A central component to unlocking change at the scale needed is for the regulatory framework to enable the procurement and disclosure of high-quality, comparable environmental, social and governance (ESG) data, according to the Association for Financial Markets in Europe (AFME).
The European ESG Disclosure Landscape for Banks and Capital Markets report, written in partnership with Latham & Watkins, maps the complex ESG reporting landscape for financial institutions.
The report sets out a framework for how firms may construct their own approach to such disclosures and breaks down the multiple requirements of the TCFD, NFRD, and Pillar 3 disclosures and the SFDR into distinct disclosure categories.
Consequently, the report calls on policymakers and regulators to build a coherent framework to support sustainable finance by prioritising the availability of high-quality data from non-financial corporates.
“Data is the lifeblood of financial markets. Without a clear regulatory framework to ensure financial institutions and investors have access to comparable ESG data from borrowers and issuers, allocating capital to supporting real economy transition plans will remain challenging,” the report says.
To get this right, AFME suggests it will be crucial to appropriately synchronise the development and implementation of the various elements of the ESG disclosure landscape.
Robust corporate disclosures are the bedrock for the rest to follow and should therefore be prioritised, the association explains.
It also highlights the importance of providing clarity, avoiding inconsistencies and duplication between reporting requirements for financial institutions.
The report identifies that international alignment in terms of reporting standards is becoming an increasingly significant area of focus for global financial market participants.
Differing levels of political impetus behind the sustainability agenda in the European Union and other significant jurisdictions, as well as differing levels of progress in the development of reporting frameworks, may risk the creation of requirements that are not aligned.
AFME says this adds more complexity and lack of clarity for financial institutions and their clients, hampering compliance in any one jurisdiction.
“Differing sets of reporting requirements applied to parent and subsidiary companies across different jurisdictions further emphasise the administrative complication of complying with different sets of ESG reporting requirements,” explains AFME.
According to Jacqueline Mills, AFME’s head of advocacy, Europe is playing a leading role in sustainable finance and is developing an ambitious and comprehensive ESG reporting framework.
Mills highlights that ensuring the availability of high-quality ESG data from corporates should be prioritised as this will be key to facilitating the allocation of capital to companies in a way that supports transition objectives.
“Moreover, the current disclosure landscape for the financial services sector is already tremendously complex, with financial institutions required to report over 70 indicators.”
“The European Commission, co-legislators, and the European Supervisory Authorities should continue to work together with the financial industry to introduce a coherent ESG disclosure framework while also considering the increasingly global dimension of ESG reporting developments,” Mills adds.
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