The UN-convened Net-Zero Asset Owner Alliance, a group of 74 leading investors with $10.6 trillion in assets, supports and warmly welcomes the climate change Exposure Draft from the European Financial Reporting Advisory Group (EFRAG).
Günther Thallinger, Chair of the Net-Zero Asset Owner Alliance Steering Group and Member of the Board of Management of Allianz SE said:
“The Alliance supports the high ambition of EFRAG’s climate change exposure draft; the alignment of 1.5c pathways, mandatory scope 1, 2 and, where relevant, scope 3 emissions reporting, as well as mandatory target setting and progress reporting. Yet, careful consideration of the how climate change and 12 other exposure drafts are phased-in, the EFRAG’s approach to rebutting the presumption of materiality, and coherence with other reporting standards, notably ISSB, are needed to ensure high quality and effective implementation of this new and important regulation.”
As noted in the Alliance’s statements on the US SEC and ISSB consultations, the current absence of standardised, comparable and granular climate-related disclosures from companies represents a significant barrier and cost to asset owners; limiting our ability to incorporate climate-related issues into investment decision-making and to implement effective stewardship and portfolio design strategies. The proposals for European Sustainability Reporting Standards (ESRS) by EFRAG, in tandem with those from the US SEC and ISSB, represent an opportunity to change this.
In particular, Alliance members wish to:
1 Recognise the progress made in developing and publishing the high ambition and granularity of the ESRS E1 Exposure Draft.
The Alliance is notably supportive of the proposals as regards alignment with a 1.5°C pathway, mandatory scope 1, 2 and, where material, scope 3 GHG emissions reporting, as well as mandatory reporting on climate-related targets and progress achievement. These disclosures are critical for asset owners to assess and manage the risks and opportunities arising from climate change; as well as enable asset owners to increase their ability to finance clean energy solutions and drive change in the real economy. We also highly welcome the provisions on climate scenario analysis, climate-related risk management and transition planning.
2 Highlight priority aspects of sector-specific reporting.
- Sector-specific metrics and targets: Sector targets are the most relevant means for financial institutions to evaluate and track real-world GHG emission reductions, incentivizing and providing capital support to companies which are the best carbon performers within their sectors, as well as supporting the financing of the global economy’s transition to a net-zero economy. The Alliance, in particular, recommends the inclusion of certain highly relevant and decision-useful sector-specific metrics for the 12 most energy-intensive sectors (please refer to the annex) following an ambitious timeline, at the latest in EFRAG’s sector-specific standards for those sectors. If certain sectors are prioritised over others, we urge EFRAG to focus on these 12 sectors as soon as possible, also, but not only to cater to financial institutions’ information demands. Companies in these sectors should be required to report scope 1, 2 and, where material, scope 3 GHG emissions (as required in ESRS E1); yet, in addition to historical data, the sector-specific standards for those sectors should also include sector-specific requirements on a forward-looking basis (at 5-year and 10-year intervals).
- Require separate emissions reporting on methane: Methane is a major greenhouse gas that is significant in several key energy industries such as oil and gas, the utility sector and agriculture. The Alliance recommends that methane emissions are reported separately and not as aggregated CO2 Further, there should be a measure of methane volume disclosure per tonne and a measure of methane intensity in the oil and gas, utility and agricultural sectors.
- Follow a targeted approach for sector-specific standards: In addition to the above, it is key that EFRAG’s approach towards sector-specific standards is driven by the ambition to close transparency gaps, not duplicate existing sector-specific reporting requirements (such as extending SFDR requirements to financial companies at the consolidated level). Otherwise, sector-specific standards will not be able to enhance the transparency and comparability of corporate climate reporting.
3 Highlight key issues where further work and revision of the ESRS are needed. In particular:
- The need for a phased-in approach to ensure high quality standards, while taking CSRD into account. Namely, the first set of ESRS should focus on:
- Disclosures needed by the financial sector to comply with its specific sustainability-related disclosure requirements (e.g. SFDR/Taxonomy) and to fulfil its key role to drive sustainable finance,
- Requirements overlapping with the ISSB standards (to ensure full interoperability and maximum alignment); and
- Comprehensive coverage of the climate topic (such as proposed in ESRS E1).
When deciding upon prioritization, the maturity of metrics as well as the decision-usefulness for stakeholders, especially investors, should be taken into account, where information of quantitative and, thus, more comparable nature is particularly relevant. In regards to prioritization, it is also key that at least the 12 high-impact sectors referred to above are prioritized when developing sector-specific standards (see above).
- The focus must lie on information that is indeed material. As such, the rebuttable presumption, which would require the disclosure of a list of non-material items accompanied by immateriality evidence as well as increase liability risk and implementation effort, should be removed, both to avoid mixing material and immaterial information, but also to set free valuable resources by preparers to produce high-quality, comparable and reliable information that is indeed material to the users of sustainability information. Relying on materiality generally, without a rebuttable presumption, would be sufficient and aligned with financial reporting as well as the approach proposed by the ISSB. For example, as regards climate, it is clear that this is a material topic across all companies, both for investors (and other stakeholders); as such, “standard” materiality assessments should be sufficient to ensure disclosure.
- Clarify how the definition of the value chain will be applied to investors and what key disclosure will be required of asset owners; taking data availability from the financial sector perspective into account (e.g., time lags may be needed where financial companies can use prior year reported data).
- Stress the importance of interoperability.
The Alliance recognises the efforts made to consider existing frameworks and the emerging ISSB standards. Yet, the Alliance would encourage all parties to continue the technical dialogue and make further efforts to avoid the fragmentation of climate-related and other sustainability-related reporting. In particular, EFRAG and ISSB should have a common structure and presentation of climate change, work towards resolving differences in terminology and since ESRS (incl. E1) go beyond ISSB global baseline, the goal should clearly be that complying with ESRS automatically means complying with ISSB.
This would limit the reporting burden on organisations and thereby reduce the time needed to achieve consistent, comparable and reliable climate change reporting, but also ensure that investors (and other stakeholders) receive globally comparable sustainability data.
 When considering whether to disclose Scope 3 GHG emissions, organizations should consider whether such emissions are a significant portion of their total GHG emissions. For example, see the discussion of the 40% threshold in the Science Based Targets initiative’s (SBTi’s) paper SBTi Criteria and Recommendations, Version 4.2, April 2021, Section V, p. 10.
About the UN-convened Net-Zero Asset Owner Alliance
The 74 members of the UN-convened Net-Zero Asset Owner Alliance have committed i) to transitioning their investment portfolios to net-zero GHG emissions by 2050 consistent with a maximum temperature rise of 1.5°C above pre-industrial levels; ii) to establishing intermediate targets every five years, and iii) to regularly reporting on progress. The Alliance is convened by UNEP’s Finance Initiative and the Principles for Responsible Investment (PRI). The Alliance is supported by WWF and Global Optimism. Further information on the Alliance can be found here https://www.unepfi.org/net-zero-alliance/