Response to consultation on draft ITS on Pillar disclosures on ESG risk
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As regards the exposures towards companies excluded from EU Paris-aligned Benchmarks, we insist on the fact that, in order to achieve a zero-carbon economy, the challenge is to green the economy. This goal will be better achieved by implementing an inclusive approach aimed at fostering the development and financing of transition projects rather than pointing fingers at so-called brown activities or implementing exclusion strategies. In this regard, Afep has always advocated for an inclusive Taxonomy fostering transition and against the development of a brown classification. In its communication dated 21 April 2021 on EU Taxonomy, Corporate Sustainability Reporting, Sustainability Preferences and Fiduciary Duties, the Commission states that « The mere fact that a company does not have Taxonomy-aligned activities does not mean that conclusions can be drawn regarding the company’s environmental performance or its ability to access finance. » Although the disclosure requirement envisaged in Template 1 is a transparency measure, we consider that it could have detrimental impacts for companies, be counterproductive and would go against the intention of the Commission and the co-legislators to establish a classification of sustainable activities (see for instance point 12.1(g) of Regulation (EU) 2020/1818 : « companies that derive 50 % or more of their revenues from electricity generation with a GHG intensity of more than 100 g CO2 e/kWh »). Finally, we consider that it is inappropriate to require the disclosure of information based on non-objective elements (See article 12.2: « Administrators of EU Paris-aligned Benchmarks shall exclude from those benchmarks any companies that are found or estimated by them or by external data providers to significantly harm one or more of the environmental objectives…»). We are therefore not in favour of requiring credit institutions to disclose their exposures to activities excluded from Paris-aligned Benchmark.
- Stakeholders, in particular in the financial sector, are increasingly asking companies to provide information regarding their alignment with the Paris Agreement targets. These information however do not cover all the issues at stake and, as such, cannot substitute for a more in-depth analysis carried out by companies.
- A scenario-based foresight analysis is to consider how an organisation might perform under possible but different futures, each of them described by a scenario. This is an appropriate tool for incorporating energy transition and climate-related issues (mitigation and adaptation) into a company’s strategic planning and for understanding the related uncertainties.
- Public energy-climate scenarios – on which the analyses carried out by companies and their stakeholders are or may be based – are not necessarily designed for this purpose. They come with certain limitations, particularly as regards the choice of input assumptions and the type of models used
- Financial stakeholders tend to adopt a normative sector-based approach (using “2°C pathways” for example, which are often incorrectly referred to as “2°C scenarios”). For companies, complying to this kind of request from financial stakeholders can be justified by reporting requirements and the need for comparability with competitors on the market. Nonetheless, such approaches remain incomplete and are not a substitute for a comprehensive in-depth strategic assessment focused on the challenges of the ongoing energy revolution. ».
- In conclusion and given the limitations of public scenarios, companies likely to be particularly affected by energy transition and climate change are recommended to conduct an operational foresight analysis based on in-house scenarios. Such scenarios are first based on a storyline describing the changes in the company’s business environment.
We consider therefore that mandating the use of a single 2° scenario is not appropriate. Considering the complexity of this matter, we believe that more thoughtful consideration should be given to this point and close dialogue with companies is necessary before laying down this requirement in a piece of legislation.
Question 2: Do the respondents identify any discrepancies between these tables, templates and instructions and the disclosure requirements set out in the underlying regulation?
Please refer to our answer to question 3.Question 3: Do the respondents agree that the new draft ITS fits the purpose of the underlying regulation?
We consider that better consistency and coordination between the different pieces of legislation and provisions regarding Sustainable Finance are necessary to ensure that the regulatory framework will be effective. Financial institutions will be able to comply with their requirements only if the necessary data are available. In this regard, non-financial undertakings could start publishing the key performance indicators required by Article 8 of the Taxonomy Regulation (Regulation (EU) 2020/852) only in 2023, the TCFD recommendations are picking up only among the largest companies or the most exposed to climate risks and the Commission has just published their proposal on a Corporate Sustainability Reporting Directive with the aim to adopt (at the earliest) by 31 October 2022 the sustainability standards that non-financial undertakings will have to report in accordance with. In this regard and although we are aware of the constraints laid down in EU legislation, in particular in terms of deadlines, we consider that all initiatives in the field of sustainability reporting should be put on hold until CSRD proposal is adopted and enters into force along with the future EU sustainability standards. The main risk if coordination is not ensured is to end up with a patchwork of disclosure requirements that could not meet the requirements of the future EU standards (understandable, relevant, representative, verifiable, comparable…) and impose an undue burden on non-financial and financial undertakings without providing meaningful information to stakeholders. As illustration and regarding more specifically Template 1, the articulation with the EU Taxonomy is not clear: although the sectors are based on the NACE classification adopted in the Taxonomy Regulation, Template 1 refers to the Benchmark Regulation. We infer from this that the approach here is different from the approach adopted to determine the Green Asset Ratio and this conclusion reinforces our concerns expressed above. We consider therefore that the EBA’s draft ITS should establish a clear link with the Taxonomy and the concept of substantial contribution and, at this stage, is too detailed.As regards the exposures towards companies excluded from EU Paris-aligned Benchmarks, we insist on the fact that, in order to achieve a zero-carbon economy, the challenge is to green the economy. This goal will be better achieved by implementing an inclusive approach aimed at fostering the development and financing of transition projects rather than pointing fingers at so-called brown activities or implementing exclusion strategies. In this regard, Afep has always advocated for an inclusive Taxonomy fostering transition and against the development of a brown classification. In its communication dated 21 April 2021 on EU Taxonomy, Corporate Sustainability Reporting, Sustainability Preferences and Fiduciary Duties, the Commission states that « The mere fact that a company does not have Taxonomy-aligned activities does not mean that conclusions can be drawn regarding the company’s environmental performance or its ability to access finance. » Although the disclosure requirement envisaged in Template 1 is a transparency measure, we consider that it could have detrimental impacts for companies, be counterproductive and would go against the intention of the Commission and the co-legislators to establish a classification of sustainable activities (see for instance point 12.1(g) of Regulation (EU) 2020/1818 : « companies that derive 50 % or more of their revenues from electricity generation with a GHG intensity of more than 100 g CO2 e/kWh »). Finally, we consider that it is inappropriate to require the disclosure of information based on non-objective elements (See article 12.2: « Administrators of EU Paris-aligned Benchmarks shall exclude from those benchmarks any companies that are found or estimated by them or by external data providers to significantly harm one or more of the environmental objectives…»). We are therefore not in favour of requiring credit institutions to disclose their exposures to activities excluded from Paris-aligned Benchmark.
