risks and KPIs, as well as the core elements of the TCFD recommendations.
Mainstream reports (such as the annual report and accounts, or registration document) were reviewed in first instance, with other reports reviewed if clearly signposted from the mainstream report or the primary location for compliance with the Directive.
Turning to principal risk disclosures, this was an area where specific challenges were identified in our review.
At a basic level, 90% of companies disclosed at least one principal risk relating to climate or environmental matters, with 54% considering both transition and physical risks. However, the description of these risks and the quality of these descriptions varied. For example, some disclosures provided a list of climate and environmental risks, with little detail about the nature, context and impact of the these risks. Where there were descriptions of the impacts of these risks, these disclosures the were often generic and lacked entity or context-specific information or quantification.
There was also an observed issue with clarity and the distinction between risks related to the impact on the business and risks related to the impact of the business. I will cover this point in more detail on the next slide.
Considering time horizons, only 6% specified how the identified risks would impact the business over short, medium and long-term.
Overall, while risk is a key area of focus under the NFRD and TCFD, it is evident further efforts are needed to improve risk disclosure. In fact, principal risk disclosures under the NFRD were often addressed separately to TCFD risk disclosures, and also sometimes separately to principal financial risk disclosures, which at times lead to duplication and inconsistency in reporting. Without clearly articulating how environmental and climate-related risks are integrated into wider business processes, investors are unable to discern how these risks are used to inform companies’ decision-making and how significant they are considered to be, relative to other business risks.
There are generally two perspectives on risks disclosure, and when we are viewing corporate disclosures, it is fundamental to understand which one is being considered and disclosed. There is a clear distinction between risks and impacts ‘to’ the business – which might include the physical and transition risks defined by the TCFD recommendations. These are the external factors that might have a significant impact on the companies ability to create value and to operate.
This perspective on risk differs from the risks and impacts ‘by’ the business. This might include risks related to water abstraction, or emissions. These impacts might also lead to risks to the business, for example in relation to GHG emissions regulations or reputational risks.
Under the current Directive, companies are expected to consider and disclose both perspectives, where relevant and proportionate.
So companies are expected to disclose the information that describes these risks as they may impact the company.
But as important as these description, there is also an expectation that disclosures should include a description of risk management processes. This should include the processes used to identify, manage, and mitigate these risks so as to demonstrate how the significance of risk is established and how it is managed. Both risk perspectives – impacts on the business, and impacts by the business – will require different internal processes. Where appropriate, the disclosure should distinguish between where these risks are incorporated into enterprise risk management processes and where a separate process is used. For example, some companies use the materiality assessment prescribed by GRI to establish the material sustainability risks based on stakeholder engagement. This process may cover both perspectives to some degree, but does not establish whether these risks are incorporated into the company-wide enterprise risk management processes.
1. Provide business-specific examples of how identified risks may impact the organisation’s operations, business model and financial performance as applicable
Companies should provide entity or context-specific descriptions of the impacts of the risks to the organisation, which may include detailed narrative or quantification of the impacts;
2. Clearly state the time horizons over which risks have been considered and ensure risk descriptions state the likely impacts over the short, medium and long-term
To enhance risk disclosure, companies should provide the time horizons used in risk management process, including when the risks are likely to materialise, in alignment with the TCFD; and
3. Link risks and their management to environmental and climate-related policies, due diligence and outcomes
Applying the concept of connectivity helps to demonstrate how risks inform strategic decision-making and provides a holistic picture of the factors and relationships that may affect a company’s ability to create value.
Remove the exemption allowing the non-financial statement to be reported outside the mainstream report
This will support accessibility, consistency and comparability of disclosures and is aligned to the TCFD recommendations, which call for disclosure of material climate-related information in mainstream report;
2. Review the principal risk requirements of the Directive to ensure emphasis is placed on risks and impacts ‘to’ the business (not only ‘by’ the business)
This will ensure the risk lens set out under the TCFD is actively considered by companies, in addition to their existing disclosures on risks to the environment, which are more commonly disclosed already;
3. Incorporate ‘climate’ into the wording of the Directive
This will ensure companies consider climate-related matters explicitly in their NFRD disclosures, including the associated financial impacts, in alignment with the TCFD; and
4. Embed the TCFD recommendations into the Directive
Their current inclusion within non-binding guidelines is insufficient to drive full adoption of the recommendations. Directly incorporating TCFD into the mandatory requirements will drive stronger linkage of non-financial and financial reporting and is the best means of ensuring disclosure.
Recognising these challenges relating to the provision of decision-useful climate and environmental disclosure, CDSB under an EU Life funded project provides a free support programme for companies.
Companies in the EU can access the full CDSB team of experts through the Enhanced Reporting Europe Campaign platform.
At the core of the platform services is enabling companies to understand the gaps and strengths in their disclosures. We do this through reviewing company climate and environmental disclosures and providing feedback on how this information can be better integrated alongside financial information.
Our deep policy expertise means that we can provide insights on developments, through policy briefings to support your climate and environmental disclosure work.
Workshops and webinars are another way that companies gain further perspective on the latest issues and good practice case studies.
Companies receive updates on tools and resources including those answering the question of what good practice looks like.
We encourage companies to contact us with specific questions, even relating to internal support to for example to brief finance teams or even just for a general discussion.
We invite you to join our event on the state of EU environmental disclosure in 2020
We will hear from the recently appointed European Commissioner Mairead McGuinness on the role of sustainable finance and corporate reporting in the economic recovery from Covid and the achievement of a European Capital Markets Union.
Patrick de Cambourg, Chair of the EFRAG project taskforce on Preparatory Work for the Elaboration of Possible EU Non-Financial Reporting Standards, will provide an update on the development of the European Non-Financial Reporting Standard.
You can register on our website cdsb.net/events
Without further ado, I'm happy to hand over to Victor
(* Please remember to remind people to ask questions)
