Who ate all the PIEs? The inexorable rise of ESG reporting.

03 June 2021

Phil LloydManaging Director, Head of Customer Sales Delivery

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John Stevenson-HamiltonRegulatory Client Engagement

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In April the EU announced the proposed extension of ESG reporting requirements from covering large Public Interest Entities (PIEs) under NFRD (around 11,000 companies in EU) to covering all large companies under CSRD (around 50,000 companies).  

On 1 June in a speech at a Reuters event the Bank of England (BoE) governor Andrew Bailey flagged the need to “develop capabilities to effectively identify, measure, manage, and where there’s outside appetite, mitigate the financial risks from climate change”. Next week the PRA1 launches the Climate Change Biennial Exploratory Scenario (CBES) exercise to assess the resiliency of banks & insurers to different climate scenarios.

At the Green Swan conference hosted by BIS2 (2-4 June) with its all-star cast of central bankers, ESG disclosure requirements have been front and centre. Both François Villeroy de Galhau (Governor Bank of France) in his speech and Mark Carney (Finance Adviser to the UK Prime Minister for COP26) in his, picked mandatory TCFD-aligned climate disclosures as their top priority for climate risk management. 

This explosion of reporting and disclosure requirements might well give pause for thought. Those subject to reporting, what has to be reported, how it will be reported is all getting more and more complicated. Then throw into the mix the lack of global alignment and the extra-territorial reach of some requirements, and it is shaping up to be quite a party.

Below we take a quick tour through some of the recent developments.

EU Taxonomy

So, the NFRD already ate all the ‘large PIEs’ (larger listed and regulated entities), now its proposed replacement the CSRD is hungry for much more (all large companies listed or not, and most listed companies).

And, that’s on top of SFDR (Sustainable Finance Disclosure Regulation) obliging Financial Markets Participants (i.e. asset managers, insurance companies, pension funds) to make certain disclosures around sustainability impacts, integration, and investment objectives. 

All this is underpinned by the EU Taxonomy Regulation - see the one pager published by EU to get a feel for how it fits together (Figure1). The EU Taxonomy provides the requirements that different economic activities have to meet to contribute to various environmental objectives, based largely on scientific guidance. Both CSRD and SFDR will reference those activities, articulating the extent to which either organisations or financial products are “taxonomy-aligned” (a phrase you are going to hear a lot more of).  

TCFD, SFDR, NFRD, CSRD....one thing that is certainly not sustainable is the ESG appetite for acronyms! At the bottom of this article we have pulled together a cheat sheet of ESG acronyms and terms we’ve come across recently...use it to play ESG Bingo next time you dial in to one of the many ESG webinars!

Figure 1
European Commission Finance & Banking Factsheet

It’s all about the KPIs

Following the package of announcements in April (see the thorough summary of the ‘April package’ by Arthur Krebbers and Caroline Haas), in May the EU released the draft text for the EU Taxonomy Article 8 Disclosures Delegated Act together with a public consultation. This sets out what disclosures financial and non-financial companies will be expected to make with particular reference to “KPIs” (Key Performance Indicators). This is translating environmental performance into financial variables, e.g. the ratio of turnover derived from products or services that are ‘taxonomy-aligned’ (there it is again!) against overall turnover. See FAQs here and links to the various EU announcements.

From a product perspective, SFDR expects Financial Market Participants (FMPs) to declare the extent to which their products have environmental characteristics (SFDR Art 8) or environmental objectives (Art 9). These are also referred to as ‘light green’ and ‘dark green’ respectively. The Taxonomy Disclosures Delegated Act requires FMPs to use the EU Taxonomy to articulate how taxonomy-aligned they are against the objectives of climate change adaptation and climate change mitigation (the first 2 of the EU Taxonomy’s 6 objectives).

From a company perspective NFRD (and ultimately CSRD when the scope expands) also expects firms in scope of the rules to disclose the extent to which their activities are taxonomy aligned (e.g. the % of future revenue that will come from such activities). The statements companies will make about their own activities will of course also help FMPs from an SFDR perspective should financial products be linked to those companies.

