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The Sustainability Series (Part 1) - Corporate Climate – Related Disclosures

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The Paris Agreement 2016 (the ‘’Agreement’’) universally marked the necessity and importance of combatting climate change. The Agreement set a global goal to limit global warming to well below 2°C and attempts to limit it to 1.5°C. The urgency of the issue has been reaffirmed at the COP26. Nonetheless, the gradual progression of climate change and environmental degradation lulled us into a false sense of security. The impact of ignoring climate change has been, and will continue to be, felt worldwide. It encompasses business, legal and financial risks, and most importantly, existential risks. The catastrophic wildfires and increased risk of pandemics such as COVID-19 is testament to this. It is therefore clear that the issue of climate change must be aggressively tackled.

In order to achieve the Agreement goal, the contribution of everyone is required, including that of the financial and corporate sector. Against this background, there is a growing momentum to promote sustainable and responsible business practices, and to nourish a long-term strategic outlook. One of the regulatory tools used to achieve this is climate-related disclosures.

EUROPEAN LEGISLATION

EU law requires certain large companies to disclose information regarding their environmental, social and governance (‘’ESG’’) practices. The aim is to shift the focus from short-term to long-term profit-oriented horizons and non-financial values and performance.

The Non-Financial Reporting Directive 2014/95/EU (‘’NFRD’’) applies to large companies (of over 500 employees) such as listed companies, banks and insurance companies. It requires the disclosure of various non-financial information such as human rights, anti-corruption and bribery practices but also environmental matters. The Directive establishes a ‘double materiality perspective’ in that it requires companies to report about how sustainability issues affect their business and about their own impact on people and the environment.

More recently, a Corporate Sustainability Reporting Directive (‘‘CSRD’’) was proposed which will amend the abovementioned requirements, replacing the NFRD. The CSRD envisages extending and harmonizing the reporting requirements for a wider array of companies including all companies listed on EU regulated markets (except for micro companies) and possibly even to listed SMEs. This proposal responds to investor demands for greater sustainability from such companies.

THE POSITION IN CYPRUS

The NFRD has been transposed in Cyprus Company law (Cap. 113) under Article 151A. This requires the abovementioned relevant companies to disclose and include in their management report a non-financial statement to the extent necessary for an understanding of the undertaking's development, performance, position and impact of its activity relating to, as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters.

As per the Directive, Article 151B further provides that public-interest entities (such as banks, listed companies and insurance companies), which are parent undertakings of a large group must include in the consolidated management report during the financial year a consolidated non-financial statement containing information to the extent necessary for an understanding of the group's development, performance, position and impact of its activity, relating to, as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters.

As regards regulated entities, the Cyprus Securities and Exchange Commission (‘’CySEC’’) does not currently supervise non-financial reporting at a national level. However, non-financial reporting falls under the competence of the European Securities and Markets Authority (‘’ESMA’’) at an EU level, where CySEC participates in the relevant working streams. Consequently, CySEC ultimately monitors non-financial reporting at national level against the context of conforming with its EU duties.

DEVELOPMENTS AND COMMENTARY

Given the urgency and significance of the situation, it is important that stricter supervisory and monitoring measures are adopted to ensure efficiency in executing climate-related disclosure duties.

With regard to legal developments, CSRD is still at an embryonic stage. There is still a long way ahead until its effect can be discerned, as well as how and when it will be implemented in Cyprus. Therefore, it is unlikely that there will be any changes to the NFRD as transposed in Cyprus soon.

Nonetheless, sustainability reporting and more specifically climate-related disclosures should be adopted as a voluntary practice by all corporations. As ESG expectations by investors intensify around the world, corporations are being called to account for their impact towards wider stakeholders – including the environment. Major corporations themselves are also increasingly demanding mandatory regulatory means to transition to net zero. It is therefore important that companies choose to stay ahead of market and regulatory developments.

The second part of the series will explore the corresponding EU duties on financial market participants such as investors, asset managers and financial advisors.

The content of this article is valid as at the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on your specific matter before acting on any information provided. For further information or advice, please contact Christina Tifa at Tel: 25363685 or via email at christina.tifa@kyprianou.com

 

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