Sustainability reporting: the point of no return

The sustainability topic has emerged as front and centre for any business model nowadays, with an increasingly demanding regulatory framework, calling both for transparency and action from leaders and managers.

The European legislation on sustainability has moved at an incredible fast pace in recent years, as the topic became a key policy priority in Europe. Following the adoption of the EU Corporate Sustainability Reporting Directive (CSRD) by the end of 2022 and the subsequent creation of the European Financial Reporting Advisory Group (EFRAG), the path for detailed non-financial reporting has reached a point of no return. This will represent a quintessential pilar for the public and the private sectors in upcoming decades, with the EU Taxonomy taking centre stage. It is therefore of the utmost importance to keep track of all those impending regulatory changes.

Technically, the CSRD will replace the existing Non-Financial Reporting Directive (NFRD), widening its scope regarding requirements, details, and targeted size companies. While under the current NFRD framework only listed companies with over 500 employees (a universe of about 11,000 European companies) are required to report non-financial information, the CSDR broadens the scope to organizations that meet two of the following three criteria: i) balance sheet above EUR 20 million; ii) net revenue above EUR 40 million; iii) over 250 employees on average throughout the reporting year (representing an estimated universe of 50,000 European companies when fully deployed). The plan envisages that eventually even SMEs will be subject to CSDR reporting.

The tight defined timeline therefore urges companies to prepare for CSRD sooner rather than later. More precisely, by 2025 listed companies with over 500 employees will have to publish a report according to CSRD in respect to its 2024 activities. It is widely expected that by 2027 listed SMEs will be required to report according to a simplified CSRD version, in respect to their 2026 activities. Broad CSRD reporting items will include: i) alignment of business model and strategy to achieve climate neutrality by 2050; ii) science-based targets and progress; iii) most significant negative impacts; and iv) identification of main climate-related risks and mitigation actions.

The challenge is a hidden opportunity

Reporting is undoubtedly a significant upcoming challenge for economic agents, albeit the impact will differ depending on each activity sector. In particular, the EU Taxonomy brings important changes as each entity must report on the alignment of each economic activity (in terms of Capital Expenditure, Operation Expenditure and Turnover) to its contribution to one of the six EU environmental objectives 1 Notably, non-financial institutions will be required to correctly quantify and report on a vast array of sustainability items, including their Taxonomy eligibility and alignment. For those companies, this also represents an opportunity to revisit their business model and acknowledge sustainability-related risks they may be facing in the future and adjust accordingly. With sustainability becoming a key competitiveness factor in financial markets, businesses perceived as more sustainable will be capable to attract more capital and possibly secure funding at lower costs. Credit institutions will face slightly different challenges. With ESMA, ECB, EBA and other supervisory authorities soon finalizing their recommendations, credit institutions must adjust to the new sustainability framework in different areas, including reporting asset-side Taxonomy alignment (which may include compute alignment for loans to SMEs and mortgages) and reporting sustainability-related risks (with a focus on climate-change risks). Additionally, financial products must be classified according to their Taxonomy alignment, thus enhancing comparability and transparency for investors. Credit institutions may eventually also benefit from this challenge, as cheaper funding may be available and even some positive discrimination for “green” assets may be envisaged in a near future.

Data and more data

Reporting will require organizations to efficiently collect data, both internally and externally. While this will consume additional resources and imply stepping-up quality datacollection, it will equally enable businesses to make more grounded decisions. In fact, the reporting exercise can become a very powerful management tool and an opportunity for businesses to become less vulnerable to sustainability-related risks. Even though the ESG theme is still essentially regarded as a reputational issue by some, it already has a real impact on any business’ profitability presently.

The concept of double materiality

Sustainability can be seen through two lenses: “outside-in” and “inside-out”. The outside world (i.e., climate change) may negatively impact any company, thus representing a risk for its profitability. Conversely, the company may have an external (positive or negative) impact on the outside world. The two dimensions are equally important and equally monitored, especially when different ESG rating agencies apply different methodologies to score an individual entity under each perspective. The harmonization of ESG rating agencies’ methodologies will surely be an important discussion topic during 2023. Yet this concept of double materiality may soon gain additional importance in the context of the Greenhouse Gas (GHG) Protocol. Under the socalled Scope 1, companies report on direct emissions, such as emissions from fuel combustion in their own factories. Under Scope 2, the computation includes also emissions related to the purchased energy. As regulation evolves, Scope 3 will eventually require companies to also report greenhouse gas emissions produced through indirect emissions along the value chain, including in purchased goods, business travel, and up- and downstream distribution. This will also imply that companies will increasingly have to consider implementing both CO2 offsetting technologies and nature-based CO2 sequestration projects.

