This post is part of the SFG law review, a monthly contribution from Oberson Abels that keeps our members up to date on the latest legal and regulatory updates.
Improving transparency to make financial flows consistent with a low-carbon economy is at the heart of the Swiss and EU strategies to achieve sustainable finance. Besides the transparency requirements that apply in the context of the offering of financial instruments, new regulations aim at increasing disclosure duties for large companies to provide more and better information as regards climate risks. In this paper, we will have a closer look at the role assigned to transparency by climate policies and how it materializes in the new EU regulations about non-financial reporting duties.
I. Increased transparency duties: a pathway towards a low-carbon economy
Improving transparency is at the forefront of the strategies regarding the implementation of sustainable finance in the EU and Switzerland. Transparency is indeed a key feature of the EU Action Plan on sustainable finance adopted by the European Commission in March 2018. In particular, one of the objectives laid out in the EU Action Plan is to improve sustainability reporting and accounting regulations (Action 9). Following a similar approach, the Swiss Federal Council called for greater transparency regarding climate risks and the environmental consequences that may result from investment decisions in its report of June 2020.
Transparency – both with regards to financial products and market participants – is seen as a critical factor for promoting sustainable finance as transparency is expected to have a catalytic role to accelerate the transition towards a more sustainable finance. By ensuring more transparency, investors should be better equipped to understand the climate issues behind their investments and compare different financial products. Consequently, improving investors’ level of knowledge should lead to more investments in “green” financial products and ultimately facilitate the transition to a green economy.
In other words, leveraging transparency should translate into greater market efficiency. Yet, the information published must be sufficient, complete and reliable.
Greater disclosure on climate matters is two-fold: (a) from a quantitative perspective, it aims to increase the amount of information available to investors to erase the asymmetry of information between investors and financial actors, (b) from a qualitative standpoint, its goal is to improve the quality of the information made available.
Based on these observations, increased transparency duties have become a central goal of the regulatory framework in the EU and Switzerland (amongst other examples) to shift towards a more sustainable economy.
II. EU regulatory framework: new measures to reinforce the existing disclosure legal duties
Extra-financial reporting in the EU applies since December 2014, following the entry into force of the Directive 2014/95/EU on disclosure of non-financial and diversity information by certain large undertakings and groups (commonly referred to as the Non-Financial Reporting Directive; NFRD).
On April 21, 2021, the European Commission adopted a law proposal: the Corporate Sustainability Reporting Directive (CSRD) which shall replace the NFRD entirely and amend provisions of four pieces of legislation (namely, the Accounting Directive, the Audit Directive and the Audit Regulation and the Transparency Directive). The CSRD is intended to clarify and strengthen the existing non-financial reporting obligations. It will also be part of the EU regulatory framework designed to prevent greenwashing.
The CSRD introduces several new features and amendments to the NFRD provisions:
- extension of non-financial reporting obligations to all large companies (listed or not) and listed small and medium-sized companies (currently: only large listed companies, banks and insurance companies are subject to non-financial reporting);
- mandatory audit by the statutory auditor of the company or another independent entity to provide assurance of the published sustainability information;
- clarification of the information to be published and publication in accordance with the EU sustainability reporting standards to be drawn up by the European Financial Reporting Advisory Group (EFRAG) (the standards will specify the information that needs to be disclosed and, where relevant, will define the structure according to which the information must be reported);
- obligation to publish sustainability information in the context of companies’ management reports and to make this information available in digital, machine-readable format so that the information can be more easily shared and processed.
The CSRD proposal is currently under review by the European Parliament and the Council of the EU. The anticipated legislative schedule is currently as follows:
- entry into force of the CSRD towards the end of the first half of 2022;
- adoption of the first set of sustainability reporting standards for large companies by the European Commission by the end of 2022;
- transposition into national laws by the Member States of the EU by December 1, 2022;
- implementation of the reporting standards by large companies for the first time to sustainability reports published in 2024, covering financial year 2023;
The adoption and implementation of the sustainability reporting standards for small and medium-sized companies will take place at a later stage.
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 This is the first part of a two-part paper which provides an overview of EU regulations (Part I) and Swiss regulations (Part II) about new non-financial reporting duties.
 Report of the Swiss Federal Council “Sustainability in Switzerland’s financial sector. Situation analysis and positioning with a focus onenvironmental aspects” of June 24, 2020, pp. 13-14.
 I.e., companies which on their balance sheet dates exceed at least two of the three following criteria: (a) balance sheet total: EUR 20 mio; (b) net turnover: EUR 40 mio; (c) average number of employees during the financial year: 250.
 I.e., companies which on their balance sheet dates do not exceed the limits of at least two of the three following criteria: (a) balance sheet total: EUR 4 mio; (b) net turnover: EUR 8 mio; (c) average number of employees during the financial year: 50.
 I.e., companies which are not micro-companies or small companies and which on their balance sheet dates do not exceed the limits of at least two of the three following criteria: (a) balance sheet total: EUR 20 mio; (b) net turnover: EUR 40 mio; (c) average number of employees during the financial year: 250.