In 2018, the EU set out a clear action plan for sustainable economic growth. The EU’s objective is to maintain growth without creating problems for future generations due to depleting resources or environmental crises, such as climate change.
The EU has sought to define clear taxonomy, benchmarking and guidance regarding the duties of, and disclosure by, companies and financial institutions within the Union concerning the environment, society and corporate governance (‘ESG).
The goals of these measures are to:
- direct capital flows towards sustainable investments,
- mainstream sustainability into risk management, and
- encourage transparency and long-term approaches in financial and economic activity.
The EU published a taxonomy in the Official Journal of the European Union on 22 June 2020, which entered into force on 12 July 2020, defining the conditions for economic activity considered sustainable.
Since 10 March 2021, the EU has started to phase in the Sustainable Finance Disclosure Regulation (SFDR) to introduce standardised reporting to reduce ‘greenwashing’, where claimed environmental benefits are untrue and allowing comparison between reports. Public consultation on the draft regulatory technical standards are open until 1 September, with the final texts anticipated in December 2021.
The UK Government announced that it would not adopt the EU’s provisions following Brexit, choosing instead to develop its own taxonomy, albeit based on the EU’s. In doing so, the UK hopes to seize an opportunity to become a leading centre for green finance in the post-pandemic world.
The UK Government intends to develop a more robust approach to ESG disclosure. The EU has taken a ‘comply or explain’ policy to disclosure, whereas the UK has opted for mandatory reporting for UK companies and financial institutions.
There will be challenges for UK businesses trading within the EU, should the UK deviate radically from the ESG provisions implemented by the Union. Variation, no matter whether this is through greater or less stringent regulation, will increase complexity and make drawing comparisons more difficult.
However, ESG reporting goes beyond the EU and certainly beyond the UK in the drive for clarity and comparability, having an international dimension. Several global initiatives include the United Nations-supported Principles for Responsible Investment, founded in 2006, and the International Platform on Sustainable Finance, launched in 2019. Both the UK and EU are members.
The accounting profession has supported international efforts to align ESG reporting. Founded in 2011, the Sustainability Accounting Standards Board was established to develop standardised ESG reporting. Furthermore, the Big Four accounting firms have developed a set of metrics for the international reporting of ESG.
Given the drive for international standards in ESG reporting to reduce complexity and allow for comparisons to be made, it may leave global Britain little latitude for deviation from international standards, with which both the UK and EU will have to align.
Ian Burrell, Global Entity Management Practice Lead, UK and Ireland, TMF Group
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