A great opportunity for the Portuguese economy

The new regulatory framework will greatly favour investments, capital-raising, and funding in green and social projects. The Portuguese economy has a tremendous untapped potential to embrace the sustainability-led transformation, with its outstanding natural conditions to collect clean energy and its vibrant innovation cluster. The economic agents can (and should) therefore reap the benefits of a rapid adjustment to the green and circular economy. SMEs can play a particularly important role in this regard, given their flexibility to adapt and reinvent their business models rapidly. Ultimately, sustainability is the key to unlock further growth potential.

1 The EU Taxonomy establishes six environmental objectives:

1. Climate change mitigation; 2. Climate change adaptation; 3. Sustainable use and protection of water and marine Resources;

4. Transition to a circular economy; 5. Pollution prevention and control; and 6. Protection and restoration of biodiversity and ecosystems.

Asustentabilidade está incorporada na estratégica do novobanco, na nossa missão de gerarmos impacto positivo para a sociedade, e em contribuirmos para a promoção de práticas de investimento sustentável, com o propósito de acelerar o processo de transição para uma economia neutra em carbono. O ESG (Environmental, Social, Governance) enquanto “expressão financeira” da sustentabilidade, está presente no modelo de negócio do novobanco, nas nossas métricas, e é uma das nossas prioridades. Para além do enquadramento regulatório, que cada vez mais exige a consideração de fatores ESG, temos a responsabilidade social de reorientar os fluxos de capital para investimentos sustentáveis e de ativamente contribuir para uma sociedade que promova a sustentabilidade e contribua para um futuro mais verde e inclusivo. E este objetivo está presente quer nas nossas práticas internas, valores e políticas, mas também, e cada vez mais, na relação com os nossos clientes ao nível dos produtos e serviços, bem como na avaliação de risco. Ao nível do financiamento estamos muito comprometidos em ajudarmos os nossos clientes na sua jornada de transição e transformação dos seus modelos de negócio e processos produtivos. Este apoio consubstancia-se através da disponibilização de linhas de crédito e de produtos específicos que já temos para o financiamento de investimentos nas áreas de eficiência energética, energias renováveis, economia circular ou processos produtivos mais eficientes, e também através de parcerias que estabelecemos com terceiras partes que podem apoiar os nossos clientes na análise técnica e ajudar a encontrar as melhores soluções para a adaptação do seu negócio e implementação dos seus programas de transição.

O nosso posicionamento perante o ESG é estrutural, tem objetivos ambiciosos e materializados, acompanhados mensalmente num modelo de governo interno estabelecido para o efeito e impacta a nossa cadeia de valor, os nossos colaboradores, os nossos fornecedores, os nossos clientes e as comunidades que servimos. Temos o firme propósito de pautarmos as nossas práticas de negócio pela urgência de contribuirmos para uma economia mais sustentável, porque acreditamos que este posicionamento também cria mais valor para a organização no longo prazo e a prepara melhor para futuros possíveis riscos climáticos, ambientais e sociais. Esta materialidade consubstancia-se também no nosso “Modelo de Dividendo Social” que reflete a forma como abordamos as nossas prioridades de sustentabilidade e ESG, os nossos compromissos e o nosso impacto positivo. O “Dividendo social 2022 – 2024” integra as três dimensões da sustentabilidade: ambiental, social e de governo corporativo, quer no modelo de negócio, quer na cultura do banco. Definimos três programas –Ambiente, Bem-estar social e financeiro e Banca Responsável – e estabelecemos iniciativas, indicadores a acompanhar e 15 objetivos muito concretos para cada um destes programas, que refletem os nossos compromissos com a sustentabilidade e são acompanhados e comunicados publicamente todos os trimestres. Por exemplo, temos o compromisso de financiamento a empresas cuja atividade económica principal ou projeto esteja alinhado com os objetivos da Taxonomia Europeia (linguagem criada pela CE para definir os critérios para classificação das atividades que contribuem para dar resposta aos desafios climáticos e ambientais, disponibilizando a empresas e investidores, um conjunto de critérios de classificação objetivos, que permitem identificar). Os desafios são enormes e exigem uma cultura empresarial de maior responsabilidade social e corporativa. Já no curto prazo, temos objetivos bastante ambiciosos para o ano de 2023, em particular, na incorporação de fatores de sustentabilidade na nossa aferição de riscos e na avaliação dos nossos clientes e carteira de crédito. Queremos corresponder às expetativas dos nossos clientes e restantes stakeholders, e ao papel catalisador que se espera dos bancos na transição para economia sustentável, neutra em carbono, contribuindo para o cumprimento dos desígnios económicos e planos de ação para o clima nacionais e europeus, e acreditamos que podemos ser o fio condutor entre estes diversos participantes na prossecução desses objetivos.