Data-heavy EU ESG reporting will cause hefty burden for firms, says Fitch director

EU’s sustainable finance plans will hit companies of all sizes, but longer-term effects will mark 'major' progress

by | July 20, 2021 | bobsguide

Upcoming EU reporting requirements on ESG will be a costly and burdensome process, particularly for SMEs, according to Fitch Ratings director of ESG research, David McNeil.

On July 6, the EU Commission released its strategy to make the 27-country bloc’s financial ecosystem more sustainable, including a new European Green Bond Standard, an updated ESG taxonomy aimed at preventing “greenwashing”, and proposals to encourage greater transition finance to help firms become more sustainable.

However, with such vast proposals, McNeil said getting firms up to speed with reporting requirements will be a “massive challenge”.

“This is clearly going to be, eventually, a burden for SMEs in particular… Even for medium and large sized companies, it’s going to be a massive undertaking,” he said.

The wide-ranging proposals are to some extent reinforcing one another, McNeil added, with reporting requirements feeding back to the ESG taxonomy and the taxonomy feeding back to green bonds and green asset ratio reporting. According to Mc Neil, this means that data collection efforts by corporates can support banks further down the line and banks’ data collection will in turn support corporates – eventually mitigating the reporting burden for both, says McNeil.

“There probably will be an element of building this complete infrastructure over the next couple of years, and then once the foundations are in place, the burden of reporting and effort of reporting will reduce over time,” McNeil adds.

‘Major steps forward’

McNeil was on the whole markedly positive about the latest EU’s proposals. While the regulatory burden is going to be high, he said the benefits outweigh the costs, and not just from a sustainability perspective: they’ll bring greater internal knowledge to companies.

“Corporates that have a good understanding of these data, generally have a strong understanding of their operations and supply chains or product portfolios,” he adds.

McNeil also argued that the ESG taxonomy proposals are positive development in the space, making greenwashing much more difficult than before.

“It’s providing quantifiable, science-based performance targets that your reporting has to be aligned with to be labelled as green. Whereas at the moment, we have a situation where green is just labelled as whatever you claim,” he said.

“The Sustainable Finance Reporting Directive (SFRD) has been a major step forward in that it’s asking asset managers to report the percentage of their funds that are aligned with sustainability principles.

At present, however, the EU’s taxonomy regime, which was scheduled to come fully into force from January 2022 as part of SFRD but may be delayed by six months to allow for a smoother implementation, is stirring debate in the sector as to the actual effects it will bear. Some critics argue its standardised categories risk compressing the depth and quality of information required from financial companies – thereby falling short of preventing greenwashing practices.

McNeil, however, disagreed.

“I think it’s producing tangible performance standards for these things and that is a major step against greenwashing,” he said.

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