Travers Smith's Sustainability Insights: Reporting requirements still shifting

A regular briefing for the alternative asset management industry.

European sustainability reporting requirements are still in a state of flux. Several years and several laws later, many companies and investors are getting on with reporting the information their stakeholders demand. But compliance teams are still not sure what regulatory requirements they should be preparing for.

To be fair, some things are getting clearer. Earlier this year, the EU signed off its sustainability "omnibus" – a dramatic rollback of non-financial reporting requirements. Many European private companies can now calculate whether they will be out of scope of the Corporate Sustainability Reporting Directive (CSRD) – and many will be. But for those who remain in scope, the actual reporting standards are not yet finalised. A significant redraft of those standards – known as the European Sustainability Reporting Standards (ESRS) – is still in process, with near-final versions expected imminently.

Even at this eleventh hour, there are reports that the European Commission might be preparing to amend the version drafted by its advisory group, EFRAG, to further advance interoperability with the International Sustainability Standards Board's (ISSB) standards. The idea is that one (CSRD-compliant) report could also satisfy ISSB requirements. That would be welcomed by some, but likely to be highly contentious – not least for firms that are in the middle of the reporting process.

The UK has endorsed the ISSB standards but is still deciding whether and how to mandate them for listed and large private companies. These are expected to replace the climate-related reporting obligations that those companies already face. More news on that for listed companies will follow soon – an FCA consultation closed in March – and it is very likely that listed companies will be required to comply with some additional requirements from next year. In May, the UK government is expected to launch a wider consultation on non-financial reporting that will also extend to private companies. The UK's gradualist approach continues.

Meanwhile, EU lawmakers continue to discuss reform of the Sustainable Finance Disclosure Regulation (SFDR) – the rules that apply to asset managers and other investors. The troubled history of that law is well-known, but its future remains far from clear. Some important disagreements are evident in documents published last month by the Council of the European Union – which comprises ministers from the EU's 27 member states – and there is still too little recognition of the special position of private markets.

The Commission's SFDR reform proposal would create three new product categories – Transition, Sustainable and ESG Basics – each with rules on investments that qualify. The industry has argued that active engagement with portfolio companies on sustainability should count. That matters for private markets, where hands-on engagement is a core tool. But member states are split. Belgium, Ireland and the Netherlands say engagement alone is not enough for transition products. Even supporters tend to focus on listed-market stewardship – voting and shareholder resolutions – rather than the deeper engagement common in private markets. France, meanwhile, wants to remove a provision that would let funds qualify for ESG Basics by investing in companies with a strong sustainability track record – a route that many private markets firms might use.

Most member states oppose grandfathering; Luxembourg is alone in supporting some targeted provisions. Without some form of transitional relief, funds raised under SFDR 1.0 but fully closed before SFDR 2.0 takes effect could face costly repapering exercises. Separately, the European Economic and Social Committee (EESC) – an advisory body to the Council – has recommended that managed portfolios stay within SFDR's scope, even though the Commission wants to exclude them. If adopted, that would bring many private markets managed accounts back into the regime. The EESC also wants all products – including those without a sustainability label – to publish a minimum set of "principal adverse impact" (PAI) disclosures. That cuts against the simplification drive, but the argument has force.

    "The direction of travel in the Council suggests that private markets participants should be engaging now ..." 

Some positives are emerging – in some cases reflecting the representations made by private markets industry associations, including Invest Europe and AIMA. Sweden has repeatedly warned that the proposed investment approaches suit listed equities and need adjustment for unlisted assets, real estate, infrastructure and private equity. Without change, it says, many insurance and pension products that invest in private assets risk being locked out of the categories.

There are also calls to extend the transition period, and France has specifically pushed for this to cover alternative investment funds. Many member states argue strongly that the detailed implementing rules (known as "Level 2") should be finalised well ahead of application, so firms have time to prepare. There is support for voluntary ESG disclosures by non-categorised products, which are indeed vital, and Denmark, Lithuania and Luxembourg rightly question whether the proposed cap – limiting sustainability information to 10% of a product's strategy description – is workable. We have also previously argued that "ESG Basics" is too political and potentially misleading as a category name, and some member states agree. Sweden has proposed "Sustainable Light."

The Parliament has yet to show its hand. But the direction of travel in the Council suggests that private markets participants should be engaging now – whether through industry associations or directly – to ensure the final framework works for their funds.

None of this is very satisfactory. Many firms will be relieved that burden reduction and more proportionate requirements are now centre stage. But, as some academics have argued, direct government action is likely to be more effective in tackling sustainability issues than market-based solutions. Endless debates about disclosure rules may be an unhelpful and ultimately counterproductive distraction.