The cost of disclosing sustainability information under European Union regulation could be slashed by €5bn, according to a German think-tank.
Theia Finance Labs, a spin-off from 2° Investing Initiative (2DII), has published a series of suggestions for how European policymakers could make reporting rules significantly less expensive for the private sector.
Among the suggestions, Theia recommends centralising all of the disclosure requirements for investors, and giving EU supervisors responsibility for performing assessments and evaluations, rather than individual entities.
Financial institutions, including asset managers and pension funds in many instances, are obliged to provide environmental and social information to the market via a series of new laws, such as the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD) and the Taxonomy Regulation.
The requirements have caused headaches in the private sector, with industry bodies complaining that they can be expensive, overlapping and unhelpful for meeting sustainability objectives.
“Regulated financial entities in Europe covered by standard sustainability disclosure regimes are already obliged to report their portfolio/loan book holdings to their respective financial regulator,” Theia noted in its paper.
“As a result, financial regulators have detailed portfolio exposure holdings and the capacity to analyse these exposures.”
While supervisors such as the European Central Bank and the European Insurance and Occupational Pensions Authority (EIOPA) have already used that information to analyse the climate-related performance of financial institutions, specific entities are never publicly identified as part of those assessments.
This means the results are of limited value to asset owners and retail investors wanting to evaluate the sustainability performance of potential asset managers, or for those seeking to clamp down on greenwashing.
“If the European financial regulators are empowered to publish non-anonymised data on the ‘sustainability’/climate performance of regulated entities across the indicators identified in the SFDR, this could eliminate the need for financial institution reporting,” argued Theia.
“What is more, such disclosures would be 100% comparable, given the application of consistent metrics.”
The think-tank cites estimates that investors spend around €150,000 each year on public disclosures and €1m annually on broader reporting requirements.
Its recommendation to centralise the process would, it predicts, cost between €10m and €15m per year, for all covered entities.
“Assuming that ~10,000 entities are affected by the SFDR […] this would imply potential cost reductions of €0.3-0.6bn per annum,” Theia said.
The proposals are likely to be met with scepticism from many – including Europe’s supervisory bodies, who are already buckling under the weight of demand for their limited resources.
Theia said the process could be funded by a small levy on private sector entities.
The report also suggested that costs could be majorly reduced through changes to EU rules on data gathering by web-scraping, and by reducing the frequency at which financial institutions are required to get their disclosures assured.
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