ESG reporting needs a drastic revision

ESG data collected from companies is used to rate investment targets in terms of how well the companies take ESG factors into account, and how their operations affect the environment and the society. The Commission is now updating this framework together with the revision of the EU non-financial reporting directive. Finance Finland holds the view that the upcoming update should be an ambitious one.

ESG is short for ’environmental, social and governance’. The obligation to report ESG data applies only to companies with 500 or more employees, and companies have much room for discretion in what they report. This means that while data is currently being reported, the volume is too small.

The scope of application should be expanded to include companies with 250 or more employees. Drawing the line at 250 employees would also be in line with the Commission’s definition of SMEs. ESG reporting is also in need of common standards: investors’ growing environmental awareness necessitates access to commensurable information on the responsibility of investment targets.

The EU would be the most appropriate leader in standardising companies’ ESG reporting. It could collect comparable data directly from the companies and make it available, for example to the financial sector and the academic world. The availability and visibility of information would help companies and private persons evaluate what they invest in and what consequences these investment decisions may have.

This information must therefore be as detailed as possible.

The reporting should be based on financially relevant information. Each company subject to the scope of application should analyse which sustainability factors are relevant to their own operations, activities and future, and make this analysis public.

Public register for the reports

Finance Finland has made a proposal for an EU-wide ESG data register. The most appropriate body in charge of the maintenance of the register would be Eurostat or some other EU authority.

Having ESG data available in a single EU register would save time and money of both the reporting companies and the users of the data. The incentive for companies to report would be added visibility and the promotion of their reputation as sustainable companies. A public register would also improve the availability of the data for small-scale investors, researchers, and teaching.

The proposal for an ESG data register has gained interest also beyond the financial sector since it was made earlier this year. It won consultancy company South Pole’s international competition for climate change mitigation ideas, and now several European financial organisations have sent a joint letter to the European Commission to promote the initiative.

The ESG data register initiative was started by the Hanken School of Economics, Aalto University, OP Financial Group and Aktia. The Finnish financial sector has continued the work in FFI’s Responsibility Committee.

Read FFI’s statament for more information