10,000+ Foreign Companies Subject to EU Sustainability Disclosures, Insurers Leave Net-Zero Alliance, and More.

April 6, 2023

The top five climate risk and disclosure stories this week.

Want access to deeper insights and curated climate news? Request a demo of our solution today.

In observance of Good Friday, the Weekly Round-Up has been published one day earlier than usual.

US, Canadian companies face EU sustainability disclosure

Over 10,000 foreign companies are estimated to be subject to the European Union’s (EU) incoming sustainability and climate reporting regime, research from global data provider Refinitiv shows.

The Corporate Sustainability Reporting Directive (CSRD) was passed into law by the European Parliament last November. From 2024, it will impose mandatory climate and other environmental, social, and governance disclosure requirements on some 50,000 EU companies, as well as non-EU companies that meet the following criteria:

  • Have securities listed on a regulated EU market. 
  • Make more than €150mn (USD$163mn) in the EU and have an EU-based branch making more than €40mn (USD$44mn) in net revenue.
  • Have an EU subsidiary that has two or more of the following: more than 250 EU-based employees, a balance sheet above €20mn (USD$22mn), or EU revenue of more than €40mn.

Refinitiv data shows there are around 10,400 foreign companies listed on EU stock exchanges, and more than 100 that are privately held but generate more than €150mn in EU revenue. Of the total number of overseas companies identified, 31% are US-based, 13% are in Canada, and 11% are from the UK. The data was first reported by the Wall Street Journal.

Companies covered by the CSRD will have to comply with European Sustainability Reporting Standards designed by the European Financial Reporting Advisory Group (EFRAG). These cover a range of sustainability topics, including climate change, pollution, water and marine resources, biodiversity and ecosystems, as well as resource use and the circular economy. The climate standards require companies to describe their plans to adapt to a low-carbon energy transition and their efforts to align with a 1.5°C warming pathway, among other things. The EU is scheduled to endorse the first bundle of EFRAG standards by June.

Overseas companies with EU stock listings will have to report using the standards from 2025 if they have more than 500 EU employees. Other large foreign companies will have to report from 2026, and small and medium-sized enterprises from 2027. Non-listed companies have to disclose from 2029.

ISSB tells firms to prioritize climate disclosures

The International Sustainability Standards Board (ISSB) voted in favor of a one-year delay to the implementation of its non-climate risk and opportunity disclosure rules.

This means companies planning to report in line with the ISSB standards, which are due to take effect from 2024, do not need to publish reports that year with information on non-climate sustainability-related risks, like water scarcity and biodiversity loss. Instead, they need only produce disclosures that align with the ISSB’s climate-related disclosure standards.

“This transitional relief ensures companies can phase in their approach, initially focusing on the quality of the climate-related information they provide,” said Emmanuel Faber, ISSB Chair. “That said, companies around the world are not all starting from the same place. We expect many of the companies that already disclose information beyond climate to continue to do so, including the 2,500 plus companies already applying the SASB [Sustainability Accounting Standards Board] Standards.”

The ISSB previously introduced a one-year transitional relief period for the disclosure of Scope 3 emissions and for reporting emissions in line with the GHG Protocol.

Insurers leave net-zero alliance

Swiss insurer Zurich has pulled out of the Net-Zero Insurance Alliance (NZIA), days after the world’s largest reinsurer, Munich Re, walked away.

A Zurich spokesperson said Wednesday that the company wanted to focus its resources on helping customers with their climate transitions now that it had set a standardized methodology for tracking and disclosing emissions. They added that the insurer remains committed to sustainability. In its most recent annual report, Zurich reiterated that it plans to reduce the carbon intensity of its investments and underwriting portfolio to net zero by 2050.

Munich Re exited the NZIA on March 31. In a statement, its CEO cited “material antitrust risks” as a factor and claimed that “it is more effective to pursue our climate ambition to reduce global warming individually.” The reinsurer also affirmed its commitment to a net-zero investment portfolio by 2050. As of April 2023, the company will no longer insure new oil and gas field projects or new midstream oil infrastructure. It has also pledged to eliminate thermal coal exposures by 2040.

The NZIA was founded in 2021 by eight leading insurers, including Munich Re and Zurich. As of April 6, the alliance counted 28 members, including heavyweights Swiss Re, Allianz, Axa, and Generali. The insurance alliance is part of the broader Glasgow Financial Alliance for Net Zero (GFANZ), which was set up by former Bank of England governor and UN climate envoy Mark Carney. Last December, investment firm Vanguard left another of GFANZ’s member alliances, citing the need to provide “clarity” to investors about “the role of index funds and about how we think about material risks, including climate-related risks.”

Few big UK firms have credible transition plans

Only five of the 100 largest UK-listed firms have published net-zero roadmaps that align with the “gold standard” set out by the country’s Transition Plan Taskforce (TPT), an analysis by consultancy EY shows.

Of the companies in the FTSE 100 — the index containing the 100 largest UK firms by market capitalization — 80 have pledged to become net zero by 2050. While 78 have released some kind of transition plan, only five have plans with enough information and detail to be considered “credible” under the TPT’s draft disclosure framework, which was published last year. 

The framework sets out five disclosure elements with 19 sub-elements that companies should adopt if they want to meet the TPT standard. To be deemed “credible”, a transition plan should include: a company’s high-level ambition to respond to climate risks and opportunities; greenhouse gas reduction targets; short-, medium-, and long-term actions that support its shift to net zero and details on how these will be financed; and governance and accountability mechanisms, among other things.

The TPT framework, once finalized, will be used by the UK’s Financial Conduct Authority to enhance climate disclosure requirements for listed companies and regulated firms.

“We expect the Framework to be finalised this year following a Government consultation,” said Rob Doepel, a managing partner for sustainability at EY. “Businesses should now be clear about what credible, detailed plans need to look like, and should have a good idea about the direction regulation is moving in.”

Net-zero asset owners to assess managers’ climate policies

The Net-Zero Asset Owners Alliance (NZAOA) has published a guide for evaluating investment managers’ climate policy engagements.

The paper lays out how NZAOA members, which together oversee USD$11trn in investments, can champion climate-friendly policies through their asset managers. It includes a framework for selecting asset managers that align with the alliance’s best practices on climate policy engagement.

“Alliance members, and all other investors committed to addressing the systemic risks of climate change, must address the current trajectory of decarbonisation through multiple levers of influence,” the guide says. “Policy advocacy presents a crucial lever; it includes advocating for stronger public policy that supports decarbonisation and designing investment stewardship practices so as to hold portfolio companies accountable for the alignment of their climate policy engagement with their climate commitments.” 

The NZAOA identifies three ways in which asset managers can influence climate policy: by lobbying for climate-related financial services regulation, by supporting decarbonization policies affecting the real economy, and by influencing portfolio companies’ own engagement with climate policies. 

It also highlights four best practices for asset managers wanting to demonstrate an effective approach to climate policy. First, asset managers should disclose a governance framework that explains their climate policy engagement strategies and describes what accompanying oversight mechanisms exist. Second, asset managers should align their direct and indirect climate policy engagements with their stated climate commitments. Third, they should align their climate policy engagement-related stewardship of portfolio companies with their climate commitments. Finally, they should produce reports that include enough relevant information on their climate policy engagement principles and processes.