Timings for the adoption of the disclosures delegated act:

  • 1 January 2022 - disclose taxonomy eligible activities and qualitative information for period 2021 (SFDR & NFRD scope)
  • 1 January 2023 - disclose all qualitative information and KPIs for period 2022 (SFDR & NFRD scope)
  • 1 January 2024 - disclosure obligations will apply fully (including CSRD scope)

One of the key KPIs for banks will be the Green Asset Ratio (GAR) – it is defined as the proportion of the bank’s assets invested in taxonomy-aligned economic activities as a share of total assets. In a recent survey of 20 EU banks, the EBA3 estimated the GAR at just 7.9% currently.

Note that while the main focus so far has been around KPIs for the climate (the ‘E’ of ESG), there will be broader requirements around Social and Governance as well. The Taxonomy Regulation requires that for an activity to be environmentally sustainable it must also comply with minimum social safeguards (as defined by the UN and OECD4). There is also a sub-group advising the Commission on the definition of a Social Taxonomy.

What about the rest of the world?

Other jurisdictions are grappling with how to implement the 2017 recommendations from the TCFD as well. 

The UK has formed the Climate Financial Risk Forum (CFRF) and has produced a 5 year roadmap towards mandatory climate related disclosures. We are waiting to see meat on the bones in terms of exactly how the PRA / FCA plan to implement more detailed disclosure requirements along the lines of the EU Taxonomy and related acts (SFDR and Taxonomy Regulation have not been adopted into UK law post-Brexit). In April 2021 the FCA published a statement re-iterating that they expect adherence to TCFD-aligned disclosure rules (also from Jan 2022 for reporting period from Jan 2021). 

In the US, President Biden has just signed an executive order on Climate Related Financial Risk, reinforcing the steps already underway from the SEC5 in relation to climate change disclosures. But here there are barely any bones, never mind meat. The US is some way behind in explaining what disclosures will be mandated and how, though the mood music has of course changed radically with the new administration. See our extensive article here by our US colleagues for more on the developing picture in the US.

Per the discussion on global taxonomies below, there are a multitude of other initiatives across APAC and other parts of the world.

A global taxonomy?

The cornerstone of all these reporting initiatives is the underlying taxonomy. A common classification system for activities that contribute to ESG objectives that will allow people to compare apples with apples and avoid the dreaded ‘greenwashing’.

The EU has been first out of the gates with their EU Taxonomy Regulation, however there are broader global initiatives underway as well, and a bewildering array of alternatives. ICMA6 have just published a 34 page review of the competing taxonomies around the world, and the GFMA7 has set out principles for a global taxonomy. Given this range, the variety of approaches, political considerations, the extra-territorial nature of the endeavour and the sheer complexity of it all, it is hard to believe there will ever be complete global alignment. But most continue to call for common reporting standards, so perhaps something will emerge.

This is all too much

We feel your pain. Just take a look at the list of acronyms in the table below. Who has the time and appetite to get to grips with all this? What we would say is it is not all happening at once, the measures are cumulative both in what must be disclosed and who is subject to the requirements.

Also, it is important to keep eyes on the prize (not just the PIEs!) - this is about a sustainable future. The disclosure regime aims to push investment towards activities that will contribute to that future and discourage more harmful behaviour.

And to return to Bailey’s speech, he says climate change can be considered as the “ultimate systemic risk”, and yet very often these physical and transition risks are not reflected in the price of most financial assets. ESG reporting in its various forms will play an important role in addressing this.

Phil Lloyd, NWM Sales

John Stevenson-Hamilton, NWM Regulatory Client Engagement

ESG Bingo

Cut out and keep the table below of acronyms and terms you might come across as you read more about ESG...

Glossary of other abbreviations




Prudential Regulation Authority



Bank for International Settlements



European Banking Authority



Organisation for Economic Co-operation and Development



U.S. Securities and Exchange Commission



International Capital Market Association



Global Financial Markets Association


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