Brussels tweaking of environmental and sustainability regulation is "not good but may be a blessing in disguise for UK-listed companies", according to analysts at Liberum, as it could lead to more money flowing from ESG funds into London.
On 9 June, the European Commission published draft reporting standards for European companies subject to the corporate sustainability reporting directive (CSRD), with feedback lasting for a month and adoption into law expected for the third quarter of 2023.
Under the proposed rules, companies will be allowed to avoid making disclosures about specific topics or data points if they are not deemed material, so they can avoid reporting on climate change risks and greenhouse gas emissions, employee health and safety if these issues are not considered significant to the business.
Disclosure of different data points has been made more flexible under the proposed measures, with some delayed by one or two years and companies with fewer than 750 employees given more flexibility to phase in reporting on material topics such as areas where the existing data is considered to be less mature, ie wastewater, biodiversity and resource usage.
The draft regulation has caused widespread criticism, the Liberum analysts noted, in particular the suggestion that climate-related risks and data disclosures be made voluntary, especially in light of the EU’s net zero goals and providing transparency for investors.
Removing mandatory ESG disclosures outside the general required disclosures and a materiality assessment is "a troublesome development", said Liberum strategists Joachim Klement and Susana Cruz, saying it will non-financial disclosures by EU companies less comparable with peers and does nothing to standardise disclosure.
"Moreover, since the UK regulator has already adopted mandatory disclosure regulation on climate-related risks and opportunities (via the TCFD reporting requirement) and gender and ethnic diversity, UK companies are now at risk of being subjected to a stricter disclosure regulation than their European peers."
But they added it is "no time to panic" as most companies reporting in the EU and the UK have already published materiality maps for their business and a large number of companies has adopted SASB reporting standards which will morph into the IFRS sustainable reporting standards and include a materiality map for each sector.
"It will be very difficult for companies to walk back on these materiality maps and stop disclosing information that they have disclosed in the past.
"ESG investors would likely react negatively to such developments and may decide to engage with company management to reinstate reporting on these topics."
For UK-listed companies, the potential blessing in disguise is because ESG funds are growing while all other equity funds experience net outflows for years now.
"If the UK has stricter regulations than the EU, we expect ESG funds in Europe with a pan-European or global mandate to shift more money into UK companies where transparency is higher, and disclosures are more meaningful and comprehensive.
"The resulting investment flows should support the share prices of UK-listed companies."
On Tuesday this week, the EC also tightened the criteria for its 'taxonomy' of what counts as a green or sustainable investment as part of a revised package of measures.
The aim of the package is to ensure that the framework is easier to use and “works for companies that want to invest in their transition to sustainability”.
The Financial Times reported that for airline companies to qualify as green, for example, sustainable aviation fuels will have to make up 15% of fuel mix by 2030, up from an initial 10% in criteria that was criticised as unscientific and the current 0.05% of the airline industry mix. Shipping companies will face similar requirements.
To be classed as green, plastics will only be allowed to be made from biowaste, while a threshold was also set for use of chemicals that are considered high risk.
Brussels estimates €700bn of additional investment each year will be needed for the EU to meet its goal of reaching net zero emissions by 2050.