Question 6: Do the respondents agree with the proposal included in templates 1 and 3 to disclose information on scope 3 emissions and with the transitional period proposed?
We understand that by June 2024, institutions will have to disclose their scope 3 emissions. Institutions will therefore need to collect information on CO2 emissions from their counterparties and develop methodologies to estimate their scope 3 emissions. During the proposed transitional period, institutions will explain the methodologies they are developing to measure and estimate their scope 3 emissions and the sources of data they plan to use. Institutions that are already estimating this information should start disclosing it, using estimates and ranges. Companies wish to stress that scope 3 emissions are much more difficult to assess than scope 1 and scope 2 emissions. They insist on the fact that scope 3 reporting should focus on significant emissions as mentioned in international standards such as the GHG Protocol or the ISO 14064-1 standard ; they should be entitled to use comply or explain in cases where it is difficult to assess at reasonable costs whether some scope 3 emissions or significant or not. Indeed, it is important to remind the complexity of scope 3 emissions assessment. To illustrate it, annexes B4 to B7 of the ISO standard specify all 4 categories and 15 subcategories of indirect emissions that can be subject to scope 3 reporting: they are synthetised in annex F1. The standard insists on focussing specifically only on significant scope 3 emissions using criteria mentioned in Annex H3. Section H5 of this annex specifies that in some cases, companies are entitled to indicate cases where the calculation of emissions from some scope 3 categories or subcategories may lead to excessive expenses in regard to the low level of certainty to assess the amount of those emissions. In that case, companies are allowed to justify why they consider not relevant to quantify some scope 3 categories or subcategories. Therefore, the requirements for institutions to disclose their scope 3 emissions should be carefully designed in order to avoid imposing unrealistic requirements and depriving non-financial undertakings from the flexibility they enjoy.Question 9: Regarding the same template 4, what are the respondents’ considerations with respect to the choice of the 2 degrees reference scenario, would respondents opt for a different scenario?
Afep published in November 2019 a report conducted by the Shift Project Think-Tank regarding energy and climate scenarios (https://afep.com/en/publications-en/guiding-companies-to-build-their-energy-climate-scenarios-report-by-the-shift-project-for-afep/). The main findings and recommendations of this study are:- Stakeholders, in particular in the financial sector, are increasingly asking companies to provide information regarding their alignment with the Paris Agreement targets. These information however do not cover all the issues at stake and, as such, cannot substitute for a more in-depth analysis carried out by companies.
- A scenario-based foresight analysis is to consider how an organisation might perform under possible but different futures, each of them described by a scenario. This is an appropriate tool for incorporating energy transition and climate-related issues (mitigation and adaptation) into a company’s strategic planning and for understanding the related uncertainties.
- Public energy-climate scenarios – on which the analyses carried out by companies and their stakeholders are or may be based – are not necessarily designed for this purpose. They come with certain limitations, particularly as regards the choice of input assumptions and the type of models used
- Financial stakeholders tend to adopt a normative sector-based approach (using “2°C pathways” for example, which are often incorrectly referred to as “2°C scenarios”). For companies, complying to this kind of request from financial stakeholders can be justified by reporting requirements and the need for comparability with competitors on the market. Nonetheless, such approaches remain incomplete and are not a substitute for a comprehensive in-depth strategic assessment focused on the challenges of the ongoing energy revolution. ».
- In conclusion and given the limitations of public scenarios, companies likely to be particularly affected by energy transition and climate change are recommended to conduct an operational foresight analysis based on in-house scenarios. Such scenarios are first based on a storyline describing the changes in the company’s business environment.
We consider therefore that mandating the use of a single 2° scenario is not appropriate. Considering the complexity of this matter, we believe that more thoughtful consideration should be given to this point and close dialogue with companies is necessary before laying down this requirement in a piece of legislation.